237 F. 921 | 5th Cir. | 1916
(after stating the facts as, above). As stated, the questions presented by the appeal in case 2932, so far as they appertain to the substantive rights of the parties, are identical with those involved in the appeal in cause 2924. The differences relate entirely to the remedies by which the rights asserted are to be worked out. For' this reason, the two causes can be well considered in one opinion.
The two general and controlling questions presented by the record in each of the cases, so far as they relate to the substantive rights of the parties to the litigation, are: (1) Whether supply claimants have a priority in payment over the holders of bonds, secured by a mortgage on the corpus and income of a railroad executed before the supplies were furnished, for supplies furnished to a' railroad company during a period of six months before the appointment of a receiver for the railroad property, the receiver having been appointed in a pro
In order to consider intelligently these contentions, it is necessary to determine the reason assigned by the courts for the allowance of the priority at all. In the case of Fosdick v. Schall, 99 U. S. 235-252, 25 L. Ed. 339, the Supreme Court said:
“The business of all railroad companies is done to a greater or less extent on credit. This credit is longer or shorter, as ,the necessities of the case require; and when companies become pecuniarily embarrassed, it frequently happens that debts for labor, supplies, equipment, and improvements are per*927 mitted to accumulate, in order that bonded interest may be paid, and a disastrous foreclosure postponed, if not altogether avoided. In this way the daily and monthly earnings, which ordinarily should go to pay the daily and monthly expenses, are kept from those to whom in equity they belong, and used to pay the mortgage debt. The income out of which the mortgagee is to be paid is the net income obtained by deducting from the gross earnings what is required for necessary operating and managing expenses, proper equipment, and useful improvements. Every railroad mortgagee, in accepting his security, impliedly agrees that the current debts made in the ordinary course of business shall be paid from the current receipts before he has any claim upon the income. If for the convenience of the moment something is taken from what may not improperly be called the current debt fund, and put into that which belongs to the mortgage creditors, it certainly is not inequitable for the court, when asked by the mortgagees to take possession of the future income and hold it for their benefit, to require as a condition of such an order that what is due from the earnings to the current debt fund shall be paid by the court from the future current receipts before anything derived from that source goes to the mortgagees. In this way the court will only do wha,t, if a receiver should not be appointed, the company ought itself to do. For, even though the mortgage may in terms give a lien upon profits and income, until possession of the mortgaged premises is actually taken, or something equivalent done, the whole earnings belong the the company and are subject to its control.”
That is the original statement of the doctrine and the .reason for it. The bondholder, even though his mortgage covers income, has only the right to look for his security to the surplus earnings after payment of the expenses necessary to ,produce them. The equity of paying the current expenses, essential to produce, and which did in fact produce, the income claimed by the mortgagee, before paying the mortgagee, is certain. The priority of the supply claims extends primarily only to the income from operation. It has no claim upon the corpus, except in case of diversion of earnings to' the benefit of the bondholders, when the supply claimant is permitted to resort to the corpus to replace what has been wrongfully diverted from earnings. The claim of the supply creditor on income' is, however, primary, and requires no showing of diversion to sustain it. It is only necessary to show that the supplies that were furnished contributed to the creation of the current income, that it is looked to by the creditor, and that there was income in fact received by the railroad company equal in amount to what it currently cost to operate the railroad. There can be no net income until the current expense claims have first been deducted from the receipts of operation, and, as the security of tire mortgagee is limited to net income, it follows that it has no equitable claim upon the receipts of operation until -liie supply creditors, who have contributed to the creation of such receipts, have been paid in full out of them. The equity of the rule lies in the manifest justice of paying those whose labor or material went to create the income which the mortgagee claims as part of his security, before the ¿mortgagee receives it in payment of his debt. If the current expense could be specifically traced to the current income it creates, the application of the rule would be easy and definite. The impossibility of tracing each dollar of expense into the corresponding dollar of income created by it has made it necesssary for the courts to fix an arbitrary period beyond which it will not be presumed that labpr and material furnished the railroad will continue to produce income.
The impossibility of tracing tire exact extent of the effect of expenditure into the future income of the receivership is no more an argument against the allowance of the priority, or 'against its equity, than is the same uncertainty with reference to the extent of the effect of expenditure on income before the receivership an argument against the conceded priority of supply and labor creditors as against the income of the company earned before the receivership. It prevailed as to the latter only to limit the time before which the furnishing of supplies or the performance of labor would not entitle the creditor to. a priority to six months. If it is to have any effect on the priority of such creditors as against the income of the receivership, it should only be to fix the time after which no priority should be allowed upon the receiver’s earnings, and not to deny the priority altogether.
It seems equitable, therefore, that the priority should extend as well to the income of the receivership as to that of the company prior
We think the case of Burnham v. Bowen, 111 U. S. 776, 4 Sup. Ct. 675, 28 L. Ed. 596, is decisive of the question. In that case the mortgage covered “all the revenues and income,” as well as 'the corpus. Prior to the receivership there had been no diversion of earnings, either “to pay mortgage interest or to put permanent improvements on the property, or to increase the equipment,” and there was no net income that came into the hands of the receiver, upon his appointment, from prior operations. There had been diversions from the earnings of the receivership to pay for right of way. The.Circuit Court had decreed that the amount diverted from the income of the receivers for the benefit of the bondholders should be restored from the proceeds of the corpus, to pay a creditor who had furnished supplies to the railroad company before the receivership. The Supreme Court sustained the decree. This could only have been upon the theory that the supply creditor had a priority upon the income of the receivership, as against the right of the bondholder to have such income devoted to the payment of interest or for betterments. The resort to the income of the receivership was not permitted for the purpose of replacing what had been wrongfully taken, and for the benefit of the bondholders, from the income of the company earned before the receivership. There was no such diversion, and there was no such income. Resort to the corpus was permitted because, and only because, the income of the receivership had been diverted from the use of the supply creditor to that of the mortgage bondholder. The priority of the supply creditor was therefore necessarily held by the Supreme Court to extend to the income of the receivership, in order for it to have sustained the decree of the Circuit Court. The language of the Supreme Court admits of no other construction than that the priority extends as well to the income of the receivership as to that of the company itself. The court said (111 U. S. 781, 782, 4 Sun. Ct. 677, 28 L. Ed. 596):
“In the present ease, as we have seen, the debt of Bowen was for current expenses and payable out of current earnings. It does not appear from anything in the case that there was any other liability on account of current expenses unprovided for when the receiver took possession, and there is nothing whatever to indicate that this debt would not have been paid at maturity from the earnings, if the court had not interfered at the instance of the trustees for the protection of the mortgage creditors. It is said, however, that as no part of the income, before the appointment of the receiver, was used to pay*930 mortgage interest, or to put permanent improvements on the property, or to increase the equipment, there was no such diversion of the funds belonging in equity to the labor and supply creditors as to make it proper to use the income of the receivership to pay them. The debt due Bowen was incurred to keep the road running, and thus preserve the security of the bond creditors. If the trustees had taken possession under the mortgage, they would have been subjected to similar expenses to do what the company, with their consent and approbation, was doing for them. There is nothing to show that the receiver was appointed because pf any misappropriation of the earnings by the company. On the contrary, it is probable, from the fact that the large judgment for the right of way was obtained about the same time the receiver was appointed, that the change of possession was effected to avoid anticipated embarrassments from that cause. But, however that may be, there certainly is no complaint of a diversion by the company of the current earnings from the payment of the current expenses. So far as anything appears on the record, the failure of the company to pay the debt to Bowen was due alone to the fact that the expenses! of running the road and preserving the security of the bondholders were greater than the receipts from the business. Under these circumstances, we think the debt was a charge in equity on the continuing income, as well that which came into the hands of the court after the receiver was appointed as that before. When, therefore, the court took the earnings of the receivership and applied them to the payment of the fixed charges on the railroad structures, thus increasing the security of the bondholders at the expense of the labor and supply creditors, there was such a diversion of what is denominated in Fosdick v. Schall the ‘current debt fund’ as to make it proper to require the mortgagees to pay it back. So far as current expense creditors are concerned, the court should use the income of the receivership in the way the company would have been bound in equity and good conscience to use it, if no change in the possession had been made. This rule is in strict accordance with the decision in Fosdick v. Schall, which we see no reason to modify in any particular.”
It is said, however, that the rule was limited to cases in which the trustee under the mortgage had delayed to take possession after default, and so made the company expend money to keep the railroad a going concern, which the bondholders would have had to expend, had they acted promptly. It is true that the delay of the bondholders is recited by the court, as one of many circumstances giving equity to the priority. The language of the court forbids the idea that it was intended to ground the equity upon the laches of the bondholders or to exclude all cases from the rule except those where such delay had intervened. The equity is stated by the court to rest upon the duty of the court, through its receiver, to do what the company would have done:
“Tbat is to say, pay out of wbat it receives from earnings all the debts which in equity and good conscience, considering the character of the business, are chargeable upon such earnings. In other words, what may properly be termed the debts of the income should be paid from the income, before it is applied in any way to the use of the mortgagees.”
This states the ground for the priority, as was done in Fosdick v. Schall, supra. While other circumstances may in individual cases strengthen the equity of the rule, they are unessential to its application.
In the case of V. & A. Coal Co. v. Central R. R., etc., Co., 170 U. S. 355-368, 18 Sup. Ct. 657, 662 (42 L. Ed. 1068), the Supreme Court, referring to the doctrine originated in Fosdick v. Schall, said:
*931 “The dominant feature of the doctrine, as applied in Burnham y. Bowen, is that where expenditures have been made which were essentially necessary to enable the road to be operated as a continuing business, and it was the expectation of the creditors that the indebtedness created would be paid out of current earnings of the company, a superior equity arises in favor of the materialman as against the mortgage bonds in the income arising both before and after the appointment of the receiver from the operation of the property.”
And, coming to apply the rule to the facts in that case, the court said (170 U. S. 370, 18 Sup. Ct. 663, 42 L. Ed. 1068):
“The circumstance that it is uncertain, from the terms of the stipulation, whether the expenditures for betterments were made by the receivers under the stockholders’ bill, or under the bill filed by the Central Company, or under the trustee’s bill for foreclosure, is immaterial. Even though the mortgages securing the bonds provided for the sequestration by foreclosure of the income of the road for the benefit of the bondholders, for reasons already stated, that income until strict foreclosure or a sale of the road was charged with the prior equity of unpaid supply claimants such as those now before the court.”
The court decided that the priority applied to the income of the receivership under the foreclosure bill, and that the filing of that bill did not impound the income as against the claims of those who furnished labor or supplies within the six months period. Again (170 U. S. on page 362, 18 Sup. Ct. 660, 42 L. Ed. 1068), the court, after stating that it was contended “that under the prayer for general relief the petitioners were entitled to have their demands allowed as a preferential claim against any surplus income which might arise from the operation of the Central road under the receiver, after payment of the ordinary expenses of operation, or out of the corpus of the estate or the proceeds of the sale thereof, in the event that the income had been diverted by the receivers in expenditures for betterments/’ said:
“Had the Central Company, through its own officers, operated its line of railway during the period when the coal in question was furnished, it cannot be doubted in the light of the decision in Burnham v. Bowen, 111 U. S. 776 [4 Sup. Ct. 675, 28 L. Ed. 596], that in the event that the company failed to make payment for such coal while a going concern, the indebtedness created upon the appointment of a receiver might properly have been allowed as a charge upon the surplus income arising during the receivership,”
And again (170 U. S. on page 365, 18 Sup. Ct. 661, 42 L. Ed. 1068), the court said, after quoting from the cases of Fosdick v. Schall and Burnham v. Bowen:
“It was thus settled that where coal is purchased by a railroad company for use in operating lines of railway owned and controlled by it, in order that they may be continued as a going concern, and where it was the expectation of the parties that the coal was to be paid for out of current earnings, the indebtedness, as between the party furnishing the materials and supplies and the holders' of bonds secured by mortgage upon the property, is a charge in equity on the continuing income, as well that which may come into the hands of a court after a receiver has been appointed as that before. It is immaterial in such case, in determining the right to be compensated out of the surplus earnings of the receivership, whether or not during the operation of the railroad by the company there had been a diversion of income for the benefit of the mortgage bondholders, either in payment of interest on mortgage bonds or expenditures for permanent improvements upon the property. Nor is the equity of a current supply claimant in subsequent income arising from the operation of a railroad under the direction of the court affected by the fact that while the company is operating its road its income is misappropriated*932 and diverted to purposes which do not inure to the benefit of the mortgage bondholders and are' foreign to the beneficial maintenance, preservation, and improvement of the property.”
We think the excerpts from the opinion in that case show that the Supreme Court decided in it that the priority of supply claimants attached to the continuing income of the company, as well after as before the appointment of a receiver, and regardless of whether there were diversions from such income for the benefit of the mortgagees; such diversions being necessary to the equity only when resort was to the corpus. We also think that the language of the opinion shows that the court considered the rule announced as necessary to the decision of the cause, and that it should not be treated as obiter by this court, in view of the Supreme Court’s contrary holding, for any of the reasons advanced by the appellees.
Nor are the cases of Moore v. Donahoo, 217 Fed. 177, 133 C. C. A. 171, C. & A. R. R. Co. v. United States & Mexican Trust Co., 225 Fed. 940, 141 C. C. A. 64, Martin Metal Mfg. Co. v. United States & Mexican Trust Co., 225 Fed. 961, 141 C. C. A. 85, or Gregg v. Metropolitan Trust Co., 197 U. S. 183, 25 Sup. Ct. 415, 49 L. Ed. 717, in conflict with this rule. In all of those cases, the supply creditor sought to resort to the corpus, and it was held that he could only do so by first showing a diversion from current earnings for the benefit of the mortgagees. These cases hold that resort to the corpus can only be had to restore diversion from earnings on which alone the supply creditor had a préference, and so, if .there had been no diversion from earnings, there should be no restoration from the corpus. There was no holding in any of-them that such a showing was necessary where the resort was to the income of the receiver, as distinguished from the corpus. In the case of Gregg v. Metropolitan Trust Co., the Supreme Court, thus distinguished the two classes of cases (197 U. S. 187, 25 Sup. Ct. 416, 49 L. Ed. 717):
“Oases like Union Trust Co. v. Souther, 107 U. S. 591 [2 Sup. Ot. 295, 27 L. Ed. 488], where the order appointing the receiver authorized him to pay debts for labor or supplies furnished within six months out of income, stand on the special theory which has been developed with regard to income, and afford no authority for a charge on the body of the fund. Eosdick v. Schall, 99 U. S. 235 [25 L. Ed. 339]; Burnham v, Bowen, 111 U. S. 776 [4 Sup. Ct. 675, 28 L. Ed. 596] ; Morgan’s L. & Texas R. R. & Steamship Co. v. Texas Central Ry., 137 U. S. 171 [11 Sup. Ot. 61, 34 L. Ed. 625]; Va. & Ala. Coal Co. v. Central R. R. & Banking Co., 170 U. S. 355 [18 Sup. Ct. 657, 42 L. Ed. 1068]; Southern Ry. Oo. v. Carnegie Steel Co., 176 U. S. 257 [20 Sup. Ct. 347, 44 L. Ed. 458]. It is agreed that the petitioner may have a claim against surplus earnings, if any, in the hands of the receiver, but that question is not before us here.”
We conclude that the appellant as a supply creditor was entitled to a preference upon the net income of the receivership before any of it was paid to the mortgagees or for betterments to the property. It follows that the payments made by the receivers out of income to the first mortgage bondholders for interest were diversions of the receiver’s earnings, of which the supply claimants, who were entitled to priority of payment out of them, could justly complain. We also conclude that the payments made by the receivers to provide equipment, to bal
That the receivers in this cause, under the orders of the District Court, had made payments for account of first mortgage interest and for betterments, prior to the making of the orders appealed from, in excess of the amount of supply claims, is conceded. The appellant complains of none made for either purpose before May 1, 1916. We hold that the payments for first mortgage interest, made by the receiver May 1, 1916, and the issuance and negotiation of certificates of indebtedness for future betterments, declared to be a lien on the net income of the receiver, operated as a wrongful diversion of that income as against the supply creditors including appellant. It is clear that, if the payment for betterments out of the receiver’s earnings operated as a diversion against supply creditors, the attempt to fasten a prior lien on the income of the receivership by the issuance of certificates would equally operate as a diversion.
2. The appellees contend, however, that, conceding the diversion, the appellant and other supply creditors are amply protected by the rule which remits them to the corpus, where the income has been diverted, and that in this case there is an ample equity in the corpus for that purpose. The appellees further contend that the court, in the interest of the administration of the property, is clothed with a discretion to authorize its receiver to divert current earnings of the receivership
(a) As the first mortgage bonds might have been declared in default for nonpayment of interest, the protection of the second mortgage bondholders, represented by the plaintiff in the foreclosure suit, required that this interest be paid. That it was to the interest of the plaintiff in that suit and those represented by it that such interest be paid and a default postponed is certain. If no other conflicting interest was adversely affected, the propriety of the payment would admit of only one answer. However, the interest of the supply creditors must be considered. Their claims, if. established, within the rule would be entitled to payment out-of the net income of the receiver before it could be applied on any mortgage. This preference over the first mortgage made a default in that mortgage a matter of indifference to them. They were not interested in preventing such a default, or 'in postponing collection of their claim for that purpose. If foreclosure were had under the first mortgage, their claims would be as much entitled to a preferential payment out of the income of the receivership under that foreclosure as under the present receivership. It was a matter of no moment to the supply creditors under which mortgage the railroad.was foreclosed, administered, and sold. Their right to immediate payment out of the net income of the
The question is, therefore, how far it was proper for the District Court to subordinate the interest of the supply creditors to that of the second mortgage bondholders. Some latitude in the method of administration must be allowed the court, even to the detriment of the supply claimants. It must be remembered, however, that the nonpayment of the first mortgage interest would not result in the disintegration of the railroad property, or destroy its unity, or remove its administration from those having an interest in it, as would be the result of a failure to pay taxes or mechanics’ or materialmen’s liens on specific parts of the railroad. Nonpayment of the latter would tend both to disintegrate the property and to take it away from those interested in it. On- the other hand, a failure to pay first mortgage interest would but transfer the control of the administration of the property from one class of security holders to another. To prevent a disintegration of the property, all those having an interest in it are concerned. To prevent a transfer or administration from one class of security holders to another is the concern only of the class having present control. The burden of preventing a physical disintegration of the railroad is that of all interested in it. The burden of preventing the foreclosure of a prior lien is entirely that of the subordinate lienholder to whose advantage it will result.
In the instant case, the second mortgage holders are the class interested in preventing a foreclosure of the first mortgage; the supply creditors have no such interest. The duty of financing the payment of interest on the first mortgage bonds was, therefore, that of the second mortgage bondholders, to the exclusion of the supply creditors. The only consideration the court should allow the second mortgage bondholders, as against the supply creditors in this matter, would be with a view of allowing the second mortgage bondholders a reasonable time in which to arrange to finance the payment of first mortgage interest. A single payment of first mortgage interest out of the surplus earnings of the receiver, first applicable to the payment of supply claims, might be justified. A settled policy of diverting the^ current earnings of the' receiver to the payment of first mortgage interest, at the expense of supply creditors, and with the resulting postponement of payment to them till the sale of the property, cannot, we think, be justified. It operates to shift the burden of financing the first mortgage interest from the second mortgage bondholders, who are alone interested in accomplishing it, to the supply creditors, who have no such interest, to the disadvantage of the latter. That disadvantage is patent. The master allowed interest, but not as a preferred claim. Mere loss of interest does not, however, measure the detriment. The financial embarrassment to the supply creditors, resulting from indefinite delay in payment, in cases where the amount is large, is to be considered.
In this case the foreclosure suit was begun in August, 1914, pay- • ments of first mortgage interest were made by the receiver out of his earnings', or borrowed money, under orders of the District Court, in
(b) It is contended by appellees that the supply claims have not been established, but are still in litigation, and present payment of them is not, therefore, possible. This would be a good argument, if the complaint was that the court below had refused to direct their immediate payment. It is not an answer to a complaint that the receiver, under the order of the court, was diverting the fund out of which the supply claims should have been paid, when established, so that it would be then unavailable, and the supply creditors consequently remitted to the proceeds of the corpus after a sale of it. This is the complaint which appellant presents by its appeal.
The appellees rely upon the case of Lloyd v. Chesapeake, O. & S. R. Co. (C. C.) 65 Fed. 351. In that case the court found that the objection to the application of receiver’s earnings to payment of interest on first mortgage bonds came from the first mortgage bondholders, who wished to precipitate. a default for purposes of reorganization, and that the supply claimants were objecting, if at all, only because some of them were controlled in the interest of the first mortgage bondholders, and for the same purposes of reorganization. The court found that the only interest, under the facts in that case? that could have been injured by the payment of interest, was the second mortgage bondholders, a minority of whom, as well as the trustee under the mortgage, requested the court to order the payment. The court eliminated the objections of both the majority of the second mortgage bondholders and the supply claimants from its consideration, because it found that both these interests were controlled by, and the objections made in the interest of, two other railroads, who, through ownership of the securities and obligations of the insolvent railroad, were endeavoring to gain control of it by precipitating a default and a foreclosure under the first mortgage. Nor does it appear in that case that a settled policy of deferring the payment of supply claims out of net earnings, in order to pay interest' on a prior mortgage, had been pursued. In matters of discretion, each case must'be governed largely by its own facts. In this case, the objection is presented in good faith by a supply claimant, in its own interest and without ulterior motive, and a systematic course of diversion covering almost two years is shown.
The appellees contend that, conceding it to have been a diversion, the supply creditors suffered no injury, since their claim on the net income so diverted would be transferred to the corpus, which was adequate for their protection. We have held that resort to the proceeds of the corpus, upon'a sale of the property, is not the equivalent of a claim on current net income, in the sense that the court administering the property is at liberty to so displace the supply creditors’ lien on income, on the theory that it is furnishing an equivalent security. There are doubtless occasions, in the interest of the estate, which would justify the diversion of the current earnings of the receiver to urgently needed improvements, remitting the supply creditors to the corpus. We do not think that the building of new shops, the purchasing of steel equipment for a new kind of passenger service, nor an entire rehabilitation of the roadbed to meet new traffic conditions, present such an exigency. The supply creditors have no interest other than to be paid out of net income. In no event can they be benefited by the improvements or the railroad property, except tó an extent necessary to keep it in operation, so that a net income may result to the receiver. As they do not share in the reorganization, they are not benefited by the physical rehabilitation of the property. Their security, being limited to the net income of the. receiver, is not enhanced by the improvement of the corpus. Diverting earnings, on which they have a primary claim, to the improvement of property, on which they have only a substituted claim, is a method of improving them out of their security without their consent. We do not think that such improvements should be made at the expense of supply claimants, even to the extent of remitting them to the corpus for their security. The cost of such improvements should be borne altogether by those who have a permanent interest in or lien upon the property to be improved. The lien of the receivers’ certificates should have been limited to a lien, prior to the lien of the second mortgage bonds, upon the corpus of the mortgaged property, and, so far as it attached to the receiver’s net income, subordinate to that of supply claimants.
It is contended that it is too late to change the form of the certificates, since they are negotiable, and the record does not affirmatively show that they have not passed into the hands of innocent purchasers. An inference may be drawn from it that they are held by or in the interest of the second mortgage bondholders. The defense that they are innocently held by purchasers without notice is an affirmative one, which can be presented in the District Court, if the appellees are so advised.
“If this view of the subject be correct, of which we entertain no doubt, the order is a final one. It is a decree fixing upon the property, on which the trust company now has a first lien, another lien of $120,000, and making it paramount to that. It changes the relation of that company to this property, displaces its rights as settled by a decree now pending in this court, and if that decree is affirmed it in effect modifies it, although this court may say that it should stand and be enforced. This order comes within all the elements of finality which we can imagine to belong to a decree of the Circuit Court. It establishes certain rights of the parties, to the injury, as petitioners believe, of their interests in the property.”
Answering the contention that the order was discretionary, and for that reason would not support an appeal, the court said (129 U. S. 215, 9 Sup. Ct. 267, 32 L. Ed. 656):
“The question is one which in its nature must be a subject of appeal. Whether the court below can exercise any such power at all, after the case has been removed from its jurisdiction into this court by an appeal, accompanied by a supersedeas, is itself a proper matter for review; and still more, whether, in the exercise of what the court asserts to be its discretionary power, it has invaded established rights of the petitioners in this case, contrary to law, in such manner that they can have np relief, except by an appeal to this court. This is a matter eminently proper to be inquired into upon an appeal from such an order.”
The appealability of the order of the District Court authorizing the issue of certificates, and declaring them to be a prior lien upon the net income of the receivership, is within the letter of this decision; the order directing the payment of the first mortgage interest out of the same fund is, we think, clearly within its spirit. The effect of the latter order is the destruction of the fund on which the supply claimants have a preferred claim or lien, and the transfer of their preference or lien to the corpus of the proceeds of its sale. The supply claimants have the right to be heard as to the disposition of the fund out of which' they are primarily to be paid, and a disposition of that fund, which operates to exclude their claims from participation in it, is final as to their rights. The fact that they are given a lien upon other property, or another fund, is not important, in view of their claim that
The equity of the independent bill is asserted upon these grounds: First, that restoration of the first mortgage interest paid the Equitable Trust Company May 1, 1916, can only be ordered in a suit in which the Equitable Trust Company was a proper party, and that it was not a proper party to the pending foreclosure suit; second, that the supply claimants were entitled to an order restraining future diversions, as well as those covered by the orders in the foreclosure suit appealed from; third, that the beneficiary of the diversions was a necessary party to any suit asking that they be restrained, and the Equitable Trust Company was the beneficiary; fourth, that the diversion of income of the receivership to the benefit of the first mortgage bondholders, by payments of interest and for betterments which enhanced their security, remitted the supply claimants to a lien on the corpus, ahead of all mortgages, and that the protection of the supply claimants may require a sale for the satisfaction of their claims, free from the lien of all mortgages, which could only be obtained in a suit to which all mortgagees were parties, which was not true of the foreclosure suit.
The second and third grounds are not well founded. The rights of supply creditors as to future diversions of the net income of tire receivership to' first mortgage interest can be amply protected in the foreclosure suit, by orders forbidding such future diversions, applied for therein. Nor is the trustee under the first mortgage a necessary party to the relief. It has no claim on the net income of the receiver in the pending suit until the supply claims have been satisfied from it. The lien of the first mortgage has not yet attached to the income of the receiver, and will not until it has been impounded by a receivership in the interest of the first mortgage bondholders.
The first and fourth grounds give the bill equity. The Tight of the supply claimants to a lien on tire- corpus, ahead of that of the first mortgage, upon a showing that the earnings of the receiver have been diverted to die benefit of the first mortgage bondholders in payment of interest and for betterments, is established. A bill to satisfy such
However, it appears that the first mortgage interest due May 1, 1916, has been paid by the receiver to the Equitable Trust Company, as trustee under the first mortgage, and has been by it passed to its .coupon account. From this we infer that the amount so paid has not been distributed to the first mortgage bondholders, but is still in the possession and control of the trust company. We have held that it was wrongfully paid by the receiver to the trust company, and should therefore be restored to the receiver, unless it has been disbursed to the bondholders, and passed beyond the control of the trust company. No order of restoration can be made in the pending foreclosure suit, to which the trustee under the first mortgage is not a party. The independent bill, therefore, has a practical purpose to justify its, existence, as well as a theoretical equity. Whether or not the interest installment of May 1, 1916, has so far passed beyond the control of the trust company as that its restitution to the receiver cannot be equitably compelled, can better be determined in the District Court.
It is contended that the prayer of the application for the temporary injunction, which was denied in the District Court, was not broad enough to entitle the plaintiff to a restoration; but the writ was not denied in the court below for that reason, and- the supposed defect in the prayer can be remedied, if necessary, in the District Court, when the cause is returned there. The District Court, in its discretion, may also consolidate the ,two pending causes, when the reason for their continued separate existence ceases.
In cause numbered 2932, the orders appealed from are reversed, with directions to enter an order setting aside the order directing the payment of the first mortgage interest, which fell due May 1, 1916, and to modify the order authorizing the issue of certificates of indebtedness, by subordinating the lien of $700,000 of such certificates of indebtedness, authorized to be issued by the receiver for betterments, so far as it attaches to the net income of the receiver, to the claims of such supply creditors as have or may establish a priority.to it. The method of accomplishing this may be left to the District Court, as it will depend upon the status as to the ownership'of the certificates.
In cause numbered 2924, the order denying the temporary injunction is reversed, and the cause remanded, with' directions to enter an order, in the District Court, enjoining the defendant the Equitable Trust Company to restore to the receiver the amount paid to it by the receiver for interest due on the first mortgage bonds on May 1, 1916, if such sum has been paid to it and is still in its possession or
And to proceed in each cause in further conformity with this opinion.
