Thomas v. Peoria & R. I. Ry. Co., 36 F. 808

36 F. 808 | U.S. Circuit Court for the Northern District of Illnois | 1888

Harlan, Justice.

The court cannot, consistently with any sound principle of equity or of public policy, recognize the contracts between the Western Car Company and the Peoria & Rock Island Railway Company, one dated March 1, 1872, and the other dated October 1,1878, as the basis of accounting between the parties to this cause. The officers and individuals dominating the car company were, substantially, the same officers and individuals that dominated the railroad company. For every purpose of business the masters of the lessor company were also masters of the lessee company. Those who contrived and directed the making of the leases in question in behalf of the car company must, under the circumstances disclosed by the record, be deemed to have contracted simply with themselves in reference to the monthly rental of its cars, and the terms upon which they were to be used by the railroad company. When it is sought to use these leases as a means by which to reach the proceeds arising from the use and sale of the property of the lessee company, those who have an interest in such proceeds, as well as the corporation itself, are at liberty, for their own protection, to question their validity, or to insist that they shall not be made the basis of claims upon these proceeds. It would be extraordinary if the holders of the mortgage bonds of the railroad company should be denied the right to show that the obligation imposed by these leases to replace such of the leased cars as were disabled or destroyed with others of like quality and value; to maintain and keep all of them.in good repair and in safe and proper running order; to furnish all the materials, and make all the renewals needed from time to time; to put and keep the cars in proper condition for regular use; and, at the termination of the lease, to return the cars to the lessor company “in proper condition and repair for immediate and active use,” — was, in effect, if not in fact, imposed upon the railroad company by those who, although holding stock in that corporation, were nevertheless interested, in behalf of the lessor company, in exacting the highest rentals for its cars, and in attaching to their use such conditions as were most favorable to it. The court cannot close its eyes to the fact that those who assumed to bind the railroad company by these leases wore directly interested in the profits to accrue therefrom to the lessor company. The rule governing such transactions is not.to be disregarded, or enforced according as the court may happen to be able to ascertain the exact amount, in dollars and cents, which may bo realized by an agent who undertakes to serve, in the same business, two principals, whose respective interests are antagonistic. Such an agent cannot make a contract for both principals that a court is bound to enforce against the wishes of the objecting principal, or other parties in interest. The present case is brought, by the evidence, within the principle announced in Wardell v. Railroad. Co., 103 U. S. 658. it was there said: ,

“The'directors of corporations cannot enter into or authorize contracts in behalf of those for whom they are appointed to act, and then personally participate in its benefits. Hence all arrangements by directors of a railroad company to secure an-undue advantage to themselves at its expense, by the formation of a new company as auxiliary to the original one, with an understanding that they, or some of them, shall take stock in it, and then that valuable contracts shall' be given to it, in the profits of which they, as stockholders in the new company, are to share, are so many unlawful devices to enrich themselves to the detriment of the stockholders and creditors of the original company, and will be condemned, whenever properly brought before the courts for consideration. ”

See, also, Thomas v. Railroad Co., 109 U. S. 522, 3 Sup. Ct. Rep. 315; Wright v. Railway Co., 117 U. S. 72, 94, 6 Sup. Ct. Rep. 697.

Practically, this is a suit by the Western Car Company upon a contract that it made, by its managers and controllers, not only for itself, but- for the other contracting party, the railroad corporation. It is none the less so because those managers and controllers also had an interest in the lessee corporation. The leases referred to must therefore be put aside as a basis for ascertaining either the amount due the Western Car Company, or the nature of the obligations assumed by the railroad company or by the receiver on account of their having used the cars in question. But'it does not follow that the railroad company and the receiver were entitled to use the property of the car company without making some compensation. While the leases of 1872 and 1873 cannot be made the basis of the accounting between the parties, the car company is nevertheless entitled to be reasonably compensated for the use of its cars; such compensation- however, to be fixed without reference to, and wholly apart from, the leases. What is to be deemed such reasonable compensation? Or, rather, what are the elements in the inquiry as to reasonableness? On behalf of the railroad company and the bondholders it is contended, mainly upon the authority of Thomas v. Railroad Co., that the true test is the value directly accruing to the railroad company from the use of the cars. If by this it is meant that the court must ascertain how much the railroad company in fact realized from the use of the cars, taking its whole business; so far as these cars were used, into account, that proposition cannot be sustained. The case cited hardly supports such a rule. All that was there said was that, in fixing the value of the labor and materials for which compensation was asked, the prices named in the contract there in question should not, in view of its illegality, govern the court; that compensation should not be given for labor and materials that were of no value whatever to the railroad company.- If the labor and materials were of real value, that is, if they were needed or required by the business-or necessities of the company, then they were to be paid for; the amount to be ascertained in some mode consistent wfith law. S'uch I understand to be the extent to which the Thomas Case goes. The court did not mean, by anything there said, to exclude evidence as to what was usually allowed for such labor and-materials at that place, or in the locality where the labor was performed and the materials furnished. In the present case it is manifest that the railroad company actually needed the cars furnished by the car company, and that they were of real value to it. Upon the question of reasonableness there is — and, in the nature of things, there must be — serious difficulty. The respondents call attention to the testimony relating to the stock dividends made by the car company, and insist upon such dividends as furnishing the proper test of rental value. But this test, while not to be disregarded altogether, is too uncertain, and would mislead; for the profits of the car company varied in different years. They also refer to the actual cost of each car, and upon that basis contend that the rent claimed by the car company is an exorbitant return for the capital at risk. This is a fair argument; but there are other considerations to be taken into account. The system of “mileage rates,” as adopted between other railroad and car companies; the class of railroad companies among which that system should obtain; the rental paid, in open market, for similar cars furnished to other railroad companies by the Western Car Company, or by other car companies; the quality of the particular cars in question, as compared with cars made by other car companies, — these are all proper elements in the inquiry as to reasonableness of compensation. Recognizing it as impossible to lay down a rule that would be applicable in every case, it may be said, generally, that a fair compensation for the use of these cars during the several periods in question would be such amount as similar cars — to be used in the same manner, and upon similar roads —would commonly rent for in the open market. If the railroad company required the cars for ordinary or proper business purposes, as I think it did, it should be charged with such rental as, in the state of the ’market at the time, was fair and just under all the circumstances.

There are other matters of a general nature to which reference must be made before we come to consider the details of the accounting between the parties as set forth in the master’s report. Under what circumstances, and to what extent, may the court charge the income of the railroad projierty in the hands of its receiver with the liabilities incurred by the railroad company, in respect to petitioner’s cars, prior to the appointment of such receiver? Without stopping to discuss this question as if it were for the first time presented, it is sufficient to say that the following propositions are sustained by the decisions of the supreme court of the United States, viz.: (1) When “a court of chancery is asked by railroad mortgagees to appoint a receiver of railroad property ponding proceedings for foreclosure, the court, in the exercise of a sound judicial discretion, may, as a condition of issuing the necessary order, impose such terms in reference to the payment, from the income during the receivership, of outstanding debts for labor, supplies, equipment, or permanent improvement of the mortgaged property, as may, under the circumstances of the particular case, appear to he reasonable.” (2) As it frequently happens, when a railroad company becomes pecuniarily embarrassed, that “debts for labor, supplies, equipment, and improvements are permitted to accumulate, in order that bonded interest may be paid and a disastrous foreclosure postponed, if not altogether avoided,” and as 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 presumption is that 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.” Consequently “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.”' (8) If anything is taken from the current debt fund, and put into that which belongs to the mortgage creditors, the court may require, as a condition of an order to take possession of the mortgage property, and hold the future income for the mortgagees, that “what is due from the earnings to the current debt shall be paid by the court from the future current receipts before anything derived from that source goes to the mortgagees;” this, notwithstanding the mortgage, may, in terms, give a lien upon the profits and income; for, “until possession of .the mortgaged premises is actually taken, or something equivalent done, the whole earnings belong to the company, and are subject to its control.” (4)- So, also, if no order is made, when a receiver is appointed, that will, in terms, save the rights of creditors furnishing supplies, equipment, labor, etc., if it appear, in the progress of the cause, “that bonded interest has been paid, additional equipment provided, or lasting and valuable improvements made, out of earnings which ought in equity to have been employed to keep down debts for labor, supplies, and the like, it is within the power of the court to use the income of the receivership to discharge obligations which, but for the diversion of funds, would have been paid in the ordinary course of business;” this “because, in a sense, the officers of the company are trustees of the earnings for the benefit of the different classes of creditors and the stockholders; and, if they give to one class of creditors that which properly belongs to another, the court may, upon an adjustment of the accounts, so use the income which comes into its hands as, if practicable, to restore the parties to their original equitable rights.” (5) That “while ordinarily this power is confined to the appropriation of the income of the receivership, and the proceeds of mortgaged assets that have been taken from the company, cases may arise that will require the use of the proceeds of the sale of the mortgaged property in the same way;” as when, before the appointment of the receiver, or in the administration of the cause, income applicable to the payment of old debts for current expenses is taken and used “ to make permanent improvements in the fixed property or to buy additional equipment.” Fosdick v. Schall, 99 U. S. 235, 252-254; Miltenberger v. Railway Co., 106 U. S. 286, 311, 312, 1 Sup. Ct. Rep. 140; Trust Co. v. Souther, 107 U. S. 591, 2 Sup. Ct. Rep. 295; Trust Co. v. Railway Co., 117 U. S. 434, 457, 6 Sup. Ct. Rep. 809; Burnham v. Bowen, 111 U. S. 776, 4 Sup. Ct. Rep. 675; Trust Co. v. Morrison, 125 U. S. 591, 8 Sup. Ct. Rep. 1004; Railroad Co. v. Cowdrey, 11 Wall. 459; Gilman v. Telegraph Co., 91 U. S. 603; Bridge Co. v. Heidelbach, 94 U. S. 798; Sage v. Railroad Co., 125 U. S. 361, 8 Sup. Ct. Rep. 887; Trust Co. v. Shepherd, 127 U. S. 494, 8 Sup. Ct. Rep. 1250. In Miltenberger v. Railway Co., and, again in Trust Co. v. Railroad Co., the court said that it could not be affirmed “that no items which accrued before the appointment of a receiver can be allowed in any case. Many circumstances may exist which may make it necessary and indispensable to the business of the road and the preservation of the property, for the receiver to pay preexisting debts of certain classes, out of the earnings of the receivership, or even the corpus of the property, under the order of the court, "with a priority of lien;” that while the discretion to do so should be exercised with great care, and while the payment of such debts stands prima fade, on a different basis from the payment of claims arising under the receivership, the former may be brought, by* special circumstances, within the principle governing the allowance of the latter.

I come now to the examination of the accounts rendered by the car company for the use of its cars. The money out of which it seeks payment of its several demands being either the proceeds of the sale of the mortgaged property, or income derived from the property during the receivership, the petitioner’s claims for use of cars, etc., accruing prior to the period of six months immediately preceding the appointment of the receiver, are passed by without any expression of opinion as to their correctness. The general rule that has obtained in this circuit for many years, though not fully or expressly formulated in any published decision, has been not to charge the income of mortgaged property accruing during a receivership, or the proceeds of the sale of such property with general debts for labor, supplies, and equipment, back of the six months immediately preceding the appointment of a receiver. While the court has not, perhaps, committed itself against applying a different and more liberal rule, when the special circumstances or equities of the case demand such a course, the general rule is as just stated; and T am unwilling in this case, and at this late day, to depart from it. Besides, lam of opinion that, under the circumstances that usually attend the administration of railroad property by the courts, through receivers, the rule stated is a wise and salutary one. It would not do to charge the income of mortgaged railroad property, managed by a receiver, or the property itself, with every debt incurred in all its previous history for labor, supplies, or equipment. As was said in Fosdick v. Schall, the business of all railroad companies is, to a greater or less extent, done on credit. Those who perform labor, or furnish supplies and equipment, usually expect and contract to be paid within a reasonable time; and they do not ordinarily perform labor, or furnish supplies or equipment, after the railroad company has failed to pay within such time for what has been previously done or furnished. Expenses incurred within such reasonable time constitute what are called “current expenses,” which ought, if possible, to be paid out of the receipts during the same period. When, therefore, debts of that character remain unsettled, or are not put in suit, for such a time as would be deemed unreasonable, it may be fairly presumed that the creditors have ceased to look to current receipts for payment, and have accepted the position of general creditors who, as such,, would have no claim for indemnity upon any special part of the income. Upon these grounds, substantially, rests the rule that recognizes the right of the court to charge the income earned during the receivership with obligations for labor, supplies, and equipment, contracted by the railroad company during the six months immediately preceding the receivership. Such debts constitute operating expenses incurred to the end that mortgage bondholders might be protected, and that the company might be kept upon its feet, and subserve the public purpose for which it was established, namely, the maintenance of a highway for the convenience of the people. I will also say that the six-months rule which this court has heretofore recognized, when applied in cases arising since July 1, 1872, finds support, by analogy, in the statute of Illinois of that date, providing that fuel, ties, materials, supplies, or any other articles or things furnished to and necessary for the construction, maintenance, operation, or repair of a railroad, by contract with a railroad corporation, or work or labor performed for such construction, maintenance, or repair by like contract, shall be paid for as part of the current expenses of the road, and a lien to secure the same is given upon “all the property, real, personal, and mixed, of said railroad corporation, as against such railroad, and as against all mortgages or other liens which shall accrue after the commencement of the delivery of such articles, or the commencement of said work or labor: provided, suit shall be commenced within six months after such contractor or laborer shall have completed his contract with said railroad corporation, or after such labor shall have been performed or materials furnished.” It may be added that the grounds upon which the court may charge the income of mortgaged railroad property, earned during the receivership, with debts for labor, supplies, and equipment received prior to the appointment of the receiver, are so fully stated in some of the cases cited — particularly in Fosdick v. Schall — that further discussion of them is unnecessary. But I will say that the six-months rule was observed by me at the circuit, when disposing of the ease of Trust Co. v. Railway Co., and the final decree, so far as it rested upon that rule, was not disturbed by the supreme court.

What, then, is the amount due the petitioner for the use of its cars during the six months immediately preceding the appointment of the receiver; that is, from August 1,1874, to February 1,1875? The master finds the respondents liable for the use, during that period, of 240 cars at $15 per month, in the sum of $21,600; that on this account there was paid $13,300, leaving a balance of $8,300. From the latter sum he deducts $6,237.01, earned by the White Line cars, and paid over to the car company, leaving a balance of $2,062.99. The deduction of the $6,237.01 was right, because that sum was earned by the White Line cars during the six months in question. But I am of opinion that the deduction of $13,300 is too large by $6,100. In estimating the payments on rental subsequent to August 1, 1874, and prior to February 1,1875, the master included the following items in petitioner’s account: August 11,1874, $2,500; August 22, $3,600; September 22, $3,600; and Octo-her 2, $3,600. I am satisfied that the items of $2,500, A.ugust 11th, and $3,600, August 22d, aggregating $6,100, are for rent that accrued prior to August 1, 1874; consequently, instead of $13,300 being deducted from $21,600, only $7,200 should have been deducted; making a balance of §8,162.99, instead of $2,062.99, under this head. There is a further dispute between the parties upon this branch of the case; the petitioner contending that allowance should be made in its favor for these additional amounts: Value of two lost cars, $850; repairs of White Line cars, $4,003,86; loss of rental during the period of such repairs, $1,000. The item as to the two lost cars must be rejected because, according to the weight of the evidence, they were lost prior to the six months in question. The remaining items of $4,003.86 and $1,000 must also be rejected for the reasons, if there were no other, that have been assigned by the master. It results that the amount due the car company, independent of any question of interest, for the period of six months just preceding the receivership, is $8,162.99.

This brings us to the examination of the claims for the use of cars during the receivership. Upon the appointment of the receiver he retained the 100 White Line cars; but a dispute exists as to whether the'numberof other cars retained by him was 138 or 135. The master proceeds upon the theory that he received, and had in use, only 135 cars; five out of the original 240 cars, other than the White Line cars, having been “in some way destroyed or lost.” The proof does show the loss of the two heretofore referred to, but it does not sufficiently appear that the others were destroyed. The remaining three may have been lost during the receivership. If so, the-receiver was bound to account for them. Giving due weight to all the evidence, it must be held that the receiver retained and used 138 of the original 240 cars. The rant of 138 cars from February 1,1875, to April 1, 1875, at $12 per month, a reasonable rental .for that period, makes $3,312. I adopt that rental for the period stated, because it is reasonable, and because it is justified by the agreement between the car company and the receiver, under date of June 11,1875, an agreement which was valid until disapproved by the court, and which, although not finally approved by the court, was so acted upon, with the knowledge of the parties, that neither side should now be permitted to question its validity. The rental from April 1, 1875, until the cars were returned, at $10 per month, the rate specified in the receiver’s agreement, aggregates $36,163. These two sums, $3,312, and $36,163, make $39,475. From this last sum deduct the difference between the rent paid by the receiver, $29,808, and the amount paid out during the same period by the petitioner for repairs, $14,046.55, that is, $15,761.45, and there will remain on account of the rental of the cars from April 1, 1875, until they Avere returned, (excluding the replevied cars,) the sum of $23,-713.55".

The next item to be considered relates to the rental of the 56 replevied cars. The master reports, upon the basis of mileage rental from March 1, 1875, to December 1, 1875, the sum of $391.34. That finding is approved. The main dispute here is as -to the rental of the 56 cars from and after December 1, 1875, until they were formally surrendered. Pie allows $10. per month, which makes an aggregate rental, after December 1, 1875, for .these cars, of $12,857.32. Upon this branch of the case.I have had great difficulty. The evidence is seriously, and, in some respects, painfully conflicting. But I perceive no reason to question the entire fidelity to truth upon the part of the witnesses. Looking at all the circumstances, I am of opinion that the indorsement by the receiver on the agreement of June 11, 1875, signed by him, that the 56 cars delivered to him, “being the cars replevied from the Chicago and Northwestern Railway Co.,” shall be retained by him “upon the same terms set forth” in the above agreement, “commencing on the 1st day of December, 1875,” should turn the scale. And as the terms of the agreement of June 1L 1875, were not unreasonable, and as the indorsement was one that the receiver might reasonably have made in the interest of a fair administration of the property in his hands, I approve the finding of $12,857.32 as the rental of the replevied cars while they were under the control of the receiver. The finding of $5,650.52 for repairs of the replevied cars, is also approved. The agreement of the receiver to keep those cars “in good repair for use on said road” justifies this allowance, if there were no other ground to sustain it.

It remains to consider the question of interest. The car company claims interest upon each item of its account for repairs, and each amount claimed as monthly rental for its cars. The demand for such interest is placed mainly upon the statute of Illinois, which provides that creditors •shall be allowed to receive interest at 6 per centum per annum for all moneys after they become due on “any bond, bill, promissory note, or other instrument of writing,” and “on money withheld by an unreason-, able and vexatious delay .of payment.” Rev.,St. Ill. 1845, p. 294; Id. 1874, p. 614; Id. 1881, p. 614; Id. 1885, p. 1356. In respect to interest on amounts due to the petitioner prior to the receiver’s written agreement of June 11, 1875, the statute has no application; for, as already stated, the leases of 1872.and 1873 cannot be regarded valid instruments of writing, so as to be the basis of the accounting between the parties, or the foundation of a claim of interest under the local statute. Nor, assuming that.statute to constitute a rule of decision in some cases.for this court, do 1 think that the receiver’s agreement of June 11, 1875, is such an instrument of writing as entitles the car company to claim interest as matter of absolute right under the statute. While that agreement or lease was valid as between the receiver and the car company until disaf-firmed by the court that appointed the receiver, the car company would have bad no legal ground of complaint, if the court had disapproved that agreement, and made such allowance for the use of the cars as was found to be just and reasonable, apart from the stipulations of the agreement. And while I have heretofore said that under all the circumstances of: this case neither party -ought to be heard to dispute the validity or terms of that agreement, it does not follow that it is a writing of the class described in the statute that has been cited. But I am of opinion, that- there has been, as to a portion at least of the period covered by this long litigation, a vexatious and unreasonable delay in the payment of what was justly due to the petitioner, and that some interest should be allowed. It is difficult to fix the precise date from which interest should equitably be calculated. On one side, it is apparent that the car company has steadily claimed a much larger amount than was, in good conscience, due to it, thereby justifying the respondents in making defense, from which occurred, necessarily, some delay. On the other side, it is equally apparent that the respondents have steadily refused payment of anything like the amount that the petitioner was, in good conscience, entitled to demand. Under all the circumstances of the case, I have concluded that it is right to allow the petitioner interest upon the aggregate amount due to it from June 22, 1885, the date of the filing of the master’s report, until its claims are paid. I am of opinion that the following amounts should be allowed the petitioner, viz.:

(1) Balance for use of cars during the six months preceding receivership, - - - - $ 8,162 99

(2) Balance of rent of 138 cars from February 1, ’75, to April 1, ’75, at $12 per month, and from and after the last date at $10 per month, 23,713 55

(3) Bent of replevied cars from March 1, ’75 to December 1, ’75, mileage basis, - - - - . 391 34

(4) Bent of same from and after December 1,’75, - - 12,857 32

(5) Bepairs of replevied cars, ----- 5,650 32

$50,775 52

Interest at 6 per cent, on this sum from June 22, 1885, the date of filing of master’s report, to September 1, 1888, - - 9,985 80'

$60,761 32

This amount, increased by such interest as shall accrue on the above sum of $50,775.52 after September 1, 1888, the petitioner is entitled to’ have paid out of the income of the mortgaged property earned during the receivership, and, if that be insufficient, out of the proceeds of the property itself. The stipulations between the parties, the letter of Hilliard, of date January 13, 1877, (which is admitted to be correct in its statements,) and the evidence in the cause showing the sums taken from current receipts that were applied, both before and during the receivership, for improvements, betterments, buildings, depots, machinery, and equip: ment, present a case that justifies the court, under the authorities cited, in charging the petitioner’s claim upon the income of the property during the receivership, and, that being inadequate, upon the proceeds of the property itself. Counsel for the petitioner will prepare the proper decree, and, after submitting it to counsel for the respondents, will present it to the court for examination.