81 F. 454 | 6th Cir. | 1897
(after stating the facts as above). The decree of the circuit court in dismissing the intervening petition of the receivers of the Chesapeake Company, in so far as it sought a lien on either statutory or equitable grounds for their claim against the Valley Company prior to that of the mortgage bonds on the corpus of the Ohio Valley Railroad, was clearly right. The Chesapeake Company was not the supplier of materials or a contractor. By its agent and lessee, the Newport News Company, it assumed the operation of the railroad of the Valley Company. All the earnings of the Valley Company and of the Newport News Company were deposited in a common fund, which, for convenience, was designated as the bank account of tlie latter company. Out of this common fund wages were paid and supplies were purchased generally in the name of the Newport News Company, but really for the benefit of both. By proper charges upon the books, it was made to appear how much more money out of the common fund was devoted to the operation of the Valley road than was received from its operation, and the balance struck doubtless correctly showed the amount due from the Valley Company to the Chesapeake Company, but the balance shown was not really for supplies and labor furnished, but was for money advanced, and for that no lien exists either by the Kentucky stat
“In tbe light of these decisions, the inquiry before us is whether these bondholders are to be postponed in respect to the proceeds of the sale of the corpus of the property upon which their lien is first and paramount, to this claim of the Houston Company, upon the ground of the particular application of these moneys, or that they supplied a diversion by the officers of the Texas Company equitably binding as such upon the bondholders. Now, if these advances were made generally, as needed by the Texas Company, it matters not whether they were devoted to the payment of running expenses or not. Tie relation of debtor and creditor existed, and no equity could arise in favor of the creditor as against other creditors holding security prior in time, by reason of the voluntary application the debtor might make of the money borrowed. We repeat that, so far as appears, the money advanced to one road by the other was simply a loan. The account between the companies was a running account, and the balance was only a balance for cash advances made from time to time. Moneys received from the operation of the Texas road and moneys received from the Houston Company all went into a common fund, from which payments were made for expenses, taxes, and so on. It is also shown that the Texas Company and the Houston Company had the same fiscal agent in New York, who paid the coupons of both; that the management of the Texas Company was, during its entire existence, in the hands of the same officers and directors who managed the Houston Company; that these officers derived their compensation from the Houston Company; that all receipts from the Texas Company were first received by the Houston Company, and then transferred on the books to the treasurer of both companies as treasurer of the Texas Company; that whenever there was a deficit of funds on the part of the Texas Company, such deficit was made up by the Houston Company; and that the latter company received and disbursed everything. Under such circumstances it cannot be maintained, against the first mortgage bondholders, that a balance of such a running account of five years’ duration represents money so applied to the Current expenses of the road, or so diverted therefrom to the payment of interest on the bonds, as to carry with it a superior equity for repayment.”
The case cannot be distinguished from the one at bar.. The decree of the circuit court in this regard is affirmed.
We think that no error can be predicated on the failure of the circuit court to enter a decree for money in favor of the receivers of the Chesapeake Company against the Valley Company. The main action was the foreclosure of a mortgage, and the intervening petition of the receivers was allowed to be filed because it asserted a lien on the property of the railroad prior in right to that of the foreclosing mortgagee. If they had no lien, the receivers were entitled to no relief, whatever. There is little or no analogy between this case and that in which a foreclosing mortgagee is allowed a judgment for the deficiency on his claim after the application to his debt of
We come now to consider the second count of the intervening petition of these receivers. They thereby seek to subject certain of the mortgage bonds issued by the Valley Company, and included in the foreclosure proceeding which belong to the Contract Company, and are on deposit with the Columbia Finance & Trust Company, to the satisfaction of a claim made by the receivers against the Contract Company under the contract executed March, 1891, by and between that company and the Chesapeake Company. Had objection been made to the petition on the ground that it'was multifarious, it might have presented some difficulty; hut no such objection was made, and, as the court undoubtedly had jurisdiction of both causes of action stated in the petition, the defect in the petition, if any, was clearly waived, as the circuit court held. The claim of the receivers of the Chesapeake Company is based upon the alleged diversion of the subsequent earnings of the Ohio Valley road to pay sis floating debts and its Car Trust obligations incurred prior to the making of the contract of March 6, 1891. The objections,urged to this claim are: First, that payments out of the subsequent earnings of the Valley road to take up its prior debts could give the Chesapeake Company no right to reimbursement therefor; second, that no earnings were used to pay floating debts; and, third, that the whole claim is more than set off by the amount due from the Chesapeake Gompany on its defaulted guaranty of interest. By the contract of March 6, 1891, the Contract Company delivered to the Chesapeake Company 60 per cent, of the stock of the Valley Company, and guarantied that the floating indebtedness of the Valley Company should not exceed $30,000, and that the Car Trust debts should not exceed $86,000, and provided for the payment of these debts by depositing with the Columbia Company as trustee bonds equal in par value to these respective amounts, and stipulated that the Chesapeake Company might sell the bonds at a price equal to and not less than 90 per cent, of par, and deposit the proceeds with the trustee, to he drawn against by the Valley Company for payment of the floating indebtedness of the Car Trust obligations, or for re
Looking at this contract in the light of the circumstances and the subsequent conduct of the parties, it is manifest that it was expected that the Chesapeake Company, or its agent and lessee, the Newport News Company, should operate the Valley road as a part of the Chesapeake, Ohio & Southwestern system; that by bookkeeping its earnings and expenses should be kept separate from those of the Chesapeakfe road, but that otherwise the roads should be treated as if one. It was evidently in the contemplation of the parties that the floating debt and the Car Trust notes might have to be taken up before the. bonds were sold, and it was intended that the proceeds of the bonds when sold should replace the sums thus expended. This is clearly shown by the words “for repayments of amounts paid on account of such Car Trust obligations or such indebtedness or liabilities” used to specify the object to which the proceeds of the bonds were to be devoted. It was plainly intended that by the use of the bonds the indebtedness of the Valley Company should be paid, and that its future earnings should not be burdened with such an obligation. The primary advantage to the Chesapeake Company in this arrangement was that it rendered more probable the payment of the interest on the guaranty bonds, or some part of it, out of the earnings of the Valley road, and thus reduced the probable burden of the guaranty. The Chesapeake Company had in fact to pay a large part of the interest which was paid on the guarantied mortgage bonds. Hence it follows that every dollar of the earnings of the Valley road after April 1, 1891, used to pay the old floating debt of the Car Trust notes increased the amount which the Chesapeake Company had to pay as interest upon the bonds. We fully concur with the circuit court, therefore, in the view that the diversion of the Ohio Valley earnings to pay the old debts of the company was equivalent to a direct advance of that amount out of the treasury of the Chesapeake Company, and that if, for such advances, the Chesapeake Company would be entitled to repayment out of the
“Cross demands and counterclaims, whether arising out of the same or wholly disconnected transactions, and whether liquidated or unliquidated, may be enforced by way of set-off whenever the circumstances are such as to waN rant the interference of equity to prevent wrong and injustice.”
In New Jersey (White v. Williams, 3 N. J. Eq. 376; Dudley v. Bergen, 23 N. J. Eq. 401; Dolman v. Cook, 14 N. J. Eq. 68; Bird v. Davis, Id. 471) it is held that a foreclosure of a mortgage is a proceeding in rem, and that the mortgagor cannot, therefore, be permitted to set off in-such an action a claim then due him from the mortgagee. This rule ñnds little or no snjiport in other states, and we cannot understand the justice of it. If A. has a claim against B. which he is trying to enforce, we can understand why B. should not be permitted to set off against it a claim in rem in the nature of a lien or otherwise against property owned by A. for which A. is not personally liable. In such a case, there is no mutuality. B.’s only mode of enforcing his claim is by appropriation and sale of A.’s property, and it may be that B. will not thus realize enough to satisfy his claim. A., of course, cannot be held for the deficiency. B. cannot, therefore, he permitted to set off his lien claim as if A. owned it personally. But the reverse is not true. If B. is enforcing a lien against A.’s property, A. can remove the lien by paying to B. the amount secured by it. If so, why may he not be permitted to cancel the lien by forgiving B. the debt B. owes him; i. e. by setting it off? We are clearly of opinion that he may do so. Justice is thereby done, and circuity of action is avoided.
But, while we differ with the court below as to the law of set-off of claims, one in personam and one in rem, we concur in the conclusion reached by it upon the other ground upon which the decree appealed from was based, namely, that under the circumstances of this case there was nothing due from the Chesapeake Company to the Contract Company which the latter could set off. We think that the action of the Contract Company in taking back the stock ended the obligation of the Chesapeake Company upon its guaranty of the bonds of the Ohio Valley so far as the contract of March 6,1891, was concerned. Of course, it could have no effect upon the guaranty indorsed on the bonds held .by purchasers without notice, but, as between the parties to the contract of March 6, 1891, we must hold that the effect of the retaking of the stock by the Contract Com
We have already pointed out that a diversion of the earnings of the Valley Company to pay these debts amounted, in effect, to an advance by the Chesapeake Company to pay them, because of the increase of the amount of interest on the guarantied bonds of the Valley Company which the Chesapeake Company was obliged to pay. To the extent that the debts and Car Trust notes of the Valley Company were paid, we think the contract executed, and that no subsequent rescission could or should affect the vested interest in the deposited bonds acquired by the Chesapeake Company through such payments. '
It is suggested that the unsoundness of our conclusion will appear if we suppose that the Chesapeake Company had failed to- pay the first installment of the guarantied interest. It is asked whether, in. such a case, it would be equitable, after the Contract Company had retaken the stock, to allow the Chesapeake Company to have the bonds of the Contract Company sold, and to- put the proceeds thereof in its pocket. . Certainly it would hot, except to the extent to which the Chesapeake Company had “directly expended its own money to pay such debts. As the Chesapeake Company in such a case would have'paid no interest, the diversion of the earnings of the Valley Company to pay its old debts would give the Chesapeake Company no equity or right toi be reimbursed out of the deposited bonds for such diversion. It is because the Chesapeake Company has paid a large amount of the guarantied interest, far in excess of the earnings of the Valley Company diverted, that the Chesapeake' Company has a standing here to ask reimbursement equal to the diversion out of the bonds which were appropriated by contract, and actual deposit with a trustee to that specific purpose, before either the interest was paid or the earnings were diverted.
The next question is whether the United States Trust Company, as the assignee of the Newport News & Mississippi Valley Company, is entitled to subject part of the 86 bonds deposited under the contract of March 6, 1891, to meet Car Trust obligations, to the payment of the amount advanced by the Newport News Company when operating the Valley Eoad to discharge a large amount of those Car Trust obligations. It is conceded that the amount thus advanced was $49,898.33. The Chesapeake Company objects to the consideration of this appeal on the ground that it was not made a party thereto. An examination of the record shows an appeal allowed to the United States Trust Company without mention of the appellees. This was one of four appeals from the same decree. The record further contains a waiver in one instrument by all parties to the action below of the issuing of citations on "all the appeals.” The record was made up as if in one appeal. Under these circumstances we must hold that all the parties to the action below have ap
The learned judge at the circuit held that the United States Trust Company was not entitled To share in the security of the deposited bonds for the advances made by its assignor, the Newport News Company, to pay 'Car Trust obligations because it was a volunteer, and could not be subrogated, therefore, to the rights of the Chesapeake* Company in respect of such security. We find ourselves unable to concur in'this view. The Newport News Company, it seems to us, was nothing but the agent of the Chesapeake Company in making these advances, and it is in evidence that it made them at the request of the Chesapeake Company. It is true that there is nothing to show that the advances were ever charged on the books of account against the Chesapeake ‘Company by the Newport, News Company, but we must infer, in the absence of any averment to the contrary in any pleading by the receivers of the Chesapeake Company, that in the adjustment of affairs between the Newport News and the Chesapeake Companies at the cancellation of the lease, the latter company was permitted to become the real owner of the claim for these advances against the bonds, for a valuable consideration. Inasmuch as these advances were made for the Chesapeake Company, and at its request, the agent making them, and subsequently acquiring title to the debt based on them, has as much right to avail itself of the security deposited to secure repayment of them as the Chesapeake Company would have were it still the owner of the claim therefor. It is not:, strictly speaking, a question of subrogation, as we view it. When these advances were made, they were the advances of the Chesapeake Company, and the security to repay them as an incident to the debt thus created between the Valley Company and the Chesapeake Company then attached, and passed with that debt into the hands of any assignee thereof. The mode of determining how many bonds and how much accrued interest are available as security for these advances must be the same as that followed with respect to the claim of the receivers of the Chesapeake Company; that is, the United States Trust Company shall be allowed as many bonds held by the trustee for 'Car Trust obligations as would be needed if sold at 90 per cent, of par to pay off the advances made. The accrued interest on these bonds which was paid in cash to* the trustee, and is now held by him, is also to be appropriated to pay these advances as part of the security.
The appeal of S. S. Brown and others from that part of the decree below dismissing their intervening petition in which they, as creditors of the Valley Company, sought to take advantage of the same bond clause of the contract of March 6, .189.1, under which we have held that relief may be granted to the Chesapeake Company and the
The decree of the circuit court is in part affirmed and in part reversed,' and the case is remanded to the circuit court with instructions to set aside the decree as entered and to enter a modified decree in accordance with this opinion. The costs of the appeal will be assessed one-half against the receivers of the Chesapeake Company and one-half against the Contract Company and S. S. Brown and other petitioners.