89 Mo. App. 460 | Mo. Ct. App. | 1901
A question of first impression in this State is presented for decision by the facts stated, but one familiar to the Eederal Courts, which devised and developed the equitable doctrine that sometimes accords a right of prior payment to the holders of unsecured demands against insolvent railway companies over the owners of mortgage bonds. The new equity blossomed in the course of the extensive litigation entertained by those courts for the foreclosure of mortgages on and the appointment of receivers of railway properties, which gradually opened a clearer view of the complex interests involved in the transportation systems of the present day. It departs widely from common-law rules concerning mortgage-liens and the privilege of mortgagees to be satisfied before creditors at large take anything from their debtor’s estate; but is so just and practical and so adapted to subserve the welfare of all parties affected by or interested in railway properties, that it furnishes an excellent type of judicial law-building to meet new exigencies, according to the careful, safeguarding process of the courts. The germ was probably borrowed from the admiralty law, which has always conceded a preference over mortgages to several classes of demands, on the theory of affording first security to those who have conserved the property by their services or supplies, for the benefit of both owner and incumbrancer — the same theory which underlies the liens accorded by the written law to laborers and materialmen. It was seen, that notwithstanding the strict letter of the law of mortgages gives railroad bondholders priority over all general creditors, there are certain forms of indebtedness which they, as well as the company, must understand will have to be discharged out of the earnings of the road before anything else is paid, in order for the company to continue active and perform its duty
A receivership is largely a matter of grace instead of right. This precept was seized by the Federal courts as a coigne of vantage, on which they raise the rule in question, by imposing the preferential payment of previous operating expenses as a condition on which a receiver would be appointed. The rule is too recent to be free from a diversity of views as to its proper limits and as to what demands ought to be favored and what rejected. It would be presumptuous for us to go into those questions further than is necessary to correctly decide the case before us. They are fully .discussed in many Federal and State opinions, which may be consulted. Fosdick v. Schall, 99 U. S. 235; Hale v. Frost, 99 U. S. 389; Miltenberger v. Logansport Ry. Co., 106 U. S. 286; Burnham v. Bowen, 111 U. S. 776; Union Trust Co. v. Illinois Midland Ry. Co., 117 U. S. 434; Kneeland v. American Loan Co., 136 U. S. 89; Louis
The present intervention was to recover traffic balances which had accrued within the year prior to the first receivership, and, therefore, inside the time fixed by the initial order of the lower court. The claim is of meritorious origin; because a railroad can not be operated at all without doing business with connecting carriers and becoming indebted to them occasionally on account of balances for the carriage of freight and passengers. Such debts are necessary to keep the company going and, therefore, fall within the principle on which a preference is given. Miltenberger v. Logansport Ry. Co., Union Trust Co. v. Illinois Midland Ry. Co., Thomas v. Western Car Co., International Trust Co. v. Townsend Brick & Contracting Co., supra. The contest in this suit arose over the application of the intervenor to have the traffic account due it paid with a part of the proceeds of the foreclosure sale. As the bondholders were the purchasers at that sale, the sum will come out of their pockets if allowed.
The fund to which unsecured creditors must have recourse, in the first place, for payment, consists of the earnings; for the recorded mortgages on the.property import notice to everybody that it is incumbered for the benefit of the bondholders, and general creditors are, therefore, presumed to have extended credit on the faith of the income of the property rather than on the property itself, as bondholders are presumed to have purchased their securities relying for payment primarily on the property and secondarily on the residue of the income after necessary expenses have been defrayed. Fosdick v. Schall, Kneeland v. American Loan Co., International Trust Co. v. Townsend Brick & Contracting Co., supra. A wider
Debts incurred prior to the receivership have been sometimes preferred to the bonds in the distribution of foreclosure proceeds. We And it stated in Thompson v. Western Car Co., that “It can not be said that in no case can indebtedness for necessary supplies, which accrued before the appointment of a receiver, be allowed a priority to the mortgage bonds,” and in Miltenberger v. Logansport Railway Co., that “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 pre-existing debts of certain classes out of the earnings of the receivership or even the corpus of the property;” but farther, that “the discretion to do so should be exercised with very great care. The payment of such debts stands prima facie, on a different basis from the payment of claims arising under the receivership, while it may be brought within the principle of the latter by special circumstances. It is easy to see that the payment of unpaid debts for operating expenses, accrued within ninety days, due by a railroad company suddenly deprived of the control of its property, to operatives in its employ whose cessation of work simultaneously is to be deprecated in the interests both of the property and of the public, and the payment of limited amounts due to other and connecting lines of road for materials and repairs and for unpaid ticket and freight balances, the outcome of indispensable business relations, when a stoppage of such business relations would be a probable result in case of nonpayment, the general consequence involving largely also the interest and accommodation of travel and traffic, may well
In Miltenburger v. Logansport Ry. Co., 106 U. S. 286, 311, the very contention debated here was decided. Among the floating claims given precedence by the decree in that suit was a traffic balance of ten thousand dollars due to connecting carriers when the receiver was appointed which, it was urged on the appeal, was improperly charged against the estate by the circuit court and ordered paid out of the proceeds of the sale in advance of the first mortgage bonds. No showing was made that earnings had been diverted to pay interest or make betterments. In fact, all the interest had been in default long before the contracting of that indebtedness and so remained until foreclosure proceedings were instituted. But the Supreme Court of the United States affirmed the decree and seemingly treated the substance of the property and its income, while in the receiver’s hands, as both equitably liable for such debts; a logical conclusion, we venture to observe.
The appellant contends that the later decisions have introduced a more conservative spirit in regard to allowing preferences, which, if respected, will deprive the present intervenor’s claim of the recognition desired. But we find nothing to countenance that notion except remarks in the opinion in Nneeland v. American Loan Co., supra, suggestive of dissatisfaction with some applications of the accepted Federal doctrine. In that case the intervention was for the rental of certain rolling stock which had been delivered to the insolvent railway by the manufacturer, under contracts in the form of leases, but which were really contracts of purchase; payment of the purchase price was never made, there had been no diversion of surplus earnings to pay interest or make improvements; the
The foregoing deliverances, and particularly that of the United States circuit court of this jurisdiction, render it certain that the account of the intervenor in the suit before us, is entitled to preference over the mortgage bonds, if there was a prior diversion of income for interest, equipment or improvements. Several perusals of the record have failed to detect any evidence to impeach the correctness of the referee’s finding that the facts warranted making the demand paramount to the mortgages, which was confirmed by the trial court. The abstract of the record furnished by the appellant shows that no interest was ever paid on any of the railway mortgages and that “the road had no net earnings during the entire period of the receivership,” but was in debt at its termination. This is insufficient to support the position of the appellant, even if we fully concede the contention that the proceeds arising from the sale of the estate are exempt from the intervenor’s debt unless a previous diversion of the income of the railway has been shown. The cases relied on, in fact all cases dealing with the question, hold that a diversion, either to pay interest on bonds, for permanent improvements tending to preserve the property or for rolling stock or other increased equipment, is enough to entitle an intervenor, with a demand falling in a preferential class, to satisfaction first out of the estate, or the money realized by selling it. If all the evidence was, before us, or a sufficient digest of it, and showed that no diversion for any purpose held to be adequate to let in intervening debts had been made, this reason for overruling the appellant’s exception would be excluded. But there is no evidence here save what has been preserved in the scanty statements contained in the abstract of the record, which only say, nothing was disbursed for interest, without showing as much in regard to substantial betterments
It is insisted that the equitable principle we have been considering, may not be recognized by the State courts because their lien statutes prescribe or point out a policy as to what classes of debts shall enjoy a preference, and, by implication, exclude all those for which no statutory lien is givén, or which are not collectible by the statutory mode. It would be a wholly unjustifiable deduction, in our opinion, to say that because the statutes afford no-lien for traffic balances, none can
Objection is interposed that the debt at issue was too stale to be preferred, since the rule is to limit the preference to those which have accrued in six months before the receivership is ordered. Nothing appears in the evidence relating to this point except that it accrued within the previous year, that is, within the time limited in the initial order. We would not presume it was contracted longer before than the lawful period, if there was any definite period prescribed. But there is no six months’ rule, as was- expressly decided in our own Federal circuit. Farmers’ Loan & Trust Co. v. K. C., W. & N. Rv. Co., supra. In Hale v. Frost, 99 U. S. 389, claims three years old were allowed, and in Burnham v. Bowen, supra, one eleven months old was allowed; while in Central Trust Co. v. Wabash St. L. & P. Ry. Co., 30 Fed. Rep. 332, the mortgages were displaced by preferential debts amounting to three million dollars, some of which were for borrowed money and had accrued “within two years.” The objection is, therefore, untenable.
Interest was allowed by the referee and court from the filing of the intervening petition to the date of the decree.
The judgment is modified so as to allow the demand for the amount found by the referee to have been owing when the receiver was appointed, to-wit: One thousand five hundred and eighty-nine dollars and sixty-one cents, with interest thereon at the rate of six per cent per annum from the seventh day of January, eighteen hundred and ninety-nine, and costs, and with that modification is affirmed.