New York, P. & O. R. v. New York, L. E. & W. R.

58 F. 268, 8 Ohio F. Dec. 23, 1893 U.S. App. LEXIS 2867

• Court: U.S. Circuit Court for the District of Northern Ohio
• Decided: October 21, 1893
• Status: Published

Opinion

BURTON, Circuit Judge,

(after stating the facts.) Complainant’s bill must be treated as an independent original bill having as its object the appointment of receivers for so much of the property of the Erie road as consists of its leasehold estate in the roads owned or leased by the complainant corporation and to enforce the covenants and contracts of that lease against the Erie Company and its receivers. The fact that receivers have been heretofore appointed under another bill by a creditor of that company, filed primarily in the jurisdiction of the residence of that company, and under like bills filed by the same creditor in this and other jurisdictions, is recognized, and the difficulty met by asking that the receivership under the former bill be extended to this, and that other and additional receivers be appointed to act in conjunction with them, within this jurisdiction. To justify this independent proceeding many averments are made charging that the receivers heretofore appointed were the executive officers of the lessee company; that as such they are not impartial custodians, but hostile to the interests of the complainant, and inimical to the lease; that their appointment was secured by collusion between the Erie Company and Trenor Euther Park, the creditor whose name and debt was used to secure the receivership; that “one of the main objects sought to be accomplished indirectly and fraudulently by means of the said suit was and is the abrogation of the lease, and the destruction of the plaintiff’s rights thereunder by judicial assistance obtained by fraudulent and collusive contrivances and devices.”

The relief now asked under the rule to show cause is:

(1) The extension of the receivership of King and McCullough to this suit.

(2) The appointment of one or more additional receivers.

(3) A direction to the receivers to comply with the covenants and contracts of the lease by paying out of the gross earnings of complainant’s road the rentals due and unpaid, and to pay in future the réntals as they shall accrue and be payable by the terms of the lease.

The averments of the bill that the appointment of the defendants King and McCullough was collusive; that the filing of the bill by Trenor Euther Park, and the appointment of the executive officers of the Erie Company as receivers, was part of a plan and purpose hostile to the complainant, and having as an end the destruction and abrogation of the lease, is a conclusion of law drawn by the pleader, and dependent upon the legal effect of the facts stated in the bill, and chiefly upon those concerning the conduct of the receivers in regard to this lease after their appointment.

As matter of law, the receivers could not abrogate a lease which was valid and binding between the Ohio corporation and its lessee, the New York corporation. Between lessor and lessee the lease must stand until it is abrogated by a resort to some one of the conditions contained therein. Whether or not the receivers have an option to adopt the léase, and make its terms and conditions obligatory upon them as receivers, and a charge upon the trust fund in their hands, presents quite another question. If they have this option, under direction of the court controlling their conduct, (hen their refusal to adopt the lease cannot tend to support the averment that their object is to abrogate 'it. If the interests of those concerned in the property of the Erie Company, considered as a trust fund in the custody of a court, of equity for administration and ultimate distribution according to the rights and equities of each as fixed when the property was seized by the court, be that a forfeiture of this lease should be guarded against by preventing any default in rents, then the receivers should pay the rents and adopt the lease.

If, however, the receivers are unable to do this, looking to all the other burdens which rest upon them, and having regal'd to the best interests of the whole trust committed to their charge, then they should not adopt the lease, if they have such option. They should compare the advantages and disadvantages in the light of the whole situation, and as business men give their judgment to the court under whose direction they act. The interest of the lessor company is not, and should not be, a controlling factor in reaching a conclusion. They stand for and represent every interest. If complainant’s interest demands that they shall adopt the lease, and the general interest of those interested as creditors is that it shall not be adopted, then the latter and wider interest should control. Whether they have an option in the matter will be considered further along, as well as the kindred question as to whether, by their possession, they have in fact elected to adopt the lease.

No case is made for the removal of the defendants as receivers, even if we were disposed to consider such an application before the court originally appointing them had been applied to. Neither does any sufficient reason now appear for extending their appointment to this bill, nor justifying this court in intruding other persons upon them as coreceivers of a part of the property committed to their management. Whatever rights the complainant has as a creditor or under the lease it can set up as against the receivers without any extension of the receivership. Such extension would complica te accounts, and result in conflicting directions. There are stronger reasons for the refusal to appoint additional receivers. The Erie system is a vast and extended one. Its lines extend into several states, and as many independent jurisdictions. The preservation of this system as a whole, its harmonious management as a unit, gives it its greatest value and power, and anything which tends to dismember it or to disrupt its management as an entirety should be avoided if possible. While it is a “system,” and while it remains a great “trunk line,” its management under- order and direction of the court should be committed to one set of receivers having like authority in each jurisdiction, and controlling each and every part of its property. Receivers are but officers and agents of the court. While necessarily much is committed to their judgment and discretion, yet their power depends upon the decrees and directions of the courts appointing them. Receiverships of railroad properties are in a large part peculiar appointments. Railroads, as public carriers, are charged with great public duties, and the public are interested that their operation shall be continuous. Creditors are likewise interested that there shall be no cessation in their maintenance as going concerns, because their value as property depends upon the active use of the line. These considerations havé developed the present well-settled proposition that such receivers are the mere custodians of the property, and hold for and as mere agents of the court. Speaking of the character of such trustees, and the effect of such holding upon the interests procuring the appointment, Chief Justice Waite said:

•‘The possession taken by the receiver is only that of the court, whose officer he is, and adds nothing to the previously existing title of the mortgagees. He holds, pending the litigation, for the benefit of whomsoever in the end it shall be found to concern, and in the mean time the court proceeds to determine the rights of the parties upon the same principles it would if no change of possession had taken place.” Fosdick v. Schall, 99 U. S. 251; Railroad Co. v. Humphreys, 145 U. S. 82, 12 Sup. Ct. Rep. 787, et seq.

.

A receiver represents no particular interest or class of interests. He holds for the benefit of all who may ultimately show an interest in the property. ' He stands no more for the creditor than the owner. They are not assignees, and the principles of common law applicable to assignees do not define or determine the character of a receiver’s possession or its effect upon the rights of those interested in the property in their possession. Receivers ought not to be appointed to represent the peculiar interests of one class, and, a fortiori, they should not be appointed to represent one interest out of a class of interests.

The receivers in this case are mere custodians of the property of the Erie Company. That company is a New York corporation. Its domicile was and is in the southern district of New York. That district was the appropriate district in which creditors should have instituted a proceeding looking to a receivership of all its property. Mr. Park’s bill was properly filed in the district of the residence of the debtor corporation, and receivers were properly appointed by the jurisdiction of residence for the property within the jurisdiction. Inasmuch, however, as the line of road extended into other jurisdictions, it was necessary to the due administration of the property that similar proceedings should be had in each independent jurisdiction. That step was taken, and a like bill filed in this court, and the receivers who had been selected in the original jurisdiction appointed as receivers of the property within this jurisdiction. Two considerations demanded the appointment of the same persons: First, the intei’est of the owner and creditors of such a system of r<?ads required unity in the custody and management; second, courtesy and comity between courts of equal and co-ordinate jurisdiction required that a court of quasi ancillary jurisdiction should in such a matter conform, under ordinary circumstances, to the selection of receivers theretofore made by the court of primary jurisdiction. The appointment of different sets of receivers, in each separate jurisdiction would tend most manifestly to the disintegration of this railroad system. Its maintenance as a system, and its harmonious management as an entirety, are nowhere more clearly shown to be essential to the interest of all concerned, including the complainant, than by its own pleadings in this cause. We are not prepared to say that circumstances might not arise which would justify and demand independent; action in the appointment of receivers by each court of independent jurisdiction, and even the removal of receivers once appointed. But the respect due by courts of co-ordinate power and jurisdiction to each other, and especially that due by a court; whose jurisdiction in a large part is in some sense ancillary to the court of primary jurisdiction, — the court where the rights and equities of all must finally be aggregated, and the accounts of the receivership be adjusted, — demands that a strong case should be made before independent and divergent; orders should be made tending to bring on conflict between courts endeavoring to administer the same property in such manner as will best subserve the interest of all interested in it. If we should appoint additional receivers, their jurisdiction would not extend beyond the borders of Ohio. They could not be placed in joint possession of even the whole of the complainant’s road, for a part of its line is in the state of New York and another in the state; of Pennsylvania. We could not hope that receivers intruded under such circumstances would be appointed by the court of primary jurisdiction. Such an appointment would be useless, vexatious, and injurious. It would lead to conflict in regard to management, and great complexity of accounts. There is every reason why it should not be done, and none why it should. The de-fen dan is, as receivers, have not, in our judgment, done or omitted to do anything which was not within the scope of their duty, and which has not been approved by the court originally appointing them. The charge that their appointment was part of a scheme hostile to the complainant company is not supported by the facts stated in complainant’s bill, or any conduct of the receivers, and as a vague and general charge is highly improbable, and wholly and fully denied by the affidavits filed in opposition to this rule.

There is nothing in the opinion of Justice Harlan in Mercantile Trust Co. v. Kanawha & O. Ry. Co., 39 Fed. Rep. 337, which conflicts with, the views here expressed. The bill of Park, filed in this court, was an original bill, properly framed to obtain the appointment of a receiver. The bill dismissed by Justice Harlan was not framed to obtain any original relief, and was only intended to obtain a ratification of what had been done and should be done under a bill pending in another jurisdiction. The power of this court under the bill filed by Park in this court is that of an independent court, authorized to deal with the property of tbe Erie Company witbin its jurisdiction. What we have said as to primary and ancillary jurisdiction bas reference not to tbe power and authority of tbis court under that bill, but as to tbe .manifest necessity of harmony in tbe administration of a line of railroad extending into several jurisdictions. Tbis was fully recognized by tbe learned justice, who said:

“A good deal was said at the argument about' the injury that might possibly ensue to mortgagors, mortgagees, creditors, and the public if an interstate railroad, covered by one mortgage, be placed under the management of different receivers, each acting under the orders of the court appointing him; and sold under separate decrees, rendered in distinct foreclosure suits brought in different circuit courts of the United States. Undoubtedly railroad property of that hind could be very materially injured in value, and the general public put to serious inconvenience, if the courts in which such separate suits are brought decline to act in harmony, or according to some fixed plan, in the administration and sale of the property. It is not, however, to be assumed that this court, if its jurisdiction is properly invoked in reference to this railroad, so far as it lies in West Virginia, will fail in. any duty imposed upon it by law, or the comity prevailing between courts of equal dignity and authority.” 39 Fed. Rep. 340.

Tbe view we bave taken finds support in tbe following cognate cases: Wabash Ry. Co. v. Central Trust Co., 22 Fed. Rep. 272; Central Trust Co. v. Wabasb Ry. Co., 25 Fed. Rep. 698; Reynolds v. Stockton, 140 U. S. 254, 11 Sup. Ct. Rep. 773.

2. Wbat is tbe relation of tbe receivers of tbe Erie road towards tbe lease executed to tbe Erie Company? It bas been very earnestly contended that the receivers, being in possession of tbe leased property, bave adopted tbe lease, and that they are bound by all tbe covenants of tbe lease, and must pay rent according to its terms. Tbis is a total misconception, as we bave already indicated, of tbe relations of a receiver, in cases of tbis kind, towards tbe property of an insolvent railroad. Eeceivers are not assignees. They did not take tbe lease in question by assignment, and tbe effect of taking possession of a leasehold interest belonging to the company is totally unlike that resulting from one who takes a lease by assignment. They took possession by and under order of tbe court, and not by act of any party or under any assignment. Eeceivers are not bound to adopt a lease, and bave tbe option, under tbe direction of tbe court, to do so or not. Tbis is well settled. Fosdick v. Schall, 99 U. S. 251; Quincy, M. & P. R. Co. v. Humphreys, 145 U. S. 96, 12 Sup. Ct. Rep. 787; St. Joseph & St. L. R. Co. v. Humphreys, 145 U. S. 113, 12 Sup. Ct. Rep. 795. As. we bave already seen, it is not in the power of such receivers to annul or abrogate such a lease as between tbe lessor and lessee company. No such power bas been claimed or pretended by tbe defendants King and McCullough. Their opinion as to whether it was a lease or not cuts no figure. Their attitude before tbe circuit court of New York, upon tbe petition of tbe complainant company for a direction requiring, them to bold under tbe lease and comply with its stipulations, and their attitude here through counsel, and by their affidavit filed on this motion, bas been consistent, and is one of distinct refusal to adopt tbe lease for tbe trust, and of readiness to return complainant’s road to it upon de-maud. Then and now they say that it is not to the interest of the trust that the lease should be adopted, but that they are able and willing to manage the road, and pay over all of its net earnings, so long as complainant is content to leave possession with them. Complainant’s right to declare a forfeiture and recover possession is clear. If, however, it is content to receive the net earnings, and look to the Erie Company as an unsecured creditor for all rents due at inception of receivership, and all unpaid while in possession of the receivers, then it should not complain. This was the view taken by Judge Lacombe upon the former application of complainant, and meets our full approval. Its claim for rent accruing before the receivership, by the refusal of the receivers to adopt the lease, is not entitled to any priority. It is an unsecured liability, and must rank along with all other claims of the same class on final distribution of the assets of the lessor company. Huidekoper v. Locomotive Works, 99 U. S. 258; Fosdick v. Schall, Id. 235; Union Trust Co. v. Illinois M. Ry. Co., 117 U. S. 470, 6 Sup. Ct. Rep. 809; Thomas v. Car Co., 149 U. S. 95, 13 Sup. Ct. Rep. 824.

But the complainant insists that the case is taken out of the general rule under which receivers are not bound to adopt a lease, ¡ by reason of the character and objects of the bill under which the receivers were appointed. Its counsel have cited and relied upon Jones, Mortg. § 483; Brown v. Railroad Co., 35 Fed. Rep. 444. The ease last cited is the case cited by Mr. Jones to support bis view of this question. That case is clearly not in accord with the later decisions of the supreme court of the United States already, cited. The doctrine laid down by Judge Gresham that receivers' take as assignees when appointed to prevent the disintegration or a system of road partly consisting of leased lines, is not sustained: by the cases we have cited. In the case of Central Trust Co. v. Wabash Ry. Co., Judge Woods states that a rehearing had been granted in tbat case. As to the doctrine of the Brown Case, he said:

“It is true that in Brown v. Railroad Co., 33 Fed. Rep. 444, it was hold that these receivers, by taking possession of a leased line under the order of the court, ‘became assignees of the lease, and, as such, liable for the rent,’ but a rehearing has been granted in that case since the report of the master in this was filed, and, while the doctrine of it is, perhaps, the established rule of cases which involve only private rights, the reported decisions show that it lias seldom, if over, been deemed applicable to receivers of railroads who had taken possession of leased roads, or of leased rolling stock found in use upon or in connection with the main or trunk lines over which they were appointed; for the reason, I suppose, that the taking possession of the leased property ordinarily is not a purely voluntary act, amounting to an election on the part of the receiver or the court appointing iiim, hut is compelled by that public policy which requires a railroad of established use to be kept in operation. Indeed, it is sometimes a physical necessity. In this case, for instance, an immediate separation of the leased lines from the Wabash roads proper, or from each other, for the purpose of surrendering any of them, wiih its rolling stock, to its owner, was manifestly impracticable* even if it appeared, as it does not, that the owner was ready and willing to resume possession and to discharge the duty to the public in keeping the road in operation.” 46 Fed. Rep. 32.

The allegations relied upon from the Park bill as indicating the object of the bill as intended to preserve the unity of the system by preventing a forfeiture of the lease from complainant is not an estoppel. It is only one of many purposes stated in that bill as making a receivership necessary, and like statements are made as to all the leases held by the Erie Company. The bill was the usual creditors’ bill, and the receivers were appointed for the general purpose of holding, managing, and preserving the property as far as possible for the best interest of all. The receivers, when appointed, deemed that the best interests of the trust did not require or justify an adoption of this lease. The court of primary jurisdiction has, upon full consideration of an application like the one now at bar, held that the lease had not been adopted, and refused to direct its adoption. Without considering the legal effect of that action as a bar, we have reached a like conclusion, — that the legal effect of the possession by the receivers up to this time has not operated as an adoption of this lease.

Complainant further contends that this contract of lease is peculiar, that under it a fixed per cent, of the gross earnings of its road belongs specifically to it, and the receivers are bound to account for that proportion. There is nothing in this contention. The rental is determined by the amount of gross earnings. These earnings belong to the lessee company. The complainant has no right to any specific dollar or part of a dollar. The rent is simply measured by the earnings. But, if it were otherwise, the receivers are no more bound by that provision of the lease than any other. They have not adopted the lease, and are only liable for what in equity and justice they should pay. The net earnings of complainant’s road are its entire contribution to the fund in the receivers’ hands. This they are willing to pay over. The circuit court of New York was unwilling to direct that any greater sum should be paid, and we are of like judgment.

The rule must be discharged.