LACOMBE, Circuit Judge.
The report so fully states the facts and the contention of the several parties, and its citation of authorities is so exhaustive, that it would needlessly incumber the record to do more than briefly state' the conclusions reached here.
[ 1 ] The first claims to be considered are the four type claims, that of the Hugh Thomas Company and three others, referred to as operating supply claims. They are for materials and supplies, bought by the City Company, shortly before receivership, for use in operating the road. The objections urged to the master’s findings that they were all of them in fact operating supply claims are unpersuasive, and the exceptions to those findings are overruled.
Claims of that character against bankrupt railroad companies have for years been accorded in the federal courts a special equity, which has entitled them to a certain priority of payment. Various theories for the creation of this special equity have been sup-o-ested, but the most satisfactory one finds its basis in public policy. A railroad is a peculiar sort of property; the public interest requires that its operations shall not cease. Whoever is undertaking to operate it, owner or lessee, must continue to do so, even at loss to itself, or the public will suffer. The operation may be so unprofitable, the operator may become so embarrassed, and its credit so impaired that it might not be able to purchase the supplies absolutely necessary for such continued operation on its own credit; dealers might be unwilling to part with their materials on the chance that the purchaser will manage in some way to pay for them before it fails. In order, then, that embarrassed railroad operators may be able to obtain the supplies necessary to keep the road running, the courts have held that persons who sell supplies of that character, for that purpose, in quantities not in excess of the requirements of the road for a brief period, shall be entitled to some security better than the personal obligation of a failing corporation. That security is found in priority of payment; the individual whose materials keep the road running for the last few weeks or months before bankruptcy has the first claim to what there may be found out of which payment can be made. Equities of a somewhat similar nature have been known to the admiralty law for a long time. In the case of a bankrupt railroad the courts have even, in some cases where the circumstances made it equitable to do so, allowed this special equity to displace the lien of a prior mortgage on the corpus of the property. Here, however, there is no question of any prior mortgage; none was ever made by the City Company, and all of its assets which [183]*183came into the hands of receivers were wholly unmortgaged. From a careful study of the authorities, it does not seem to this court that the peculiar and special circumstances which must be shown to justify according to an operating-supply claim a priority over the holder of a mortgage covering the property from which the claimant seeks payment need be shown when the latter asks to displace no prior lieu, and to be paid only from unmortgaged assets. Practically all the authorities bearing on this question of priority in payment of supply claims are found in the master’s opinion, and will be fully discussed, no doubt, upon appeal. To review them here would be a duplication. The master says:
“If it wore not for this case (Whelan v. Enterprise Transportation Co. [C. C.] 175 Fed. 212), T should suppose that it had been asserted expressly or by implication in every case ill the Supreme Court from Fosdick v. Schall, 99 U. S. 235 [25 L. Ed. 339], to Gregg v. Metropolitan Trust Co., 197 U. S. 183 [25 Sup. Ct. 115, 49 L. Ed. 717], that the court had full power to apply cash on hand at the beginning oí a receivership or the proceeds of quick assets thereafter turned into cash in payment of such claims (for operating supplies within a reasonable period and to a rea sonable amount) to the exclusion of general creditors for construction or for rental claims, and that such power was beyond question.”
In this statement of the law, as deduced from the authorities, this court fully concurs.
It is contended that there should be affirmative proof, direct or circumstantial, as to each claim that the claimant did not rely on the personal credit of the purchasing company, but parted with his goods in the expectation that, in the event of failure, he would be paid for them out of the unmortgaged assets. Reference is made to Kneelaud v. American Loan & Trust Co., 136 U. S. 89, 10 Sup. Ct. 950, 34 L. Ed. 379, where the claim was not for labor or supplies furnished for current operation. But, if the above quotation correctly expresses the law, such proof seems unnecessary. Every one is assumed to know the law, however ignorant he may really be of its provisions. That assumption has resulted in many cases of great hardship to the individual; there is no reason why it should not be applied when the result will give him a benefit. If as matter of public policy claims of this character are accorded a special equity, they should have it whether the vendor at the time of sale did or did not know that he was entitled to it.
[2] The conclusions of the master that all of these type claims are. under all the circumstances, within the lime limitation approved by controlling authority are also concurred in.
Having reached the conclusion that these four type claims should be first paid out of the general unmortgaged assets of the City Company’s estate in the hands of the court, the master quite properly made findings and conclusions as to the existence of certain specific funds, out of which on one theory or another, it was contended that they were entitled to priority in payment. It is not thought,necessary to take up this branch of the case, for these reasons: When receivers were appointed the court came into possession of over $600.000 in cash and materials and supplies on hand, valued at over $1,150,000. The estate [184]*184of the City Company loaned the cash and sold the supplies to receivers to enable them to operate the system. Receivers have also collected for the same estate, on bills receivable, insurance prepayments and similar items over $400,000. The amount of credits resulting from the loan of the cash and the sale of the materials has been reduced by payments made on account of the City Company’s estate by an amount concededly less than $600,000. That estate, therefore, has about $1,-500,000 from these sources, and upwards of $2,000,000 as proceeds of a chose in action (the so-called “Equity Suit”) — all of these assets are unmortgaged. Since the total amount of all claims against the city estate of the kind represented by the four type claims is considerably less than $1,000,000, it is unnecessary to search for any fund from which to pay them other than these same unmortgaged assets. Such an inquiry will become necessary only should the Court of Appeals reverse the holding of this court as to the special equity of such claims in these unmortgaged assets.
Free access — add to your briefcase to read the full text and ask questions with AI
LACOMBE, Circuit Judge.
The report so fully states the facts and the contention of the several parties, and its citation of authorities is so exhaustive, that it would needlessly incumber the record to do more than briefly state' the conclusions reached here.
[ 1 ] The first claims to be considered are the four type claims, that of the Hugh Thomas Company and three others, referred to as operating supply claims. They are for materials and supplies, bought by the City Company, shortly before receivership, for use in operating the road. The objections urged to the master’s findings that they were all of them in fact operating supply claims are unpersuasive, and the exceptions to those findings are overruled.
Claims of that character against bankrupt railroad companies have for years been accorded in the federal courts a special equity, which has entitled them to a certain priority of payment. Various theories for the creation of this special equity have been sup-o-ested, but the most satisfactory one finds its basis in public policy. A railroad is a peculiar sort of property; the public interest requires that its operations shall not cease. Whoever is undertaking to operate it, owner or lessee, must continue to do so, even at loss to itself, or the public will suffer. The operation may be so unprofitable, the operator may become so embarrassed, and its credit so impaired that it might not be able to purchase the supplies absolutely necessary for such continued operation on its own credit; dealers might be unwilling to part with their materials on the chance that the purchaser will manage in some way to pay for them before it fails. In order, then, that embarrassed railroad operators may be able to obtain the supplies necessary to keep the road running, the courts have held that persons who sell supplies of that character, for that purpose, in quantities not in excess of the requirements of the road for a brief period, shall be entitled to some security better than the personal obligation of a failing corporation. That security is found in priority of payment; the individual whose materials keep the road running for the last few weeks or months before bankruptcy has the first claim to what there may be found out of which payment can be made. Equities of a somewhat similar nature have been known to the admiralty law for a long time. In the case of a bankrupt railroad the courts have even, in some cases where the circumstances made it equitable to do so, allowed this special equity to displace the lien of a prior mortgage on the corpus of the property. Here, however, there is no question of any prior mortgage; none was ever made by the City Company, and all of its assets which [183]*183came into the hands of receivers were wholly unmortgaged. From a careful study of the authorities, it does not seem to this court that the peculiar and special circumstances which must be shown to justify according to an operating-supply claim a priority over the holder of a mortgage covering the property from which the claimant seeks payment need be shown when the latter asks to displace no prior lieu, and to be paid only from unmortgaged assets. Practically all the authorities bearing on this question of priority in payment of supply claims are found in the master’s opinion, and will be fully discussed, no doubt, upon appeal. To review them here would be a duplication. The master says:
“If it wore not for this case (Whelan v. Enterprise Transportation Co. [C. C.] 175 Fed. 212), T should suppose that it had been asserted expressly or by implication in every case ill the Supreme Court from Fosdick v. Schall, 99 U. S. 235 [25 L. Ed. 339], to Gregg v. Metropolitan Trust Co., 197 U. S. 183 [25 Sup. Ct. 115, 49 L. Ed. 717], that the court had full power to apply cash on hand at the beginning oí a receivership or the proceeds of quick assets thereafter turned into cash in payment of such claims (for operating supplies within a reasonable period and to a rea sonable amount) to the exclusion of general creditors for construction or for rental claims, and that such power was beyond question.”
In this statement of the law, as deduced from the authorities, this court fully concurs.
It is contended that there should be affirmative proof, direct or circumstantial, as to each claim that the claimant did not rely on the personal credit of the purchasing company, but parted with his goods in the expectation that, in the event of failure, he would be paid for them out of the unmortgaged assets. Reference is made to Kneelaud v. American Loan & Trust Co., 136 U. S. 89, 10 Sup. Ct. 950, 34 L. Ed. 379, where the claim was not for labor or supplies furnished for current operation. But, if the above quotation correctly expresses the law, such proof seems unnecessary. Every one is assumed to know the law, however ignorant he may really be of its provisions. That assumption has resulted in many cases of great hardship to the individual; there is no reason why it should not be applied when the result will give him a benefit. If as matter of public policy claims of this character are accorded a special equity, they should have it whether the vendor at the time of sale did or did not know that he was entitled to it.
[2] The conclusions of the master that all of these type claims are. under all the circumstances, within the lime limitation approved by controlling authority are also concurred in.
Having reached the conclusion that these four type claims should be first paid out of the general unmortgaged assets of the City Company’s estate in the hands of the court, the master quite properly made findings and conclusions as to the existence of certain specific funds, out of which on one theory or another, it was contended that they were entitled to priority in payment. It is not thought,necessary to take up this branch of the case, for these reasons: When receivers were appointed the court came into possession of over $600.000 in cash and materials and supplies on hand, valued at over $1,150,000. The estate [184]*184of the City Company loaned the cash and sold the supplies to receivers to enable them to operate the system. Receivers have also collected for the same estate, on bills receivable, insurance prepayments and similar items over $400,000. The amount of credits resulting from the loan of the cash and the sale of the materials has been reduced by payments made on account of the City Company’s estate by an amount concededly less than $600,000. That estate, therefore, has about $1,-500,000 from these sources, and upwards of $2,000,000 as proceeds of a chose in action (the so-called “Equity Suit”) — all of these assets are unmortgaged. Since the total amount of all claims against the city estate of the kind represented by the four type claims is considerably less than $1,000,000, it is unnecessary to search for any fund from which to pay them other than these same unmortgaged assets. Such an inquiry will become necessary only should the Court of Appeals reverse the holding of this court as to the special equity of such claims in these unmortgaged assets. In order, however, that the whole case may be before the appellate court, all the findings and exceptions should be disposed of in some way; this can be done by a pro forma disposition of such of them as this court does not find it necessary to consider. Such disposition will prejudice nobody, since it expresses no opinion as to the questions thus disposed of, and it makes no difference which interest appeals, as the expense of preparing the record will, as it has heretofore been, be borne by the estate.
[3] The next claims to be considered are for rent, dividends, and taxes covenanted to be paid under some lease or leases. Prior decisions in this litigation classify all such claims as in substance for rental. The court concurs in.the master’s conclusion that such claims are not of a character which admits of their inclusion among that class of claims for materials and supplies proper and reasonable for the current maintenance of a railroad as a going concern, in favor of which a special equity has been created by controlling decisions.
[4] The next claims are those for tort; that is, for damages resulting to individuals from the operation of the road before receivership. It is contended that because such damages are the usual and natural result of running a railroad, they are to be considered as much an operating expense as are the various materials and supplies used in such operation. The question of priority in payment of tort claims of this sort has been frequently before the courts; the decisions clearly indicate that they rank with general unsecured claims. It may be that in some case, where shocking injustice would result from thus -classifying them, a court of equity might be inclined to extend the rule as to operating-supply claims so as to cover them. But that is not the situation here. It has been repeatedly remarked that this receivership presents unique features, mainly because the road was operated by a lessee which issued no mortgage; the title to the corpus of the property — lands and buildings, tracks and equipment — remaining in the lessor with whom none of these claimants had any direct relations. The supplies were sold to'the City Company; the damages resulted from its operations; it, not the lessor, the owner of the corpus, was the one to respond therefor. In the course of the litigation foreclosure suits [185]*185against the owner of the corpus were prosecuted to a final conclusion, and the property, as is usual in such cases, was sold for a sum which represented, not its value, but approximately the amount of securities held by the bidders. This proceeding is peculiar also in the circumstance that, at no expense to themselves, with no assessment laid against them, the holders of these tort claims were permitted and invited to come in and share in this acquisition of the corpus, to which their debtor had no title, on the same basis as the holders of first mortgage bonds. Out of $1,900,000 of such claims proved, $1,465,000 availed of this unique opportunity. Those of the claimants who neglected or rejected such opportunity seem hardly in a position to insist that new law should be made in this case, in order to classify them with, operating supply claimants. The court concurs fully in the disposition made by the master of the contention made by the tort claimants that claims of the Metropolitan Company arising under its lease to the City Company should not be deferred in payment to the tort claims.
It is unnecessary to add anything to this concluding part of his opinion.
As to all other claimants for preference the decision of the special master is affirmed.
To the findings of fact numbered 3, 4, 5, 8, 9, 10, 12, 14, 15, 16, 17, 20, 21, 22, 23, 24, 25, and 59 to 81, both inclusive, no exceptions have been filed; they therefore stand confirmed.
The exceptions to findings numbered 6, 11, 18, 26, and 51 are overruled, and the findings confirmed.
The exception to the last paragraph of finding No. 19, touching a payment of interest on October 1, 1907, is sustained for the reason that it is not in accord with the opinion of the Court of Appeals in the so-called “Termination' of Lease Proceeding.”
Subsequent to September 24, 1907, no payments were made for interest out of the estate of the City Company. As already stated its cash on hand and cash collections were loaned, and its materials and supplies were sold to receivers; such loan will be repaid, and such materials paid for when accounting between the City estate and receivers determine the proper amount due.
The remaining exceptions to finding No. 19, and the exceptions to findings numbered 1, 2, 7, 13, 27 to 50. both inclusive, 52, 53, 54, 55, 56, 57, and 58, are pro forma overruled, and the findings confirmed.
The exceptions to the conclusion of law numbered I down to the end of subdivision (a) are overruled, and so much of the conclusion is confirmed. The exceptions to the remaining- parts of the. conclusion are pro forma overruled, and the conclusion confirmed.
The exceptions to conclusions of law numbered II and III and VI are pro forma overruled, and the conclusions confirmed.
The exceptions to conclusion of law numbered IV are overruled and the conclusion confirmed.
There being no exception to conclusion of law numbered V, the same stands confirmed.
As modified by this opinion, the report of the special master is confirmed.