Southern Ry. Co. v. Carnegie Steel Co.

76 F. 492, 22 C.C.A. 289, 1896 U.S. App. LEXIS 2150

• Court: Court of Appeals for the Fourth Circuit
• Decided: November 10, 1896
• Docket: No. 165
• Status: Published

Opinions

SIMONTON, Circuit Judge

(after stating the facts). It is manifest that the two hills, that of Clyde and others, stockholders and creditors, and that of the Central Trust Company, a mortgage creditor, were intended to serve one purpose. Both looked to a satisfactory financial reorganization of the Richmond- & Danville system. The first was filed to secure the protection of the court until such time as such financial reorganization could be perfected. The second was filed to c.arry out the financial reorganization which was then perfected. They can he treated as one proceeding, the one being the necessary consequence of and part of the other.

When the receivers were appointed in the second case, and were directed to take charge of the property theretofore in the hands of the receivers appointed in the first case, the court provided:

“Nothing in this order contained shall be construed to vacate any of the orders heretofore entered in the case of Wm. P. Clyde and- others. But the court reserves full power to act upon the masters’ reports filed in the said cause, and in said cause to adjudge and decree upon the rights of creditors-asserting a claim against the property of the said railroad company, or income thereof, in preference to the mortgage debt thereof, by orders to be entered in the said suit óf Wm. P. Clyde and others, upon notice to parties, with like effect upon the mortgage'property and income as if the orders were entered in this cause.”

When the Central Trust Company tiled its bill, praying the appointment of receivers, it submitted its rights as mortgagee to these conditions. New England R. Co. v. Carnegie Steel Co., 75 Fed. 59.

Fosdick v. Schall, 99 U. S. 235, and the long line of cases following it, elucidating and applying the principles there first laid down, have established this doctrine: Railroad property is a matter of public concern. The franchises necessary to their creation and operation involve, in great extent, the rights and interests of the public, and these rights and interests must be preserved. To do this, the railroad must he kept a going concern. In order to construct a railroad, two parties must concur, — the capitalists, who put in the money and the work, and the sovereign power, which contributes the franchises, especially that of eminent domain. Without the money and without these franchises the road cannot be built. The consideration which moves the sovereign to grant these franchises is the public use Of the road when built, — that it remain of use, that it be and remain a going concern. To this end, the first, application of its earnings must be made. The stockholders subscribe, and the bondholders lend their money, with knowledge of this. Neither of them can get anything until the current expenses are paid. Upon this assurance, all persons who furnish labor or supplies to a railroad corpora tion are encouraged to give it credit, and to contribute to keep it a going concern. If, through inadvertence, or by intention, or from any other cansft, any portion of the earnings has been applied to interest or dividends, or to the permanent improvement of or addition to the property, leaving unpaid debts incurred for things necessary to keep it a going concern, this is a diversion which the court, while aiding the mortgage creditor, will first correct Fosdick v. Schall, 99 U. S. 235; Miltenberger v. Railway Co., 106 U. S. 286, 1 Sup. Ct. 140; Trust Co. v. Souther, 107 U. S. 591, 2 Sup. Ct. 295; Burnham v. Bowen, 111 U. S. 776, 4 Sup. Ct. 675; Kneeland v. Machine Works, 140 U. S. 596, 11 Sup. Ct. 857; Finance Co. of Pennsylvania v. Charleston, C. & C. R. Co., 48 Fed. 188. And it makes no difference if the person furnishing supplies allows his claim to remain an open account, or prefers to close it. with a note or acceptance giving extended credit; nor is it any waiver of the right to renew the paper at maturity. Burnham v. Bowen, 111 U. S. 776, 4 Sup. Ct. 675.

The rule is stated by Waite, C. J., in Burnham v. Bowen, 111 U. S. 780, 781, 4 Sup. Ct. 675, 677:

“Every railroad mortgagee. in accepting his security, impliedly agrees that the current debls made in the ordinary course of business shall be paid from the current receipts before he has any claim on the income. Such being the case, when a court of chancery, in enforcing the rights of mortgage creditor's, takes possession of a mortgaged railroad, and thus deprives the company of the power of receiving any further earnings, it ought to do what the company would have been bound to do if it had remained in possession; that is to say, pay out of what it receives from earnings all the debts which in equity and good conscience, considering the character of the business, are chargeable upon such earnings. In other words, what may properly be termed the •debts of the income’ should be paid from the income, before it is applied in any way to the use of the mortgagees. The business of a railroad should be treated by a court of equity under such circumstances as a ‘going concern,’ not to be embarrassed by any unnecessary interference with the relations of those who are engaged in or affected by it. In the present case, as we have seen, the debt of Bowen was for current expenses, and payable out of current earnings. It does not appear from anything in the case that there was any other liability on account of current expenses unprovided for when the receiver tools possession, and there is nothing whatever to indicate that this debt would not 'hav'e been paid at maturity from the earnings if the court had not interfered at the instance of the trustees for the protection of the mortgage creditors.”

If this he the law when a receiver is appointed at the instance of mortgagees, how much stronger is the equity when the receiver is appointed at the instance of stockholders, to secure uninterrupted opportunity for a satisfactory reorganization? The question is as to the application of those principles to the case at bar. There can he no question that the steel rails furnished by the Carnegie Steel Company come within the.class of supplies necessary to keep the railroad company a going concern; and the evidence establishes the fact that, after incurring the debt, the railroad company was in the receipt of large earnings, which were applied to permanent improvements, rentals, and interest on the mortgage debt; that the receivers, who, under the Clyde bill, took possession of the property, earned large income, which was applied in the same way, leaving this debt unpaid; and that, when these receivers were discharged, they showed in their accounts a cash surplus, which was duly paid over to their successors under the Central Trust Company bill. The original contract of purchase of the rails was on June 10, 1891. Deliveries were made under it between July 25 and October 10, 1891' The price was represented by notes, with privilege of renewal. This privilege was exercised. Before the notes matured, the Clyde bill was filed, and receivers appointed. The notes fell due. The exact dates are these: The receivers were appointed June 15, 1892. The first note matured June 24, the second June 27, the third July 7, the fourth August 19, the last September 10, 1892. The supplies were furnished between July and October, 1891, — the first of them nearly eleven months, the last a few days more than nine months, before the appointment of receivers in the Clyde case. In the cases in the supreme court and on circuit in which this consideration for the claims of supply creditors is discussed, it is called an "equity.” , The only qualification in applying the equity when the facts call for its exercise is that the claim has arisen within a reasonable time before the receiver was appointed. Ho fixed definition of a reasonable time has been adopted.

In Thomas v. Railway Co., 36 Fed. 817, six months was made the limit of a reasonable time. In Miltenberger v. Railway Co., 106 U. S. 288, 1 Sup. Ct. 140, ninety days was the limit adopted. In Burnham v. Bowen, supra, the supplies were furnished some time in 1874 (when does not appear), and the receiver was appointed early in 1875. In Bound v. Railway Co., 8 U. S. App. 472, 7 C. C. A. 322, and 58 Fed. 473, eighteen months was considered too long a period. See, also, Railroad Co. v. Lamont, 32 U. S. App. 483, 16 C. C. A. 364, and 69 Fed. 23.

Mr. Justice Brewer, whose ability and large experience on this subject give his opinions great weight, in Blair v. Railway Co., 22 Fed. 474, says:

“The idea which underlies these principles I take to he this: That the management of a large business, like that of a railroad company, cannot be conducted on a cash basis. The temporary credit, in the nature of things, is indispensable. Its employes cannot be paid every month. It cannot settle with other roads its (radie balances at the close of every day. Time to adjust and settle these various matters is indispensable. Because, in the nature o£ things, this is so, such temporary credits must be taken as assented to by the mortgagees. * * * in this view, such temporary credits accruing prior to the appointment of the receiver must be recognized by the mortgagees, and such claims preferred. -Now, for what time prior to the appointment of a receiver may these credits be sustainedV There is no arbitrary time prescribed, and it should be only such reasonable time as, in the nature of tilings and in the ordinary course of business, would be sufficient to have such claim settled and paid. Six months is ,the longest time I have noticed as yet-given. Ordinarily, I think that is ample. Perhaps, in some large concerns, with extensive lines of road and a complicated business, a longer time might be necessary.”

It is evident that, in determining what is a reasonable time, regard must be bad to the special circumstances of each particular case. jSTo hard and fast rule can be adopted, nor any line of de-markation clearly made. “Wliat is a reasonable time is a question of law depending upon the circumstances of the particular case.” Paine v. Railroad Co., 118 U. S. 160, 6 Sup. Ct. 1019; Morgan v. U. S., 113 U. S. 477, 5 Sup. Ct. 588.

In the present case the Carnegie Company were dealing with the Richmond & Danville Company. This road controlled an enormous system of railroads, and was in the enjoyment of a very large revenue. There can be no doubt that, if the system had been continued, these rails could have been paid for out of the earnings. Demand for rails was constant; and it was to the highest interest of the railroad company to keep up its credit with the Carnegie Company. The system, however, had become too extended, and needed reorganization. Those interested in it as stockholders and owners attempted plans of reorganization, but. did not get the unanimity necessary to perfect: them. They sought the aid of the court, and asked its protection from creditors until such time as a scheme of reorganization could be completed and adopted. Their prayer was granted, and the receivers appointed. This whole action was for the advantage of those who owned or were interested in the property of ttie railroad company, for their advantage primarily and principally, if not for their advantage solely. But for this intervention in behalf of these stockholders and creditors, their taking the property out of the hands of the company, and sequestrating it for their own purposes, it must be presumed that the notes of the Carnegie Company would have been met at maturity. At the least, it can be said, in the language of Burnham v. Bowen, 111 U. S. 781, 4 Sup. Ct. 677, “There is nothing whatever to indicate that this debt would not have been paid at maturity from the earnings if the court had not interfered,” at the instance of these stockholders. The mortgage creditor obtained the appointment of receivers in bis bill on the express condition that the rights of creditors under the Clyde bill should be conserved. And, as that bill deprived the company of the power of receiving any further earnings, the court which appointed the receiver should require that to be done which “the company would have been bound to do if it had remained in possession; that is to say, pay out of what is received from earnings all the debts which, in equity and good conscience, considering the character of the business, are chargeable on the earnings.”

Has the Oarnegie Steel Company lost its claim by laches? In the transaction with the railroad company, the rails were to be paid for with notes, maturing at no long date. This was for the advantage of the railroad company, distributing the payments, and making more easy the burden on the earnings. The paper was renewed according to the original contract of sale. This, as has been seen, is no waiver. Before the paper matured, the receivers took it out of the power of the company to meet the paper. As soon as it matured, the claim was made. The Carnegie Company did not sleep on its rights. It must be borne in mind that the Clyde bill was not the action of creditors of a corporation struggling to keep from bankrttptcy, driven by creditors, after a long period of shaking credit. It was a plan adopted by the owners of the property to secure perfect reorganization, and avowedly to prevent creditors from disturbing inchoate plans to this end. The movement was conceived by the debtor company. They took their own time in applying to the court, and “the sudden action of the court left this debt unpaid.” Bound v. Railway Co., 8 U. S. App. 472, 7 C. C. A. 322, and 58 Fed. 473. This case has been relied upon as settling a rule adverse to the claimant. In Bound v. Railway Co., the Lackawanna Company furnished steel rails, and took notes therefor, 18 months before the appointment of a receiver. These notes were payable out of earnings by the terms of the notes. Three months after the date of the notes, and five months before their maturity, interest on the second mortgage bonds of the railway company was paid. No other diversion of income was proved or appeared in the case. By taking the notes at 8 months, the Lackawanna Company was held to have assented to the use of the earnings during this period for payment of interest. This defeated their claim.

The question can be considered from another standpoint. There can be no question that, notwithstanding the terms of the mortgage, the mortgagee cannot require an account of the earnings, tolls, and income from the mortgagor, until he has made demand therefor or for a surrender of possession under the provisions of the mortgage. Sage v. Railroad Co., 125 U. S. 378, 8 Sup. Ct. 887, and cases quoted. When, therefore, the receivers appointed at the instance of stockholders and creditors took possession, they enjoyed the same right to the earnings and income which the railroad company enjoyed, and rightfully received them. As the railroad company would have been bound to use this income in the payment of the current expenses for labor and supplies, the receivers should have done so also. But, instead of this, receivers diverted the earnings, income, and funds in their hands towards the betterment of the property, permanent improvements and additions to it, and in payment of interest. And this was natural. They were appointed to take possession of the property, and to conserve it until a plan of reorganization could be adopted and perfected. To facilitate this plan, the property must be kept up. To this end, the funds coming from earnings were used. When the puipose of the first receivership was accomplished, the mortgage creditors came in and reaped the benefit. Surely, those creditors whose claims were neglected, and from whom the earnings were diverted, have the right: to aslc and receive at the hands of the court the recognition and preservation of their claims. We see no error in the conclusion of the circuit court on this point. This renders unnecessary any discussion as to the force and effect of the Virginia statute. On that we express no opinion. The decree of that court is affirmed, with costs,