Southern Ry. Co. v. Ensign Mfg. Co.

117 F. 417, 54 C.C.A. 591, 1902 U.S. App. LEXIS 4449

• Court: Court of Appeals for the Fourth Circuit
• Decided: July 10, 1902
• Docket: No. 449
• Status: Published

Opinion

SIMONTON, Circuit Judge

(after stating the facts as above). Our first inquiry is, between whom was the contract of purchase of these goods? Was the Richmond & Danville Railroad Company, or the Central Railroad & Banking Company, the purchaser? The goods were delivered upon an order of the general purchasing agent of the Richmond & Danville, with whom the Ensign Manufacturing Company had had long and frequent dealing, and in the regular course of that dealing. The goods were shipped upon that order, and as directed in that order. The Richmond & Danville did not profess to be acting as agent for the Central Railroad & Banking Company, and in fact had no authority to act as such agent. One of the express terms of the lease was that when additional equipment was needed for the lessee, and its supply demanded by the lessee, and the lessor shall agree that such additional equipment is necessary, the moneys requisite to pay for the same shall be provided by the lessor. There is no evidence in the record of such demand, or of any concurrente in the necessity for it. So the contract was between the Ensign Manufacturing Company and the Richmond & Danville Railroad Company. This being so, the direction upon the order, “Make bill against Central Railroad,” could only have been intended to direct the purchasing company upon what part of the property it was operating the goods were to be used and against whom in its own books they were to be charged,—a part of its system of bookkeeping.

But this does not constitute the case. The vital question is: Granting that this is in law a debt of the Richmond & Danville Railroad Company, is it in- the class of those favored debts to which the court gives a claim prior in lien to.the mortgage foreclosed in this suit? It will not do to stand upon the legal demand. Were this the case, the legal demand of the bondholder, secured by his recorded mortgage, must prevail. The intervener must rely on its equity, and then the question arises, can this equity be asserted against the mortgagees of the Richmond & Danville Railroad Company and the Southern Railway Company, its purchaser, or is it more properly an equity to be asserted against the Central Railroad & Banking Company of Georgia? The supreme court of the United States, in Fosdick v. Schall, 99 U. S. 235, 25 L. Ed. 339, and the many cases following it, applying the principles therein established, has recognized an equity in creditors, who supplied a railroad company with labor and supplies necessary to keep it a going concern, to be reimbursed from earnings of such road in the hands of a receiver. This equity is held to be superior to the claims of the mortgage creditors. Sometimes it is so potent as to justify payment out of the corpus of the property, in the absence of earnings. The reason for this exceptional rule, which is applied only to railroads, is because of their quasi public character. They obtain and use certain franchises granted by the public, and in consideration thereof must subserve the interests of the public. Especially must every railroad be kept a going concern. To this end, their earnings are first applied to debts incurred for labor and supplies necessary to keep the road in actual operation. In this way not only is the public interest served, but the value of the property covered by the mortgage is maintained, and the interests of all concerned not allowed to go to ruin. Southern Ry. Co. v. Carnegie Steel Co., 176 U. S. 289, 20 Sup. Ct. 347, 44 L. Ed. 458. In this way those furnishing such nece.ssary labor and supplies are assured that, even if the railroad should unexpectedly go into the hands of receivers, the earnings thereafter will be applied to meet their demands; and if, in the operation of a railroad by a receiver, earnings which should have been used in meeting obligations for current supplies are diverted from this purpose, and are used for the advantage of the mortgage creditors, such diversion must be made good, even if it be necessary to encroach upon the corpus of the mortgaged property. Fosdick v. Schall, 99 U. S. 235, 25 L. Ed. 339; Burnham v. Bowen, 111 U. S. 776, 4 Sup. Ct. 675, 28 L. Ed. 596; Trust Co. v. Morrison, 125 U. S. 591, 8 Sup. Ct. 1004, 31 L. Ed. 825; St. Louis, A. & T. H. R. v. Cleveland, C., C. & I. R. Co., 125 U. S. 658, 8 Sup. Ct. 1011, 31 L. Ed. 832; Southern Ry. Co. v. Carnegie Steel Co., supra. The rule is expressed in terse form in Burnham v. Bowen, supra:

“If current earnings are used for tlie benefit of mortgage creditors before current expenses are paid, tbe mortgage security is chargeable in equity with the restoration of the fund which has thus been applied improperly to their use.”

In Kneeland v. Trust Co., 136 U. S. 89, 10 Sup. Ct. 950, 34 L. Ed. 379, the general doctrine was recognized. But the court, speaking with emphasis of the sacred character of vested liens, declared that the rule should be applied only in a few specified and limited cases. In Thomas v. Car Co., 149 U. S. 95, 13 Sup. Ct. 824, 37 L. Ed. 663, the doctrine of Fosdick v. Schall was recognized, but was not applied, because the party seeking the preference over the mortgage lien had contracted upon the responsibility of the railroad company, the mortgagor, and not in reliance upon the interposition of a court of equity. In Virginia & A. Coal Co. v. Central R. & Banking Co., 170 U. S. 355, 18 Sup. Ct. 637, 42 L. Ed. 1068, a rule is laid down reconciling Burnham v. Bowen and Thomas v. Car Co. See Niles Tool Works Co. v. Louisville, N. A. & C. R. Co., 50 C. C. A. 390, 112 Fed. 561.

No hard and fast rule has been adopted. Each case depends upon its own circumstances. “Whether the debt was contracted upon the personal credit of the railroad company, without any reference to its receipts, is to be determined in each case by the amount of the debt, the time and terms of payment, and all other circumstances attending the transaction.” Southern Ry. Co. v. Carnegie Steel Co., 176 U. S. 285, 20 Sup. Ct. 358, 44 L. Ed. 458. One of these circumstances upon which great stress is laid is that this equity is applied to such claims only as arose within a reasonable time before the receiver was appointed. Paine v. Railroad Co., 118 U. S. 159, 6 Sup. Ct. 1019, 30 L. Ed. 193; Miltenberger v. Railway Co., 106 U. S. 288, 1 Sup. Ct. 140, 27 L. Ed. 117; Thomas v. Railway Co. (C. C.) 36 Fed. 817; Blair v. Railway Co. (C. C.) 22 Fed. 471. In this last case Judge Brewer says that six months is the longest time within his knowledge that ever has been given. In the opinion of this court in Bound v. Railway Co., 7 C. C. A. 322, 58 Fed. 473, 8 U. S. App. 472, these claims to be preferred are said to be for “those ordinary and necessary current expenses of operating a railway contracted within a short time before a re.ceivership, which by the sudden action of the court in appointing a receiver were left unpaid.”

Three things, therefore, are necessary in order to give a claim against a railroad company, in the hands of a receiver, a preference over the mortgage lien: The supplies furnished must be of that ordinary and necessary character for operating a railroad, and keeping the mortgaged property a going concern; that the person furnishing them relied upon the interposition and protection of his equity by the court, and did not contract upon the personal responsibility of the railroad company; that the debt was contracted but a short time before the appointment of the receivers, and was left unpaid because of the sudden action of the court in making such appointment.

Taking these up in their order: The car wheels, no doubt, were of that character of supplies necessary for the operation of a railroad; but in the case before us an equity is claimed, superior to the vested lien of these mortgagees of the Richmond & Danville Railroad. The supplies were not furnished for the use of any railroad on which these mortgagees had a lien, nor for the benefit of any such railroad. On the contrary, they were furnished to the Richmond & Danville Railroad, in the performance by it of the obligations it assumed for the Georgia Pacific Railroad Company to the Central Railroad & Banking Company, and were on the latter road, in which these mortgagees and the receivers appointed at their instance had no interest whatever, and from which there is no evidence in the record that they derived any benefit. The claim does not come within “those ordinary and current expenses of operating a railroad,” referred to in Bound v. Railway Co., supra. In this respect the case differs essentially from Southern Ry. Co. v. Carnegie Steel Co., supra, in which case the steel rails upon which claim was made were furnished for the use of the mortgaged property, came into the hands of the receivers, were used by them, and at the sale went into the hands of the purchasers.

Did the Ensign Manufacturing Company furnish these goods, relying upon the interposition and protection of their equity by the court, or did they contract upon the personal responsibility of the Richmond & Danville Railroad Company? On this point Mr. Ensign, the manager of this company, speaks as follows:

“I further desire to state that the supplies furnished to the Richmond & Danville Railroad Company, being car wheels and .in small lots, and being sent to different points along the line of its road, were furnished because of the fact that the Ensign Manufacturing Company had had' a running account with the Richmond & Danville Company for a number of years, and had been engaged in making and shipping car wheels, and would fill order's from time to time from the said Richmond & Danville Railroad Company, and ship them wherever and to' whatever points the said Richmond & Danville Railroad Company, or its purchasing agent, desired, without question as to who would pay the same, looking to the Richmond & Dan-ville Railroad Company, and the current receipts of the road for payment for said supplies. These supplies were usually paid for in the course of 60 or 90 days. Payments were made by checks from the Richmond & Dan-ville Railroad Company office, and while the Ensign Manufacturing Company made out bills for the goods in controversy in this matter, amounting to $1,590, against the Central Railroad & Banking Company .of Georgia, it was simply because the Richmond & Danville Railroad Company’s purchasing agent so requested on the orders, and not because the Ensign Manufacturing Company looked to the Central Railroad & Banking Company of Georgia for payment.”

It appears from this that the manager knew that the goods were purchased for and were used by the Georgia railroad. In Kneeland v. Trust Co., 136 U. S. 89, 10 Sup. Ct. 950, 34 L. Ed. 379, the court, animadverting upon the disposition to extend the equitable doctrine of Eosdick v. Schall, says:

“No one. is bound to sell to a railroad company, or to work for it. Whoever has dealings with a company whose property is mortgaged must be assumed to have dealt with it on the faith of its personal responsibility, and not in expectation of subsequently displacing the priority of the mortgage. * * * It is the exception, and not the rule, that such priority of lien can be displaced. We emphasize the fact of the saeredness of the contract lien.”

Following the Kneeland Case, the court, in Thomas v. Car Co., 149 U. S. 110, 13 Sup. Ct. 824, 37 L. Ed. 663 decided that, in order to secure this equity, the creditor must have furnished the supplies relying upon the interposition of the court. In Southern Ry. Co. v. Carnegie Steel Co. the same doctrine is reiterated, having previously been recognized in Virginia & A. Coal Co. v. Central R. & Banking Co., 170 U. S. 355, 18 Sup. Ct. 657, 42 L. Ed. 1068. The same doctrine was applied in this court in Bound v. Railway Co., supra.

So the question comes, were these goods furnished on the credit of the Richmond & Danville Railroad Company,—its personal credit,— or in reliance on this equity? The testimony of Mr. Ensign, above quoted, answers this question. His company had had frequent dealings with the Richmond & Danville Railroad Company, had had a running account with it for years, had filled orders when made, looking to the Richmond & Danville Railroad Company and the current receipts of that road, presenting its bill in 60 or 90 days, and in all previous instances had been promptly paid. The goods had been in this instance charged to the Georgia railroad simply because the purchasing agent of the Richmond & Danville so- requested it, and not because the Ensign Company looked to the Georgia road for payment. Now, as the goods furnished under the order of the Richmond & Danville Railroad Company were for the use of the Georgia road, and were actually used by it, the Ensign Company could have relied upon this equity, and could have asserted it against the current earnings of the Central Railroad & Banking Company of Georgia in priority to its mortgages. Virginia & A. Coal Co. v. Central R. & Banking Co., 170 U. S. 368, 369, 18 Sup. Ct. 657, 42 L. Ed. 1068. The equity exists, notwithstanding the mortgages, notwithstanding thp lease which is subordinate to the mortgages, notwithstanding the fact that the Richmond & Danville Railroad Company ordered the goods. It is an equity in favor of the materialman, existing against any person interested in the railroad property, either as owner, lessee, or mortgagee. If, however, the goods were not delivered in reliance on this equity, but because they were ordered by the Richmond & Danville in the satisfactory course of dealing existing between it and the Ensign Company for years, they were delivered on the personal credit of the Richmond & Danville, and under the cases cited above the claim for them cannot be preferred.

The mere fact that the payment for the goods was expected from the earnings of the railroad company is not sufficient to put the equity in motion. See Lackawanna Iron & Coal Co. v. Farmers’ Loan & Trust Co., 176 U. S. 303, 20 Sup. Ct. 393, 44 L. Ed. 475; Bound v. Railway Co., supra. This conclusion is strengthened by the fact that the account in this case was made in October and November, 1891, and the receivers were not appointed until August, 1892. We have seen how much stress the court places on the period elapsing between the incurring the debt and the sudden action of the court in appointing a receiver. Indeed, in the order appointing receivers in the main cause, the only current and unpaid pay rolls and vouchers and supply accounts incurred in the operation of the railroad system which they were directed to pay out of the earnings coming to their hands were limited to such as were incurred within six months prior to the date of the order.

The case at bar strongly resembles, if it is not on all fours with, Virginia & A. Coal Co. v. Central R. & Banking Co. of Georgia, 170 U. S. 355, 18 Sup. Ct. 657, 42 L. Ed. 1068. In that case the same purchasing agent of the Richmond & Danville Railroad Company, while that company was operating this Central Road, contracted with the coal company to furnish coal to the Central Railroad for 12 months from July 1, 1891, to July 1, 1892. The coal was furnished. The bill not having been paid, the coal company intervened in a suit in which the receiver of the Central Road and the Richmond & Danville Railroad Company were parties. To its petition for intervention it made both of these parties defendant, and by it sought payment for the coal. They claim against the Richmond & Danville under the contract. That against the Central was through the equity, in that the coal was purchased for the use of, and was used by, the Central Road. The supreme court held that the equity, under which payment for supplies should be paid out of current earnings in the hands of the receiver, existed against the Central Railroad & Banking Company, because the supplies were used in its operation, notwithstanding that the contract of purchase was that of its lessee. As the result of the case, payment was ordered to be made by the company for whose use the goods were brought. No decree was entered against the Richmond & Danville. The court, in fact, held that the legal contract was with the Richmond & Danville, but, when it was sought to enforce the equity, the earnings of the Central were liable to it. So we hold in this case. Although the contract was made with the Richmond & Danville Railroad Company, and the Ensign Manufacturing Company is a creditor thereunder against this company, yet, as the goods were purchased for and were used tiy another company, no equity exists, as against the mortgagees of the Richmond & Danville, giving the claim priority over them.

The decree of the circuit court is reversed, and the cause is remanded to that court, with instructions to dismiss the petition.

Reversed.