Westinghouse Electric & Mfg. Co. v. Brooklyn Rapid Transit Co.

291 F. 836, 1922 U.S. Dist. LEXIS 1025

• Court: District Court, S.D. New York
• Decided: August 9, 1922
• Status: Published

Opinion

MAYER, Circuit Judge.

In view of the elaborate report of the special master (hereinabove set forth), an extensive statement of facts is not necessary. At the outset it is important to bear in mind that two wholly separate matters are here for consideration as the result of combining the hearing of these matters for the purpose, mainly, of avoiding in some respects duplication of record.

The first matter arises under application No. 79, and the order of the court thereon, No. 79A. The main question in that proceeding is what, if any, accounting there should be between the Heights receiver and the Brooklyn City in respect of the operations by the Heights receiver of leased property between July 14, 1919, and October 18, 1919.

The second matter arises generally under application 47, which, in its relation to this reference, was an application by the B. R. T. receiver for an adjudication that his claim for unpaid power hills was a preferred claim against the assets of the” Brooklyn City Co. This application subsequently led to order 47B, referring this claim of the B. R. T. receiver to the special master, to be investigated by him at the same time as he conducted his investigation of the questions under order No. 79A. Under order No. 47B, the question upon which the master reports is .the liability, if any, of the Brooklyn City, the lessor to the B. R. T. receiver, for power, maintenance, and other services furnished by the B. R. T. receiver subsequent to July 14, 1919.

1. As preliminary to an understanding of the principal questions under consideration, it is vital to recall the situation on July 14, 1919, the date of the appointment of the Heights receiver. The B. R. T., which was then in receivership, had been furnishing power, maintenance, etc., through its receiver to the Heights Company and its leased line, the Brooklyn City Co. On July 14, 1919, Brooklyn City Co. had no cars, no operating organization, and in brief no means of operating or maintaining its lines, either immediately or for a considerable time to come. The lines of the Brooklyn City Co. were very extensive and comprised about 50 per cent, of the operated Surface lines of the borough of Brooklyn. If the court had ordered the Heights receiver immediately to disaffirm the lease and return the property to the Brooklyn City Co., there would have been a cessation of operation, which, of course, would have been gravely detrimental to the public interest, and which in all probability would have imperiled the franchises of the Brooklyn City Co. and destroyed or substantially impaired its good will as a running railroad.

Such a course on the part of the court would have been unthinkable, and the Heights receiver was therefore confronted with the very practical necessity of continuing to operate the Brooklyn City Co. property It was the effort of the court to keep together a unified system for the-benefit both of the public and of the property involved. Financial and other problems which presented themselves to the receiver were of a most difficult character. He believed that he could continue to operate the Brooklyn City property, and it may well be that his belief would have matured into accomplishment, but for the strike which occurred in the summer of 1919.

When the Heights receiver took possession, he had the right to disaffirm the lease at once, or to operate the road for such reasonable time as would enable him to form a judgment and to present his conclusions to the court. See American Brake Shoe & Foundry Co. v. New York Railways Co. (C. C. A.) 282 Fed. 523, decided June 21, 1922, for the most recent discussion as to the rights and duties of receivers in respect of leased property. In determining his rights and powers, the Heights receiver would naturally examine the provisions of the lease from the Brooklyn City Co. to the Heights Co., as well as the then status of the lessor and lessee with relation to each other.

Prior to July 1, 1919, Brooklyn Heights Co. had failed to pay Brooklyn City Co. certain items of rental, such as certain of the taxes referred to in paragraph XV of the lease. Brooklyn City Co., however, had not enforced any of its remedies under the lease for failure to pay these rental items, hut on July 1, 1919, it accepted the payment of $300,000, which was the quarterly payment on that item of tire lease which required that 10 per cent, upon the capital stock of the lessor was to b,e paid quarterly on the 1st days of July, October, January, and April in each year. This quarterly payment under the terms of the lease was not a payment in advance for the quarter, but a payment on the day folio-wing the end of the quarter. The acceptance by Brooklyn City Co. of the quarterly payment of $300,000 on July 1, 1919, was in law a waiver by Brooklyn City Co. of its right to enforce its remedies under the lease in respect of any other defaults in the payment of rental items prior to July 1,1919. Durand & Co. v. Howard & Co., 216 Fed. 585, 132 C. C. A. 589, L. R. A. 1915B, 998.

In view of the foregoing and also of the terms of the lease, Brooklyn City Co. was not in a position to demand back its property from the receiver until some default occurred after July 14, 1919. In other words, so long as the receiver paid the various items constituting the rent, Brooklyn City Co. could not get back its property, nor, on the other hand, can it be said to have acquiesced in the operation by the Heights receiver during such period as the Heights receiver paid the stipulated rent. Indeed, it is agreed by counsel that the first date when a demand would be effective was October 1, 1919. This was because the Heights receiver paid the rental items as they became due, with the single exception of the sum of $87,476.93, which was an installment of the New York state gross earnings tax. The receiver, however, obtained from the state comptroller an extension of time within which to pay this tax, said extension being up to October 1, 1919.

In paragraph XV the lessee covenanted “to pay and discharge within a reasonable time after the same shall become due any and all taxes,” etc. It was further provided:

“Sliould the lessee fail to make payments * * * within the time herein required, then the lessor may after the expiration of said time pay the same and lessee agrees to repay the amount so paid to the lessor on demand.”

The expression “within the time herein required” obviously means “within a reasonable time after the same shall have become due.” October 1st, the extension date, was obviously “a reasonable time,” and until that date, therefore, there was no default under the terms of the lease in the payment of this rental item. The result was that during the whole period from July 14 to and including September 30, 1919, the Heights receiver operated for the lessee’s account.

It is well settled that, when a receiver operates for lessor’s account, the lessor is entitled to net earnings, if any, but he also runs the risk of being charged with a deficit, if any. At the time that the Heights receiver undertook this operation, no one knew how the operation would result. Where, as here, the lessor had not acquiesced, and was not in a legal position to acquiesce, it would have been manifestly unfair to the lessor to charge him with a deficit, if such had occurred, because, generally speaking, the operation for lessor’s account is based on the lessor’s consent or acquiescence. The answer to the contention on behalf of Brooklyn City Co. that the net earnings rule should apply for the period from July 14th to October 1st, and .that, otherwise, an inequitable result would follow, is that the Brooklyn City Co. put itself in the position above described when it made its lease with the Heights Co. Under the lease, which did not provide for payment of rental in advance, the Brooklyn City Co. disabled itself from re-entry so long as the rental items were paid.

Of course, the Heights receiver might have paid the stipulated rental for a period so long that his conduct could have been construed as an adoption of the lease. He might by his conduct have found himself in the position described in United States Trust Co. v. Wabash Western Railway Co., 150 U. S. 287, 14 Sup. Ct. 86, 37 L. Ed. 1085, recently analyzed in American Brake Shoe & Foundry Co. v. New York Railways Co., supra; but such was not the case here. The receiver is always entitled to a reasonable time within which to decide whether or not he shall adopt the lease, and his payment of rental items after July 14th until October 1st spreads over a period well within a reasonable time. While the facts may differ in immaterial detail, the principles governing the case at bar are substantially the same as those involved in the Second Avenue Case, 225 Fed. 734, 141 C. C. A. 6. But, if that case were laid aside, the fundamental difficulty which the Brooklyn City Co. cannot overcome is that it was never in the position from July 14th to October 1st to acquiesce, so as to make the receiver’s operation for account of lessor, and it may be repeated, for emphasis, that, if the contrary were held, the result would have been unjust and inequitable against the lessor, if a deficit of operation had occurred.

What happened was that there was a surplus of some $89,000 for ■this period, after operating expenses had been deducted from receipts, although, of course, there was nowhere near enough obtained from operation with which to pay the October 1st quarterly rental. I am of opinion, therefore, that the special master was right, and consequently that the operation from July 14th to October 1st was for the account of the lessee, and not of the lessor.

2. In considering the relations of the B. R. T. receiver to the Heights receiver and the Brooklyn City Co., it must be remembered that he was an outside party, i. e., a materialman furnishing power, maintenance, etc. The argument which the court has heard on more than one occasion was again presented; i. e., that there was identity between the B. R. T. receiver and the Heights receiver and between the two corporations. It is true that, as a holding company, B. R. T. owned the stock of the Heights Company; but that fact is one of no consequence in respect of the matters here under consideration. The creditors (lien and others) of each of these corporations are different, and the obligations of each are different. Prior to the receivership, the whole so-called B. R. T. system was unified and run in effect under a single management for purposes of economy of administration and harmony i'n policy. When the court was confronted with the necessity of appointing a receiver for the Heights Company and the other surface lines, it seemed desirable that the general plan instituted by so experienced an administrator as Judge Racombe, in the Metropolitan receivership, should be followed. Subsequent events have justified this course in view of the many critical occasions where the whole situation demanded harmony of policy in matters affecting in the same way the various corporations in receivership. It is true, of course, that the ultimate decision in many matters rests with the court; but the court cannot be expected to supervise in detail the daily problems of administration.

In settling rights and 'stating accounts, however, it is immaterial that the same person happens to be the receiver of two corporations which in a given situation have antagonistic rights and interests. In such circumstances, in the last analysis, it is the court which decides, and it becomes unimportant that the same person happens to be the receiver of different corporations, each urging its own rights. The court, in such circumstances, is called upon to determine the rights of the respective receivers or corporations; and, in the same way, preliminary to that determination, the receiver of each asserts the rights of each and necessarily calls upon the court to decide as between conflicting interests.

It is rather a lay than a law argument to contend that there is no distinction between the Heights receiver and the B. R. T. receiver. The Heights receiver and the B. R. T. receiver in their relations to each other were called upon .to deal with two important situations: (1) The prereceivership obligations owing from the Heights receiver to the B. R. T. receiver; and (2) the need of the Heights receiver after July 14th of the necessary power, maintenance, etc., from the B. R. T. receiver.

The payment of the prereceivership power, etc., bills due to the B. R. T. is fully justified upon either of two grounds: (1) The ne-' cessity of payment as heretofore considered and passed upon in the Nassau Company Case; and (2) the legal position of the B. R. T. receiver as a materialman who could insist that his prereceivership hills should be paid out of the continuing income derived from operation of the Brooklyn City Co., even after the Brooklyn City Co. had regained possession of its property.

The first ground—i. e., that of necessity—need not be elaborated. It was fully considered in the Nassau Case, and is again referred to in this case in the report of the special master. The second ground needs no better nor more relevant authority than Virginia & Alabama Coal Co. v. Central Railroad, etc., Co., 170 U. S. 355, 18 Sup. Ct. 657, 42 L. Ed. 1068 (hereinafter called the Virginia Case).

What the Heights receiver did was to pay to the B. R. T. receiver the prereceivership. power, etc., bills owing tjo the B. R. T. receiver and to leave unpaid the B. R. T. receiver’s power, etc., bills incurred by the Heights receiver between July 14th and about September 10th. .What the Heights receiver could have done, if he so desired, was to pay the bills of B. R. T. receiver, incurred between July 14th and about September 10th, and then pursue the continuing income of Brooklyn City Company for the payment of the prereceivership power bills of the B. R. T. receiver. The result would be the same, as will appear infra.

In addition to what has been said, attention must again be called to the condition of the Brooklyn City Co. on July as affecting its relation with the B. R. T. receiver, if the Heights receiver had turned the property back at that time. Brooklyn City Co. would have been helpless for a very considerable period of time, certainly for a period quite beyond October 18th. The record shows that it would not have been possible to get the necessary cars and equipment in the open market, that the then ready cash situation of the Brooklyn City Co. was such as to present great difficulties, if its road had been returned and had been forced to operate without the aid of the B. R. T. receiver and the Heights receiver in furnishing it with cars, power, maintenance, etc., and the men necessary for a surface railroad operating organization.-

Brooklyn City Co. was able to operate on October 18th only because there was a co-operative spirit around the circle, necessary in the public interest and fair, in the opinion of the court;, because of the difficult position in which all the surface roads, including the Brooklyn City Co., found themselves in the summer and fall of 1919 due to then existing conditions which will be clearly recalled, but which need not be recited at length. If the necessities of the B. R. T. receiver and the Heights' receiver or the Brooklyn City Co. were balanced one against the other, and if it may be imagined that actual threats were made one against the other, it is plain that the B. R. T. receiver was in the superior position and could refuse to furnish the necessary power, etc., unless his prereceivership bills were paid, and such refusal would have brought the B. R. T. receiver much less troublesome results than would have been imposed upon the Brooklyn City Co.

But, in any event, the Virginia Case, supra, would have protected the B. R. T. receiver. That case invites careful analysis. The Central Company of Georgia executed a lease of a railroad controlled by it to the Georgia Pacific Company. The Georgia Company did not take possession of the property of the Central Company, or assume any control over the same, except that on the date of the lease it requested the Richmond & Danville Company to assume the control of the leased property, with which request there was an immediate compliance. The Danville Company ordered coal from the Virginia & Alabama Coal Company, and this coal was bought and actually used on the Central Company’s road. Later the Central Company went into the hands of a receiver. It is not necessary to give the details of the entire procedure; suffice it to say that the Virginia & Alabama Coal Company sought to recover certain money for coal furnished for use on the lines of the Central Company. The Supreme Court held that there was a superior equity in favor of the materialman—i. e., Virginia Company—as against the mortgage bonds in the income, arising both before and after the appointment of the receiver, from the operation of the property. If the Supreme Court had thus decided upon the theory, in effect, that the lease from Central Company to Georgia Pacific Company was not valid, and that the Danville Company was the Central Company’s agent, the case might have been inapplicable to that at bar, but the Supreme Court went further and arrived at the same result upon the assumption that the lease was lawful. This will be noted in the italicized part of the following extract from the opinion (170 U. S. 368, 369, 18 Sup. Ct. 662, 42 L. Ed. 1068):

“The dominant feature of the doctrine, as applied in Burnham v. Bowen, is that where expenditures have been made which were essentially necessary to enable the road to be operated as a continuing business, and it was the expectation of the creditors that the indebtedness created would be paid out of the current earnings of the company, a superior equity arises in favor of the materialman as against the mortgage bonds in the income arising both before and after the appointment of a receiver from the operation of the property. The equity thus held to arise when a purchase of necessary current supplies is made by the owning company is not in any wise influenced by the fact that the company itself is the purchaser of the supplies, but is solely dependent upon the fact that the supplies are sold and purchased for use, and that they are used in the operation of the road, that they are essential for such operation, and that the sale was not made simply upon personal credit, hut upon the tacit or express understanding that the current earnings would be appropriated for the payment of the debt. Clearly, if the owning company had entered into an agreement with some individual to commit to his uncontrolled management as their agent the operation of the company’s lines, the bondholders could mot be heard to say that thereby no equities could arise in favor of labor or supply claimants in the income of the property preserved or kept in operation by their efforts. This would be the category in which the Danville Company would stand if the lease of the Central lines was not valid. On the other hand, if the lease was lawful, upon the insolvency for am.y cause of the Da/tw-Ule Company labile the lease continued in force, its relation toward its leased line in the adjustment and settlement, as agaAnst the leased road, of equities arising between those who had furnished supplies to the road and the bondholders would be precisely that of an owner of the leased Unes, cmd if such possession is terminated by the court through the agency of a receiver equities in the meóme of the property contimie to' survive..” (Italics mine.)

It will be seen that the point of the foregoing is that, if Danville Company, in effect the lessee, because operating for the Georgia Pacific Company, the lessee, had become insolvent (in this case the Heights Company in the same position as the Danville Company) then the materialman (here B. R. T. receiver) could successfully claim a superior equity upon the current earnings of the lessor company (in that case Central Company and in this case Brooklyn City Co.), even after the property was again operated by the lessor. It is therefore seen that there is no point of distinction between that case and the' case at bar, because the lessor and not the lessee property was operated by a receiver. The point is that the superior equity in favor of the materialman is in the continuing income of the lessor company. In other words, the Supreme Court in the Virginia Case has laid down a rule intended to protect the materialman in respect of current supplies, because it is these supplies which enable the railroad to continue its operation. As said in another part of the opinion (170 U. S. 365, 18 Sup. Ct. 661, 42 D. Ed. 1068):

“It was tlius settled that, where coal is purchased by a railroad company for use in. operating lines of railway owned and controlled by it, in order that they may be continued as a going concern, and where it was the expectation of the parties that the coal was to be paid for out of current earnings, the indebtedness, as between the party furnishing the materials and supplies and the holders of bonds secured by a mortgage upon the property is a charge in equity on the continuing income, as well that which may come into the hands of a court after a receiver has been appointed as that before.”

The lessor in the case at bar is in precisely the same position as the bondholders in the Virginia Case. By its lease it had turned over its property to the lessee, and the power, maintenance, etc., bills incurred prior to the receivership were necessary to keep the railroad a going concern, and, as a consequence, the B. R. T. receiver looked to and had a lien upon the income earned out of the Brooklyn City Co. property until his debt was satisfied. In such circumstances, the B. R. T, ■ receiver could proceed against the Brooklyn City Company income until any balance due it was satisfied; for tjhe effect of the Virginia Case is really to impose a lien in rem upon the continuing income of the railroad to which the supplies' have been furnished, and, whatever other reasons may be advanced, it is apparent that public interest is a controlling element; for the Supreme Court cites Union Trust Co. v. Illinois Midland Co., 117 U. S. 434, 6 Sup. Ct. 809, 29 L. Ed. 963, in which much emphasis is placed upon the public interest. But this doctrine works out equitably, as well illustrated in the case at bar, where the continued supply of power, maintenance, etc., prior to the receivership, kept the Brooklyn City lines in operation.

It was the duty, therefore, of the Heights receiver to pay the B. R. T. receiver out of the money in his hands as Heights receiver, and, if he had not paid the B. R. T, receiver these prereceivership bills, the B. R. T. receiver could now pursue the operating net income of the Brooklyn City Co. produced any time after October 1st. Viewing, however, the claim of the B. R. T. receiver in accordance with the course of conduct actually pursued, it appears that, the prereceivership bills of the B. R. T. receiver having been paid by the Heights receiver, the former is now a creditor for the bills incurred during the period, July 14th to October 1st, and in point of fact, as stated supra, for power, etc., furnished from July 14th to September 10th.

It is plain from the facts of the case that the power, etc., was not supplied solely on the personal credit of the Heights receivership. With large unpaid bills existing on July 14, 1919, with a situation of the most unpromising character, with grave doubt as to whether the Brooklyn City Co. could be operated other than with a loss, it is not to be supposed that the B. R. T. receivers supplied power, etc., only on the personal credit of the Heights receivership.

Yet, even though the Brooklyn City Co. could not itself have operated at any time between July 14th and October 1st, without the help of the B. R. T. receiver and the employees of the B. R. T. and the Heights receivers, it was manifest, as pointed out supra, that it was the duty of the Heights receiver to keep the Brooklyn City Co. road going in the interest of the public and of the Brooklyn City Co. itself. Whether power, maintenance, etc., had been furnished by the B. R. T. receiver or some other concern (and it is doubtful whether another concern could or would have supplied the needed power, maintenance, etc.) made no difference. Power, maintenance, etc., were vitally necessary to keep the road in operation, and, as has been pointed out, so long as the Heights receiver paid the rental items, the Brooklyn City Co. was in no different position than before the receivership, because of the position in which it had placed itself by the terms of the lease. Thus, again, the Virginia Case applies, and, under its doctrine, the B. R. T. erceiver can, at his choice, resort to the continuing income of the Brooklyn City Co. operation rather than to the personal liability of the Heights receivership.

3. As between the Heights receiver and the Brooklyn City Co., however, the former must pay the bills of his operation for lessee’s account to the extent of his ability. He cannot operate for lessee’s account, and unjustly enrich the lessee’s estate by failing to pay his operating bills, just because the creditor may choose to assert his right.to the in rem remedy against the subsequent income of the operated property.

The Heights receiver has asked a court of equity, in control of the Heights property, for instructions as to the disposition of the funds in his hands. These funds are divided broadly into three classes: (1) Free cash; (2) certain trust funds enumerated in the master’s report; and (3) funds claimed to be under liens. Class (2) plainly cannot be utilized to pay the B. R. T. receiver, and the rights under class (3) have not been determined. Class (1), however, is available for the unpaid bills of receiver’s operation. These unpaid bills, however, include not merely the bills of the B. R. T. receiver for power, maintenance, etc., supplied to operate the Brooklyn City Co. property, but various other claims which may be of equal equity and priority. If, then, the Heights receiver has, to illustrate, $1,000 free cash, and the claims of equal rank against his operation for lessee’s account aggregate $2,000, he can, at present, safely pay only 50 per cent., and, if the B. R. T. receiver’s bills for the July 14th-October 1st period were $1,200, the Heights receiver could now pay $600 on account of such bills.

The actual status, however, is much more favorable to the Brooklyn City Co. than the foregoing proportions. I shall not attempt to state the figures accurately, but, instead of a charge against the Brooklyn City Co. of $342,190.16, the amount is apparently somewhere in the neighborhood of $100,000, as the amount due the B. R. T. receiver is less than $342,190.16, and the amount presently available out of the Heights free cash is around $200,000.

Under the authority of the Virginia Case, the B. R. T. receiver may collect at once the balance remaining out of the net income now earned or hereafter earned by Brooklyn City Co., and may therefore have a decree accordingly. On the other* hand, Brooklyn City Co. may recover over against Heights receiver any further free cash which may come into his hands. If it should be held that the funds in the possession of the Heights receiver now claimed to be under liens are not subject to such liens, then, of course, such funds will also be available for the payment by Heights receiver to Brooklyn City Co. of any sum which Brooklyn City Co. may pay to the B. R. T. receiver.

It is quite likely that counsel can agree on a collation of the figures, and this subject can be dealt with and further testimony taken, if necessary, when the decree comes up for settlement.

4. Finally, on the question of jurisdiction, Gas & Electric S. Co. v. Manhattan & Queens Trac. Co. (C. C. A.) 266 Fed. 625, particularly af pages 633, 634 (cf. Hume v. City of New York, 255 Fed. 488, 166 C. C. A. 564), seems decisive.

5. Some exceptions have been withdrawn; others have become academic; and the subject-matter of others has been reserved for later, consideration. These and all other details can be taken care of in the decree.

Except as what has been set forth supra may be modification of the master’s report, the report is confirmed. Settle decree on five days’, notice.