Gregg v. Metropolitan Trust Company/Opinion of the Court

This is a petition against a receiver appointed in proceedings for the foreclosure of two railroad mortgages. The petitioner, in pursuance of a contract made on December 1, 1896, with the Columbus, Sandusky, & Hocking Railroad Company, the mortgagor, delivered railroad ties to the value of $4,709.53 in May and on June 1, 2, and 3, 1897. The receiver was appointed on June 1, 1897. After his appointment there was found on hand a part of the above ties, to the value of $3,200, and these ties were used in the maintenance of the railroad as a going concern. The petitioner makes a claim on the body of the fund in the receiver's hands, for these and other necessary supplies furnished within six months, amounting in all to $6,804.49. The claim for the ties, at least, is admitted to have been 'a necessary operating expense in keeping and using said railroad, and preserving said property in a fit and safe condition as such.' The petitioner waives a special claim against the receiver for $863.39 for the ties received June 2 and 3, but does claim a lien for $3,200 for ties on hand and not returned to him after the receiver's appointment, in case his whole claim is not allowed. The circuit court of appeals affirmed a decree of the circuit court establishing this claim as a six months' claim, but denying the right to go against the body of the fund the right to go against the body of the fund, court. 48 C. C. A. 318, 109 Fed. 220, 59 C. C. A. 637, 124 Fed. 721.

The case stands as one in which there has been no diversion of income by which the mortgagees have profited, or otherwise, and the main question is the general one, whether, in such a case, a claim for necessary supplies furnished within six months before the receiver was appointed should be charged on the corpus of the fund. There are no special circumstances affecting the claim as a whole, and if it is charged on the corpus it can be only by laying down a general rule that such claims for supplies are entitled to precedence over a lien expressly created by a mortgage recorded byfore the contracts for supplies were made. An impression that such a general rule was to be deduced from the decisions of this court led to an evidently unwilling application of it in New England R. Co. v. Carnegie Steel Co. 21 C. C. A. 219, 33 U.S. App. 491, 75 Fed. 54, 58, and perhaps in other cases. But we are of opinion, for reasons that need no further statement (Kneeland v. American Loan & T. Co. 136 U.S. 89, 97, 34 L. ed. 379, 383, 10 Sup. Ct. Rep. 950) that the general rule is the other way, and has been recognized as being the other way by this court.

The case principally relied on for giving priority to the claim for supplies is Miltenberger v. Logansport, C. & S. W. R. Co. 106 U.S. 286, 27 L. ed. 117, 1 Sup. Ct. Rep. 140. But, while the payment of some pre-existing claims was sanctioned in that case, it was expressly stated that 'the payment of such debts stands, prima facie, on a different basis from the payment of claims arising under the receivership.' The ground of such allowance as was made was not merely that the supplies were necessary for the preservation of the road, but that the payment was necessary to the business of the road,-a very different proposition. In the later cases the wholly exceptional character of the allowance is observed and marked. Kneeland v. American Loan & T. Co. 136 U.S. 89, 97, 98, 34 L. ed. 379, 383, 10 Sup. Ct. Rep. 950; Thomas v. Western Car Co. 149 U.S. 95, 110, 111, 37 L. ed. 663, 668, 669, 13 Sup. Ct. Rep. 824; Virginia & A. Coal Co. v. ''Central R. & Bkg. Co.'' 170 U.S. 355, 370, 42 L. ed. 1068, 1073, 18 Sup. Ct. Rep. 657. In Union Trust Co. v. Illinois Midland R. Co. 117 U.S. 434, 465, 29 L. ed. 963, 973, 6 Sup. Ct. Rep. 809, labor claims accruing within six months before the appointment of the receiver were allowed without special discussion, but the principles laid down in the Miltenberger Case had been repeated in the judgment of the court, and the allowance was said to be in accordance with them. It would seem from St. Louis, A. & T. H. R. Co. v. Cleveland, C. C. & I. R. Co. 125 U.S. 658, 673, 674, 31 L. ed. 832, 837, 8 Sup. Ct. Rep. 1011, that in both those cases there was a diversion of earnings. But the payment of the employees of the road is more certain to be necessary in order to keep it running than the payment of any other class of previously incurred debts.

Cases like Union Trust Co. v. Souther, 107 U.S. 591, 27 L. ed. 488, 2 Sup. Ct. Rep. 295, where the order appointing the receiver authorized him to pay debts for labor or supplies furnished within six months out of income, stand on the special theory which has been developed with regard to income, and afford no authority for a charge on the body of the fund. Fosdick v. Schall, 99 U.S. 235, 25 L. ed. 339; Burnham v. Bowen, 111 U.S. 776, 28 L. ed. 296, 4 Sup. Ct. Rep. 675; Morgan's Louisiana & T. R. & S. S.C.o. v. Texas C. R. Co. 137 U.S. 171, 34 L. ed. 625, 11 Sup. Ct. Rep. 61; Virginia & A. Coal Co. v. ''Central R. & Bkg. Co.'' 170 U.S. 355, 42 L. ed 1068, 18 Sup. Ct. Rep. 657; Southern R. Co. v. Carnegie Steel Co. 176 U.S. 257, 44 L. ed. 458, 20 Sup. Ct. Rep. 347. It is agreed that the petitioner may have a claim against surplus earnings, if any, in the hands of the receiver, but that question is not before us here.

The order appointing the receiver did not go beyond the distinction which we have mentioned, and gave the petitioner no new or higher right than he had before. After directing him to do certain things, it gave him authority, but did not direct him, to make various payments. It gave him authority, among other things, 'to pay the employees, officials, and other persons having claims for wages, services, materials, and supplies due and to become due, and unpaid, growing out of the operation of the railroad of the defendant, including current and unpaid vouchers; to settle accounts incurred in the operation of the railroad of the defendant company; to pay any and all obligations accrued or accruing upon any equipment trust made by the defendant railroad company; and for such purpose, as well as for the purpose of meeting the obligations of the pay rolls,' he was authorized, 'in his discretion, to borrow such sums of money as may be necessary for such purpose, not exceeding $35,000. But said receiver will pay no claims against the said railroad company which have accrued due more than six months prior to the date of this order.' It is questionable whether the purposes for which the $35,000 might be borrowed were other than paying equipment trust debts and pay rolls. But even if any words in the order authorized a charge on the corpus in order to pay claims like that of the petitioner, or a payment of them except from income, certainly there are none requiring it, or going beyond giving authority to the receiver if, for instance, he thought payments of previous debts necessary to the continued operation of the road. A strict construction of the decree is warranted by the previous decision of the same circuit court of appeals in International Trust Co. v. T. B. Townsend Brick & Contracting Co. 37 C. C. A. 396, 95 Fed. 850.

A few days later, on June 7, 1897, the receiver applied for and received leave to issue certificates up to $200,000, 'for the purpose of paying car trusts, maturing and matured, pay rolls, interest on terminal roperty, traffic balances, taxes, and sundry other obligations created in and about the maintenance and operation of said railroad within six months next preceding and following the appointment of a receiver herein.' By a further decree on July 7, $30,000 of these certificates were applied to payment for land bought by the company, $135,000 to car trust obligations, current pay rolls, necessary repairs, and expenses of operating the road, and $35,000 to the pay rolls for the previous April and May. The petitioner suggested that the latter decree was a diversion of funds in which, by the terms of the order authorizing the certificates, he was entitled to share, and that the payment of the $35,000 for the April and May labor entitles him to come in on principles of equality. It is not necessary to answer this contention at length. The original order gave the petitioner no such rights as he asserts. It would have been a stretch of authority for the receiver, in his discretion, to apply the borrowed money to this debt. At least, he was not bound to do so. The petition on which the original order was made stated that the money was wanted to pay certain obligations, 'or so much thereof as may be necessary,' embodying the distinction which we have drawn from the cases. We already have intimated that the payment of railroad hands might stand on stronger grounds than the payment for past supplies; and, if the payment was wrong, it would not be righted by making another, less obviously within the scope of the decree.

We are of opinion, finally, that there is no special equity with regard to the $3,200 worth of ties on hand and used by the receiver after his appointment. It is said that the purchase by the railroad company after it had defaulted, as it had, in the interest of its bonds, was fraudulent, and that the petitioner would have been entitled to take back the ties but for the appointment of the receiver. The answers to the contention again are numerous. It does not appear that the purchase of the ties was fraudulent. Donaldson v. Farwell, 93 U.S. 631, 23 L. ed. 993. It does not appear, and is not likely, that the company bought with the intention not to pay the price. It does not appear that it concealed its insolvency. The default in the interest of the bonds was a public fact. Again, it is a mere speculation whether the petitioner, if he had had the right, would have demanded back the ties. He did not demand them of the receiver. It is quite as likely that, if he had known the whole truth, he would have taken his chances. The thing that he is least likely to have known is the form of the appointment of the receiver, and, therefore, it is probably a fiction that that encouraged him to wait. It should not have encouraged him, because, as we have said, it gave him no rights. The fact that the receiver used the ties is of no importance. They already were the property of the road, and it was his business to use them. The material point is not the time when they were used, but the time when they were acquired.

Decree affirmed.

Mr. Justice McKenna, with whom concur Mr. Justice Harlan and Mr. Justice White, dissenting: