Quincy Company v. Humphreys/Opinion of the Court

When the receivers were appointed, the Wabash Company consisted of a system controlling some 3,600 miles of road, made up by the consolidation and leasing of many different railroads, upon nearly every one of which there existed one or more mortgages. The company was insolvent; its preferential indebtendness amounted to nearly four and one half millions; its credit was gone; and many parts of the property were in a wretched condition. The bill was obviously framed upon the theory that an insolvent railroad corporation has a standing in a court of equity to surrender its property to the custody of the court, to be preserved and disposed of according to the rights of its various creditors, and, in the mean time, operated in the public interest. The relief sought was predicated upon the view that those rights were not changed by the application, and that the proceeding was in the interest of each and all of them, as such interest might appear. The bill is characterized by one of the counsel as 'without precedent.' We are not called upon to inquire as to how that may be, but we readily agree that the concession to a mortgagor company of the power through its own act to displace vested liens by unsecured claims is dangerous in the extreme. But no such concession was made here. On the contrary, from the beginning, the court, by repeated directions and orders, fully recognized the fact that none of the numerous defendants had consented that their rights, whatever they might be, should be subordinated to those of others to which they were superior, and that no defendant should be subjected to loss of priority because necessarily brought into association with others by the bill.

In the order of appointment, the receivers were directed to pay out of the income that should come into their hands rental which had accrued or which might accrue upon all complainant's leased lines, but to keep accounts, showing the source of income and revenue with reference to expenditure. Immediately, and within a month thereafter, the receivers called the attention of the court to the fact that the earnings of 10 enumerated lines or divisions had not at any time since their acquisition been sufficient to pay their operating expenses, the cost of their maintenance, and interest on the bonds and other obligations secured upon each of them, while certain others had; and by the confirmation of the master's report, which was made on the 28th of June, 1884, the court, adopting its recommendations, direct that the receivers should pay interest on the bonds or obligations secured on the several paying enumerated lines or divisions, from whatever balance of income might remain in their hands, after meeting other obligations; and that an account should be kept of the earnings and incomes from, as well as the accounts of all the operating expenses, cost of maintenance, and taxes upon, certain other enumerated lines or divisions, including that of petitioner. This was followed by the declaration of the court that the earnings of the branches which earned their interest were not to be taken to pay interest on nonearning branches, but that the concerns which had not earned running expenses would be permitted to collapse. Then came the intervening petition of the appellant company for a transfer of the lease, which petition was granted; but the order of court was not availed of or acted upon by petitioner.

The order of April 16, 1885, reiterated the position taken by the court, and specifically pointed out that, where there was no income, rental claims would not be paid.

The petitioners, however, after taking possession of their road, asked the court to decree, not the allowance of their rental claims, and those for repairs and taxes paid, as unsecured indebtedness, but a line in their favor for those amounts superior and paramount to the mortgages on the property of the Wabash Company. They sought, in other words, to have these claims charged upon the corpus of the property in preference to subsisting contract liens; and they based this contention upon the proposition that the receivers had adopted the lease, and made themselves, and the property in their hands, liable according to its terms.

It is not asserted that these receivers became the assignees of the unexpired term of the leasehold estate with the right to dispose of it, but it is claimed that, because they took possession of the railroad of the Quincy Company, and held and operated it until August 1, 1885, they became liable to the extent of the rental up to that time. But the receivers were not statutory receivers, nor did they occupy identically the same position as assignees in bankruptcy or insolvency, and the like. They were ministerial officers, appointed by the court of chancery to take possession of and preserve, pendente lite, the fund or property in litigation; mere custodians, coming within the rule stated in Chicago Union Bank v. Kansas City Bank, 136 U.S. 223, 236, 10 Sup. Ct. Rep. 1013, where this court said: 'A receiver derives his authority from the act of the court appointing him, and not from the act of the parties at whose suggestion or by whose consent he is appointed; and the utmost effect of his appointment is to put the property from that time into his custody as an officer of the court, for the benefit of the party ultimately proved to be entitled, but not to change the title, or even the right of possession in the propery.'

As observed, in relation to such a receiver, by the supreme court of Maryland, in Gaither v. Stockbridge, 67 Md. 222, 224, 9 Atl. Rep. 632, and 10 Atl. Rep. 309, cited by counsel for appellee: 'It is manifest that the scope of his duties and powers are very much more restricted than those of an assignee in bankruptcy or insolvency. In the case of an assignee in bankruptcy the law casts upon such assignee the legal title to the unexpired term of the lease, and he thus becomes assignee of the term by operation of law, unless, from prudential considerations, he elects to reject the term as being without benefit to the creditors. But not so in the case of receivers, unless it be, as in New York, and some of the other states, where, by statute, a certain class of receivers are invested with the insolvent's estate, and with powers very similar to those vested in an assignee in bankruptcy. Booth v. Clark, 17 How. 331. The ordinary chancery receiver-such as we have in this case-is clothed with no estate in the property, but is a mere custodian of it for the court; and, by special authority, may become an officer of the court to effect a sale of the property, if that be deemed necessary for the benefit of the parties concerned. If the order of the court, under which the receiver acts, embraces the leasehold estate, it becomes his duty, of course, to take possession of it. But he does not, by taking such possession, become assignee of the term, in any proper sense of the word. He holds that as he would hold any other personal property involved, for and as the hand of the court, and not as assignee of the term.'

But appellants insist that, without regard to privity of estate or privity of contract, receivers in chancery are liable, not for a reasonable rental value during the occupancy of leased property committed to their charge by order of court, but for rental according to the covenants of the leases whenever there are unequivocal acts of use in control of such property; and that they thus adopt the leases and become bound by their terms so long as such use and control continue. It is said that this is settled doctrine, and that whether receivers take as statutory or common law or quasi or equitable assigness; whether the title is in them, or the estate, or the whole estate, has vested in them, or whether they hold as mere custodians for the court,-is immaterial; that they are put to an election to assume or to reject the leases, and, if they elect to avail themselves of them, they are bound to respond according to their terms. This position ignores any distinction beween those who take by operation of law and those who do not, but, inasmuch as it confessedly requires the application of the same rule as in the case of statutory receivers, assignees, and liquidators, this branch of the controversy may be disposed of on appellants' own ground.

That rule is thus stated in Mr. Platt's work on Leases, (volume 2, p. 435,) in reference to assignees in bankruptcy: 'A reasonable time was allowed the assignees to ascertain the value of the lease before they made their election; for which purpose they might have it valued, or put up for sale, without danger of such act being deemed an acceptance. If, however, they accepted a bidding, or dealt with the estate as their own, or used it in a manner injurious to the persons otherwise entitled, they were not within this protection.' The principle that such assignees shall not be held, unless by their consent, to take what will charge the estate with a burden, has been often applied by this court, (Glenny v. Langdon, 98 U.S. 20; File Co. v. Garrett, 110 U.S. 288, 4 Sup. Ct. Rep. 90; Sparhawk v. Yerkes, 142 U.S. 1, 12 Sup. Ct. Rep. 104,) and also by the state courts, as in Martin v. Black, 9 Paige, 641, by Chancellor WALWORTH; in Com. v. Franklin Ins. Co., 115 Mass. 278, by Judge ENDICOTT; in Berry v. Gillis, 17 N. H. 9, by Chief Justice PARKER; and in many other cases.

It is thus expounded in respect of official liquidators under the English 'Companies Act,' by Lord Justice LINDLEY, in Re Oak Pits Colliery Co., 21 Ch. Div. 322, 330.

'(1) If the liquidator has retained possession for the purposes of the winding up, or if he has used the property for carrying on the company's business, or has kept the property in order to sell it, or to do the best he can with it, the landlord will be allowed to distrain for rent which has become due since the winding up. * *  * (2) But if he has kept possession by arrangement with the landlord, and for his benefit as well as for the benefit of the company, and there is no agreement with the liquidator that he shall pay rent, the landlord is not allowed to distrain. * *  * When the liquidator retains the property for the purpose of advantageously disposing of it, or when he continues to use it, the rent of it ought to be regarded as a debt contracted for the purpose of winding up the company, and ought to be paid in full, like any other debt or expense properly incurred by the liquidator for the same purpose; and in such a case it appears to us that the rent for the whole period during which the property is so retained or used ought to be paid in full, without reference to the amount which could be realized by a distress. * *  * But no authority has yet gone the length of deciding that a landlord is entitled to distrain for or be paid in full rent accruing since the commencement of the winding up, where the liquidator has done nothing except abstain from trying to get rid of the property which the company holds as lessee. If the landlord had endeavored to re-enter, and the liquidator had objected, the case might be different, but, having regard to the provisions of the Companies Act of 1862, we are of opinion that in the case now supposed the landlord must rely on his right, if any, to re-enter and prove for the arrears due to him, and that he is not entitled to any thing more.'

In Oil Co. v. Wilson, 142 U.S. 313, 322, 12 Sup. Ct. Rep. 235, where an oil company contracted with a railway company to purchase certain rolling stock and lease the same to the railway company at a specified rental, the latter agreeing to purchase and pay for it in cash on or before a given date, or, if it should be unable to do so, to turn it over to the oil company at the expiration of the contract, in good order and condition, and the railway company became insolvent, and its mortgage bondholders instituted proceedings to foreclose, and had a receiver appointed, it was said: 'The receiver did not simply, by virtue of his appointment, become liable upon the covenants and agreements of the railway company. High, Rec. § 273; Hoyt v. Stoddard, 2 Allen, 442. Upon taking possession of the property, he was entitled to a reasonable time to elect whether he would adopt this contract and make it his own, or whether he would insist upon the inability of the company to pay, and return the property in good order and condition, paying, of course, the stipulated rental for it so long as he used it.' As between the mortgagees invoking the interpostion of the court and the oil company, the agreed rental was held to be the proper payment to be made for the use of the rolling stock under the particular contract in question.

Tested by this rule, we are of opinion that these receivers did not become bound by an election, or by reason of any act of their own, or by any order of the court.

The court did not bind itself or its receivers eo instanti by the mere act of taking possession. Reasonable time had necessarily to be taken to ascertain the situation of affairs. The Quincy Company, as a quasi public corporation operating a public highway, was under a public duty to keep up and maintain its railroad as a going concern, as was the Wabash Company under the contract between them; but the latter had become unable to perform the public service for which it had been endowed with its faculties and franchises, and which it had assumed to discharge as between it and the other company. Its operation could only be continued under the receivers, whose action in that respect cannot be adjudged to have been dictated by the idea of keeping the property in order to sell it, or using it to the advantage of the creditors, or doing otherwise than 'abstain from trying to get rid of the property.' Clearly this was no case of the employment of the property of another for one's own benefit, Within a month the receivers applied to the court for instructions, distinctly setting forth that there was no income wherewith to pay the rental in question, and the order of court, entered at once, proceeded upon the theory that they were not to be bound by the rental prescribed.

Nor was there any resistance by the receivers, or impediment interposed by them, to the re-entry of the Quincy Company. The receivers did not so remain in possession, nor were they authorized by the court to so remain, as to render the lessor unable itself to resume possession. The lease gave the Quincy Company the option to re-enter, and put an end to it, upon default in payment of rental continued for 30 days. Default in fact did not occur until July 1, 1884, but upon the face of the bill the utter inability of the Wabash Company to pay rent appeared; and under the circumstances, it is unreasonable to suppose that if appellants had applied to the circuit court for possession of the property earlier than they did, the court, in view of the state of case disclosed by the record, would have declined to hand it over. Such spplication was made December 16, 1884, and an order granted accordingly, but not availed of by the Quincy Company. Subsequently, on a renewed application, the company retook its road, freed from any liability for the enormous preferential indebtedness of the Wabash Company, and with its public duty discharged up to that time by the receivers at a loss of more than $20,000. The lease had not theretofore been canceled by the court, doubtless because it was considered that that ought not to be done without the assent of the lessor; but the court said: 'The right of a lessor or mortgagee, whose rent or interest is unpaid, to insist upon possession or foreclosure, will be promptly recognized.' This was as late as April 16, 1885, but it was consistent with the order of June 28, 1884, and the position of the court throughout. Indeed, there can be no pretense that the Quincy Company or its trustees were encouraged to remain inactive in reliance on payment of rental under order of court unless the earnings of their road justified it.

Our conclusion is that the receivers, as such, did not become so committed to the terms of the lease as by reason thereof to be subjected to an obligation requiring the rental to be paid out of the property of the Wabash Company in preference to the payment of the mortgagees of that property. Whether that rental might be preferred in payment to the unsecured debts if there had been any equity in the mortgaged premises is a question not arising for decision.

If the receivers were not bound as having become virtually assignees of the lease, or by reason of any acts of their own or orders of the court, were the petitioners entitled to the relief they prayed upon any ground heretofore recognized as justifying such imposition upon the corpus of the property in priority to the claims of lien creditors?

In Morgan's, etc., Co. v. Texas Cent. Ry. Co., 137 U.S. 171, 197, 11 Sup. Ct. Rep. 61, we said that the doctrine of Fosdick v. Schall, 99 U.S. 235, is 'that a court of equity may make it a condition of the issue of an order for the appointment of a receiver that certain outstanding debts of the company shall be paid from the income that may be collected by the receiver or from the proceeds of sales; that, the property being in the hands of the court for administration as a trust fund for the payment of incumbrances, the court, in putting it in condition for sale, may, if needed, recognize the claims of materialmen and laborers, and some few others of similar nature, accruing for a brief period prior to its intervention, where current earnings have been used by the company to pay mortgage debt or improve the property, instead of to pay current expenses, under circumstances raising an equity for their restoration; as, for instance, where the company, being insolvent and in default, is allowed by the mortgage bondholders to remain in possession and operate the road long after that default has become notorious, or where the company has been suddenly deprived of the control of its property, and the pursuit of any other course might lead to cessation of operation. Miltenberger v. Railroad Co., 106 U.S. 286, 311, 312, 1 Sup. Ct. Rep. 140. If the officers of the company, remarked Mr. Chief Justice WAITE in Fosdick v. Schall, 'give to one class of creditors that which properly belongs to another, the court may, upon an adjustment of the accounts, so use the income which comes into its own hands as, if practicable, to restore the parties to their original equitable rights. * *  * Whatever is done, therefore, must be with a view to a restoration by the mortgage creditors of that which they have thus inequitably obtained. It follows that, if there has been in reality no diversion, there can be no restoration, and that the amount of restoration shall be made to depend upon the amount of the diversion.' Burnham v. Bowen, 111 U.S. 776, 4 Sup. Ct. Rep. 675; Union Trust Co. v. Illinois M. Ry. Co., 117 U.S. 434,' 6 Sup. Ct. Rep. 809.

The immense floating debt for supplies and other preferential claims here precludes the inference that there was any such diversion of earnings applicable to the payment of rental, and the priority asked cannot be rested on that ground.

In Wallace v. Loomis, 97 U.S. 146, 162, it was said by Mr. Justice BRADLEY, speaking for the court: 'The power of a court of equity to appoint managing receivers of such property as a railroad, when taken under its charge as a trust fund for the payment of incumbrances, and to authorize such receivers to raise money necessary for the preservation and management of the property, and make the same chargeable as a lien thereon for its repayment, cannot, at this day, be seriously disputed. It is a part of that jurisdiction always exercised by the court, by which it is its duty to protect and preserve the trust funds in its hands. It is undoubtedly a power to be exercised with great caution, and, if possible, with the consent or acquiescence of the parties interested in the fund.'

But here this rental was certainly not an expense origiuated in the process of administration by the court, and the road was surrendered as soon as the lessor would take it. Nor did the mortgagees consent to have the claim charged upon the corpus of the property in preference to their mortgages. The case does not come within Kneeland v. Trust Co., 136 U.S. 89, 10 Sup. Ct. Rep. 950; Miltenberger v. Railway Co., 106 U.S. 286, 313, 1 Sup. Ct. Rep. 140, or any other of the authorities cited.

We do not discover any equitable ground upon which appellants are entitled to preference in the distribution of the proceeds of the sale of the mortgaged property. The cost of the maintenance of the Quincy road by the receivers exceeded its total earnings; and the net earnings of the whole Wabash system, before the Quincy Company retook its road, did not amount to one quarter of the amount of preferred debt existing when the receivers were appointed. The property was surrendered to it freed from any charge for that debt, to the payment of which it contributed nothing. The action of the court in making the appointment of receivers on the application of the mortgagor cannot be successfully challenged upon this appeal. The theory of the bill and the action of the court and its officers left all the creditors with their rights existing as they existed before the appointment was made, and we find no legal or equitable grounds upon which the prior liens of the mortgagees can be displaced.

The decree of the circuit court dismissing these petitions was right, and it is affirmed.