Thomas v. Western Car Company/Opinion of the Court

In this opinion the contracts between the car company and the railway company are held to be fraudulent and void as to the railway company; but the court holds that, nevertheless, the car company is entitled to be reasonably compensated for the use of its cars, without reference, however, to the contracts.

As to what would be a reasonable compensation, the court holds that 'a fair compensation for the use of these * *  * would be such amount as similar cars to be used in the same manner, and upon similar roads, would commonly rent for in the open market.'

The court then states the general principles which have been established by the decisions of this court as to charging the income of the receivership with the payment of certain classes of liabilities of the railroad company incurred prior to the receivership, and their payment from the proceeds of the sale of the railroad prior to the mortgage indebtedness. It holds that the six-months rule, which is the general rule in the seventh circuit, should govern, and finds the car company entitled to $8,162.99, as the balance due to it for the use of the cars during the six months prior to the receivership, thus increasing by $6,100 the allowance made by the master on this branch of the case.

As to the claims against the receivership, the court found that the receiver was chargeable with the rental of 138 cars, instead of 135, as found by the master, amounting to $9,667, and with the $14,046.55 paid by the car company for repairs on these cars. The court also allowed the car company the rentals claimed for the 56 replevied cars, $12,857.32, though, as the opinion states, 'with great difficulty.' It also allowed the $5,650.32 claimed for repairs of the replevied cars. The total amount found due to the car company was $50,775.52, and interest at 6 per cent. was allowed on this sum from June 22, 1885, the date of the filing of the master's report.

On October 9, 1888, the final decree was entered, from which the complainants in the original foreclosure suit prayed, and were allowed, an appeal.

After the entry of the decree, Ransom R. Cable filed a petition, praying that the decree might be opened, and that he might be made a party defendant thereto and to the intervening cause, for the purpose of prosecuting an appeal therefrom, or be allowed to prosecute an appeal from said decree in the names of the complainants in the original cause. This petition represented that a decree directing the sale of the railroad property and franchises was rendered January 11, 1877, and that at this sale under this decree the petitioner had become the purchaser, and the sale to him had been confirmed, and he had been ordered to pay into court on his bid all of the first mortgage bonds held by him, and had deposited under this order 1,395 of the entire 1,500 first mortgage bonds of said company. On December 1, 1888, it was ordered that leave be granted Cable to prosecute the appeal in the name of the complainants to the original cause, and that this appeal should become a supersedeas on his filing an appeal bond in the sum of $80,000. The bond was therefore filed, and thereafter the record on this appeal was brought to this court.

C. M. Osborn and S. A. Lynde, for appellants.

John M. Butler and H. B. Hopkins, for appellee.

Mr. Justice SHIRAS, after stating the facts in the foregoing language, delivered the opinion of the court.

The questions presented by this record for our determination arise out of objections by the appellants to allowances made by the court below in favor of the Western Car Company, the appellee, and which company was permitted to intervene in the foreclosure proceedings brought by the appellants against the Peoria & Rock Island Railway Company.

The first contested question is as to the propriety of the allowance of the sum of $8,162.99 for the use of cars of the Western Car Company for a period of six months prior to the receivership.

It cannot be said that in no case can indebtedness for necessary supplies, which accrued before the appointment of a receiver, be allowed priority to the mortgage bonds. It was held in Miltenberger v. Railroad Co., 106 U.S. 286, 311, 1 Sup. Ct. Rep. 140, that 'many circumstances may exist which may make it necessary and indispensable to the business of the road and the preservation of the property for the receiver to pay pre-existing debts of certain classes out of the earnings of the receivership, or even the corpus of the property.' It is, however, added that 'the discretion to do so should be exercised with very great care. The payment of such debts stands, prima facie, on a different basis from the payment of claims arising under the receivership, while it may be brought within the principle of the latter by special circumstances. It is easy to see that the payment of unpaid debts for operating expenses, accrued within ninety days, due by a railroad company suddenly deprived of the control of its property, due to operatives in its employ, whose cessation from work simultaneously is to be deprecated, in the interests both of the property and of the public, and the payment of limited amounts due to other and connecting lines of road for materials and repairs, and for unpaid ticket and freight balances, the outcome of indispensable business relations, when a stoppage of the continuance of such business relations would be a probable result in case of nonpayment, the general consequence involving largely, also, the interests and accommodation of travel and traffic, may well place such payments in the category of payments to preserve the mortgaged property in a large sense, by maintaining the good will and integrity of the enterprise, and entitle them to be made a first lien.'

This subject received further consideration by this court in the case of Kneeland v. Trust Co., 136 U.S. 89, 97, 10 Sup. Ct. Rep. 950, and where it was said: 'That appointment of a receiver vests in the court no absolute control over the property, and no general authority to displace vested contract liens. Because in a few specified and limited cases this court has declared that unsecured claims were entitled to priority over mortgage debts, an idea seems to have obtained that a court appointing a receiver acquires power to give such preference to any general and unsecured claims. It has been assumed that a court appointing a receiver could rightfully burden the mortgaged property for the payment of any unsecured indebtedness. Indeed, we are advised that some courts have made the appointment of a receiver conditional upon the payment of all unsecured indebtedness in preference to the mortgage liens sought to be enforced. Can anything be conceived which more thoroughly destroys the sacredness of contract obligations? One holding a mortgage debt upon a railroad has the same right to demand and expect of the court respect for his vested and contracted priority as the holder of a mortgage on a farm or lot. So, when a court appoints a receiver of railroad property, it has no right to make that receivership conditional on the payment of other than those few unsecured claims which, by the rulings of this court, have been declared to have an equitable priority. No one is bound to sell to a railroad company, or to work for it, and whoever has dealings with a company when 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 liens. It is the exception, and not the rule, that such priority of liens can be displaced.' And, accordingly, all claims for rental of cars prior to the appointment of the receiver were disallowed.

Tested by the principles asserted in these cases, the claim for car rental that had accrued prior to the receivership cannot be maintained, but should have been disallowed.

The case of a corporation for the manufacture and sale of cars, dealing with a railroad company, whose road is subject to a mortgage securing outstanding bonds, is very different from that of workmen and employes, or of those who furnish, from day to day, supplies necessary for the maintenance of the railroad. Such a company must be regarded as contracting upon the responsibility of the railroad company, and not in reliance upon the interposition of a court of equity.

In the present case it appears, in the contract between the car company and the railroad company, that the former reserved the express right to terminate the contract and demand possession of the cars forthwith upon any failure by the railroad company to promptly pay the interest or the principal of any of its bonds or other liabilities. Such a provision shows that the car company was aware of the existence of the outstanding bonds, and protected itself by other methods than relying upon the possible order of a court which might appoint a receiver. Moreover, it appears in this case that the principal officers of the car company were in control of the railroad company and its operations, and must be treated as having full notice of the financial condition of the railroad company, and as having leased the cars to it in reliance upon its general credit, rather than in expectation of displacing the priority of the mortgage liens.

The item of $9,667, allowed for a balance of rental of cars that accrued during the receivership from February 1, 1875, to the surrender of the cars, appears to us to come fairly within the doctrine of this court as a proper allowance.

The next contested claim is for $12,857.32, allowed by the court below for rental of the 56 cars which had been replevied by the Western Car Company from the Chicago & Northwestern Railroad Company, and placed in the control of the receiver of the Peoria & Rock Island Railway Company.

It is contended by the appellants that these cars were not necessary for the use of the receiver, and were put in his custody as a matter of convenience for the car company, and that, at any rate, the amount charged for their use, and allowed by the court below, was excessive. They claim that a mileage charge for the actual use of the cars would be an equitable allowance. The evidence upon this branch of the case is conflicting and confusing. The learned judge of the court below, in his opinion, says: 'Looking at all the circumstances, I am of opinion that the indorsement of the receiver on the agreement of June 11, 1975, signed by him, that the 56 cars delivered to him, 'being the cars replevied from the Chicago and Northwestern Railroad Company,' shall be retained by him 'upon the same terms set forth' in the above agreement, 'commencing on the first day of December, 1875,' should turn the scale; and as the terms of the agreement of June 11, 1875, were not unreasonable, and as the indorsement was one which the receiver might reasonably have made in the interest of a fair administration of the property in his hands, I approve the finding of $12,857.32 as the rental of the replevied cars while they were under the control of the receiver.'

Our conclusion, reached with some difficulty, and after a careful consideration of the evidence, is to accept the views of the court below, and to allow this claim.

The next matters of contention are the allowances made by the court below on account of repairs of the rented cars, being $14,046.55 for repairs on the 138 cars rented under the agreement of June 11, 1875, and $5,650.32 for repairs on the 56 replevied cars.

It should be observed that the sums so allowed were not for repairs made by the receiver, but for moneys expended by the car company in rebuilding and repairing the cars after they were surrendered to the car company by the receiver. By the contract between the receiver and the car company it was provided that the former should keep the cars in good repair for use on the road. Hilliard, the receiver, testified that the condition of the cars, when he was appointed, was very poor, and in this he was corroborated by other witnesses. He also states that when they were delivered up to the car company they were in as good condition as, and better than, when he received them. Mozier and Doyle, who were familiar with their condition when the receiver took possession of them, and who had made repairs on them while the receiver used them, testified that the condition of the cars was better when delivered up than when they came into the hands of the receiver.

There is, however, testimony on behalf of the car company to the contrary. Our consideration of the conflicting evidence brings us to the conclusion that the car company is entitled to an allowance on account of repairs, but not to the amount awarded by the court below. The master reported on this subject as follows: 'I have found it difficult to deal with this branch of the case, for the reason that while it appears that the bills which have been presented for these repairs were actually paid by the petitioner, it is also evident that in many instances these repairs were extravagantly conducted, and that in many respects they were rendered necessary by their condition before they came into the hands of the receiver. It is also apparent from the testimony that in many cases cars were practically rebuilt and renewed.' And in respect to the 56 replevied cars he says: 'It is apparent from the testimony that these cars were received in bad condition, after having been used for two or three years by the railroad, from which they appear to have been taken by the receiver, partly, at least, upon the suggestion and for the accommodation of the petitioner.'

He further reported that he found it impossible, from the testimony, to determine to what extent the respondent was liable for the payment of this charge, and that he was unable to make what might finally be regarded as an equitable distribution of this liability, and was therefore obliged to charge the respondent with the full amount of the payments shown to have been made on this account. If, indeed, it was impossible, under the evidence, for the master to discriminate between what was expended to put the cars into running order for use, as stipulated for in the contract, and the amount expended in rebuilding the cars, it may be that the proper conclusion would have been to disallow the claims altogether. However, we are not disposed either to allow the claims for repairs in full, or to refuse wholly to regard them. We agree with the court below in thinking that the contract bound the receiver to keep the cars in good running order, and, if he did not do so, to be charged with what was reasonably expended by the car company on that behalf after they were surrendered. Our examination of the evidence leads us to the conclusion that some allowance is properly chargeable against the receivership on this account.

In fixing the amount of such allowance we do not find ourselves wholly left to conjecture. Theodore Mozier, the master mechanic of the Peoria & Rock Island Railroad Company, certified that he made an inspection of 138 of these cars at the time they were surrendered to the car company by the receiver, and he estimated that the sum of $994.20 would suffice to put them in fair running order. James Doyle, who was for some years in the employ of the Peoria & Rock Island Railway Company, and afterwards in that of the receiver, in the car shops, assisted Mozier in inspecting these cars. He states that, in his opinion, the cars were in poor condition when they came into the hands of the receiver, and were in better condition when surrendered by him. He gave a detailed statement of repairs put upon these cars while in possession of the receiver, amounting to $1,440. The testimony on the part of the car company consists chiefly of evidence of the amounts actually paid for repairs and reconstruction of the cars after they were surrendered; but it fails-indeed, does not pretend to try-to show how much of such payments was due to the original condition of the cars, and how much to the wear and tear while in the hands of the receiver.

It is affirmatively found by the master that in many instances the repairs were extravagantly conducted, that in many cases the cars were practically rebuilt and renewed, and that in many respects the repairs were rendered necessary by their condition before they came into the hands of the receiver.

We think it is clear that the object and scope of the repairs put upon the cars were not merely to put them in running order, but to renew them, so as to put them in a condition acceptable to a new lessee. The expenditure for such repairs is shown to have been about $100 per car; and it was testified by General Huidekoper, a witness on behalf of the car company, and a person of large experience in such matters, that the cost of a general overhauling and rebuilding of cars is from $50 to $80; and that $36 a year for ordinary repairs, and $80 every two years for general repairs, would keep the cars in good order.

Assuming, then, that the proportion of the amount shown to have been expended in the renewal of these cars was $80 per car, and the rest in ordinary repairs of the kind contemplated by the contract, and deducting from the claims as made for the entire number of the cars, to wit, $19,695, the estimated cost of reconstruction, as certified to by Huidekoper, $13,920, there remains the sum of $5,775, representing ordinary repairs, and to that extent we approve the decree of the court below in allowing for repairs.

The final matter of contention is the allowance of interest. We think the court below was plainly right in rejecting the car company's claim for interest based upon the statute of Illinois, prescribing interest at the rate of 6 per cent. per annum for moneys after they become due on 'any bond, bill, promissory note, or other instrument of writing.' But the learned judge was of opinion that some allowance of interest should be made, because of what he deems to have been a vexatious and unreasonable delay in the payment of what was justly due the car company. As against this view of the case it is urged that the delay was occasioned by resisting demands made by the car company, which the result of the litigation shows were excessive, if not extortionate.

We cannot agree that a penalty in the name of interest should be inflicted upon the owners of the mortgage lien for resisting claims which we have disallowed. As a general rule, after property of an insolvent passes into the hands of a receiver or of an assignee in insolvency, interest is not allowed on the claims against the funds. The delay in distribution is the act of the law; it is a necessary incident to the settlement of the estate. Williams v. Bank, 4 Metc. (Mass.) 323; Thomas v. Minot, 10 Gray, 263. We see no reason in departing from this rule in a case like the present, where such a claim would be paid out of moneys that fall far short of paying the mortgage debt.

We therefore reverse the decree of the court below in the particulars hereinbefore mentioned, and remand the record, with directions to modify the decree in accordance with this opinion. Reversed.