Union Pacific Railroad Company v. United States (99 U.S. 402)/Dissent Strong

MR. JUSTICE STRONG, with whom concurred MR. JUSTICE HARLAN, dissenting.

I concur with the majority of the court in holding that the railroad was completed, within the meaning of the sixth section of the act of 1862, on the sixth day of November, 1869. I concur also in the definition of 'net earnings,' as the term was used in that section. But the majority now express the opinion that if the net earnings in any one year are not more than sufficient to pay the interest on the first-mortgage bonds of the company in that year, the United States is not entitled to any portion of five per cent of those earnings for that year, though, if they are more than sufficient to pay that interest, the excess or surplus is subject, so far as it will go, to the payment of the five per cent. This is substantially holding that the claim of the government to the annual payment of five per cent of the company's net earnings, after the completion of the road, is postponed to the annual interest on the first-mortgage bonds. To this I cannot assent. It is, I think, based upon an entire misconstruction of the acts of Congress which gave existence to the company, and to which alone we can look for the contract between it and the government. A very few words will indicate my opinion, and show the reasons upon which it rests. By the fifth section of the act of 1862, the Secretary of the Treasury was required to issue to the company bonds of the United States to an amount therein specified. The bonds were to be issued as a loan, and the section provided as follows: 'And to secure the repayment to the United States, as hereinafter provided, of the amount of said bonds so issued and delivered to said company, together with all interest thereon which shall have been paid by the United States, the issue of said bonds and delivery to the company shall, ipso facto, constitute a first mortgage on the whole line of the railroad and telegraph, together with the rolling-stock, fixtures, and property of every kind and description, and in consideration of which said bonds may be issued.' This clause describes the lien, and the only lien, reserved by the United States. It covers the railroad and telegraph, the rolling-stock and fixtures, and property of every kind and description. It does not cover income from the property, either gross receipts or net receipts derived from its use, while it remains in the possession of the company and before any forfeiture for breach of the conditions of the mortgage. A mortgage of a property is a very different thing from a mortgage of its income. The mortgagor, so long as he remains in possession, or until actual entry by the mortgagee, may receive the rents and profits to his own use, and is not accountable for them to the mortgagee. Fitchburg Cotton Manufactory Corporation v. Melven et al., 15 Mass. 268; Boston Bank v. Reed et al., 8 Pick. (Mass.) 459. Indeed, it is clear law that a mortgagee has no specific lien upon the rents and profits of mortgaged premises until condition broken. The Bank of Ogdensburgh v. Arnold and Others, 5 Paige (N. Y.), 38. I think it very apparent that in the reservation of the lien Congress did not intend to interfere with or assert rights over the earnings of the railroad, or to prevent their appropriation to the general uses of the company. They were not intended to be covered by the lien, or embraced within it. And I am confirmed in this belief by the fact that immediately following the clause in the fifth section describing the lien, a right was reserved to the United States to take possession of the road on failure of the company to redeem the bonds loaned.

Assuming that I am correct in this, I pass to the sixth section of the act, which makes no reference to the lien, though it imposes duties upon the company. It enacts that the grants aforesaid are made upon condition that said company shall pay said bonds at maturity, and shall keep said railroad and telegraph in repair and use, shall transmit despatches at all times over said telegraph line, and transport mails, troops, &c., for the government when required, giving to the government the preference in the use of the road and line for all the purposes aforesaid. The section then declares that all compensation (subsequently changed to one-half thereof) for services rendered for the government shall be applied to the payment of the bonds and interest, so as aforesaid named, until the whole amount is fully paid. Then follows the clause which the United States is seeking in this action to enforce. It is as follows: 'And after said road is completed, until said bonds and interest are paid, at least five per centum of the net earnings of said road shall also be annually applied to the payment thereof.' The grants referred to in this section, and declared to be conditional, are probably those of the right of way and alternate sections of land given previously in the preceding sections. They can hardly refer to the loan of bonds. This, however, is not very material. While it is true that the section refers to payment of the debt due to the United States, it contains no allusion to the lien for the security of the debt reserved in the fifth section. And it can hardly be pretended that performance of the duties thereby imposed upon the company is secured by the statutory mortgage. The mortgage is not a security for having the road and telegraph kept in order, nor for the transmission of despatches, or the transportation for the government, nor for priority of use by the government, nor for the application to the payment of the bonds of half the compensation for services to the government. Nor is it any more a security for the required payment of a percentage of the net earnings. These duties are secured by the condition attached to the land grants, and by the implied assumption of the company. They are entirely collateral to the obligation and lien of the mortgage. They are not a part of it. It is no uncommon thing that a creditor has several securities for one debt. He may have a bond and a mortgage to secure its payment; he may have also a promissory note, or an assignment of stock. Nobody would claim that in such a case the note and the assignment are included in the lien of the mortgage.

Having thus shown, as I think, what the lien of the government was, what it covered, and what it did not, I pass to the tenth section of the amending act of 1864, by which, as construed by a majority of the court, the claim of the United States to a percentage annually of the net earnings of the road, is postponed to the rights of what is called the first mortgage of the company. That section authorized the company, and other companies, to issue their first-mortgage bonds on the roads and telegraph lines to an amount not exceeding the bonds of the United States, and of even tenor and date, time of maturity, rate and character of interest, with the bonds authorized to be issued to them. It then declared thus: 'And the lien of the United States shall be subordinate to that of the bonds of any or either of said companies hereby authorized to be issued on their respective roads, property, and equipments, except as to the provisions of the sixth section of the act to which this act is an amendment, relating to the transmission of despatches, and the transportation of mails, troops, munitions of war, supplies, and public stores for the government of the United States.'

The first mortgage thus authorized was less comprehensive than the statutory mortgage of the United States. It did not include the lands of the company, nor any of its property, except the road and the telegraph line. It certainly did not include the earnings of the company. What, then, was subordinated to it? I think nothing but the lien of the United States bonds,-that lien which was reserved in the fifth section of the act of 1862. This is the express language of the section. Whatever right to the railroad and telegraph line the United States had by virtue of its mortgage, that right was postponed to the mortgage bonds authorized by this tenth section, and issued under it. Nothing else was postponed. Subordination of the lien of the United States to the company's first mortgage could not have the effect of enlarging the operation and scope of that mortgage and bringing additional subjects within it. Surely it did not make the mortgage a lien upon any other property than that which the company was authorized to mortgage. It did not make it a lien, either prior or subsequent, upon the lands of the company, or the income or earnings of its road. And as I think I have shown the duty of the company to apply annually five per cent of its net earnings, after the completion of its road, to the payment of its debt to the United States, was collateral to its other obligations,-a cumulative duty, not embraced in the lien or mortgage reserved by the United States in the fifth section of the act of 1862,-it cannot be affected by the tenth section of the act of 1864. Whatever else was postponed, it was not.

It has been argued on behalf of the appellant that the exception from the subordinating clause of those provisions of the sixth section of the act of 1862, relating to the transmission of despatches, and the transportation of mails, troops, munitions of war, supplies, and public stores for the government of the United States, implies that the other provisions of that section, or at least the five per cent provision, were intended to be subordinated to the lien of the first-mortgage company bonds. This supposed implication is the principal reason urged in support of the position taken by a majority of the court. It is, however, in my judgment, entirely unfounded. The purpose of the exception appears to me to be very plain. As I have noticed, the section authorized the company to issue their first-mortgage bonds upon the railroad and the telegraph line, and enacted that the lien of the United States bonds should be subordinate to the company's first-mortgage bonds. Subordinate, clearly, only in its effect upon that which was covered by the company's mortgage, namely, the road and the telegraph line. But if the company's mortgage was permitted to be without exception the paramount lien upon the road and telegraph line, the right secured to the United States by the sixth section of the act of 1862 to the transmission of despatches, and transportation of the mails, &c., might be totally destroyed by a foreclosure of the mortgage and a sale under it. To guard against this possibility was evidently the sole purpose of the exception, and its necessity is manifest. I repeat, if the company's authorized mortgage on the railroad and the telegraph line were permitted to be, without restriction, a paramount lien, the preferential right secured to the United States by the conditions of the sixth section of the act of 1862-the right to the transmission of despatches and transportation of mails, stores, munitions of war, &c., in preference to others-would have been at the mercy of the company's mortgagees. That right of priority Congress was not willing to endanger. The exception was introduced to avert the danger of its loss. Congress, in effect, said to the company, 'Though we agree that your mortgage shall be the first lien upon the road and the telegraph line, yet no foreclosure of it, no taking possession under it, and no sale shall interfere with the right of the United States to the transmission of despatches and to transportation in preference to all others.' To save that right the exception was necessary. It had reference solely to the operation of the company's mortgage upon the road, upon which a preferential right to transportation had been reserved, and to the telegraph line, along which government despatches were first to be carried. I cannot believe it had any other purpose or intent, much less that it was intended to operate as a grant, or to postpone the other rights assured to the United States in the sixth section. The implication that every duty in that section imposed upon the company, except the one expressly mentioned, was intended to be subordinated to the lien of the company's bonds is too unreasonable to be accepted, and it will not be claimed. Yet such must be the extent of the implication, if the exception means what the majority of the court think it means. If the duty of the company to apply to the payment of its bonds a percentage of its net earnings annually after the completion of its road is postponed to the rights of the first-mortgage bondholders, so is the duty to apply one-half the compensation for services rendered for the government, and so is the duty to keep the railroad and telegraph line in repair, by parity of reason. Those rights of the government and the right to the percentage of the earnings stand alike. They are all reserved by the tenth section of the act of 1864.

My conclusion, therefore, is that nothing in the tenth section of the act of 1864 postpones the right of the government to recover five per cent of the net earnings of the road before any thing is deducted from those earnings for either principal or interest of the first-mortgage bonds of the company.

It may be that the construction of the acts of Congress for which I contend, if adopted by the court, would not increase the amount recoverable by the United States in the present suit, but it may have an important effect on future claims against the company for the five per cent, and it has upon the claims of the United States against the other companies to which the sixth section of the act of 1862 was applicable.