Union Trust Company of New York v. Souther

Appeal from the Circuit Court of the United Court for the Southern District of Illinois

This appeal was taken because of a difference of opinion between the circuit judge and the district judge, holding the circuit court, as to a matter decided, and the facts on which the questions certified depend may be stated as follows:

On the seventh of October, 1871, the Cairo & St. Louis     Railroad Company mortgaged its property, franchises, tolls,      incomes, and profits to the Union Trust Company of New York, to secure an issue of bonds amounting in the aggregate to      $2,500,000. Default was made in the payment of interest     falling due October 1, 1873, and semi-annually thereafter. On     the sixth of December, 1877, the trust company filed its bill      in the circuit court of the United States for the southern      district of Illinois to foreclose the mortgage. In the bill     it is, among other things, averred that the company is      insolvent; 'that many and large claims exist against said      railroad company of the character known as floating debt; and      that unless a receiver is appointed * * * great, irreparable      damage to said bondholders will ensue, and the property will      be liable to be greatly depreciated, and to be involved in      useless litigation; and your orator and its bondholders will      lose the benefit thereof as a security for the payment of      said bonds.' Upon this allegation it was prayed that the      'court will appoint a receiver according to the course and      practice of this court, with the usual powers of receivers in      like cases.'

As soon as the bill was filed a receiver was appointed, and     in making the appointment the court, of its own motion,      entered the following order: 'And said receiver, after paying      the expenses of operating, maintaining, and repairing said      railroad and property, and after making such other payments      herein authorized as are or may be necessary for the conduct      of such receivership, shall pay and discharge all amounts due      and owing by said railroad company for labor, or supplies,      that may have accrued in the operation and maintenance of      such railroad property within six months immediately      preceding the rendition of this decree.'

In 1876 the railroad company paid $3,000 to the beneficiaries     under the mortgage on account of their expenses, to a much      larger amount, in keeping an agency in the United States, and      in connection with the forbearance which they had given the      company in respect to overdue interest. Previous to the     appointment of the receiver none of the current income of the      company, except this single amount, had been paid to the      bondholders.

When the order in respect to debts for labor and supplies was     entered, the court instituted no special inquiries in respect      to the use which had been made of the income prior to that      time.

The receiver thus appointed took possession of the property and operated the road until the end of the year 1881, and     after a sale had been perfected under a decree of      foreclosure. During the receivership the net earnings of the     road, after paying all operating expenses, exceeded $200,000. The whole amount was, however, under the orders of the court,     with the consent of the trust company, from time to time,      expended 'in purchasing additional grounds, rolling-stock,      etc., and in making permanent repairs and improvements upon      said railroad property, instead of discharging therewith the      claims of [against] the railroad company for labor,      materials, and supplies' during the six months immediately      preceding the appointment of the receiver, and when the      property was finally sold over $65,000 of these debts      remained unpaid. Among them was one to E. E. Souther &     Brother amounting to $532.14 for supplies. On the ninth of     May, 1878, after the receiver got into possession of the      road, Souther & Brother filed in the suit for foreclosure an      intervening petition praying for the allowance of their claim      and its payment. On the sixteenth of May the claim was     allowed and the receiver directed to pay it out of the net      earnings, 'and before any improvements or ameliorations are      made upon the property in his hands as receiver.' On the      fifth of June both the trust company and receiver filed      motions to set aside this order. These motions remaining     undisposed of, the road was sold under a decree of      foreclosure in 1881, and brought only $4,000,000, when the      amount due under the mortgage was $4,300,000 and some more. After the report of the sale was made, and a deficiency     appeared, the court, on the eighth of September, 1882, set      aside the order for the payment of the debt to the      intervenors and allowed the trust company to answer. An     answer was filed and proof taken which disclosed the      foregoing facts. Upon the facts so established one of the     questions which arose was whether, under the circumstances,      the court had the right to make an order directing the      payment of the claim. The circuit judge was of the opinion     that it had, and a decree was entered accordingly. From that     decree this appeal was taken.

S.C.orning Judd and W. F. Whitehouse, for appellant.

T. C. Mather, for appellee.

Mr. Chief Justice Waite, after stating the case, delivered the opinion of the court.