An oil company contracted with a railway company to purchase
certain rolling stock and lease the same to the railway company at
an agreed rental, the latter agreeing to purchase the same on or
before a given day and pay for it in cash, 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. It was
further agreed that freights earned by the railway by
transportation for the oil company might be applied to the payment
of the rental and of the purchase money. The railway company was
insolvent and, before the expiration of the contract, its mortgage
bondholders had proceedings instituted in equity for the
foreclosure of their mortgage, in which W. was appointed receiver.
The receiver continued to use the rolling stock. The oil company
intervened, claiming to recover from the receiver the balance of
the purchase money, and to secure the carrying on of the contract
by the receiver and the retention by it of the amount of freights
due from it, and their application to the payments of the rent and
the purchase money. The receiver answered, declining to complete
the contract, and averring that the rental had been paid in fall
and that there was a balance due him for freight. He also
filed a cross-petition to recover the surplus.
Held:
(1) That the contract provided that if the railway company
became unable to pay its current debts in the ordinary course of
business, it should be released from its obligation on returning
the property.
(2) That the receiver had the right to return the property upon
complying with the terms of the contract in respect thereto.
(3) That notwithstanding the absence of a provision in the
contract forfeiting payments already made in case of failure to
complete the purchase, it was open to doubt whether an action at
common law world lie to recover such payments.
(4) That the dismissal of the intervening petition did not
necessarily involve the dismissal of the cross-petition, and that
the court might do full justice between the parties.
(5) That the receiver was as much entitled to recover the money
due upon the contract made with the railway company as with
himself.
Page 142 U. S. 314
(6) That as between the railway company and the receiver, the
latter was entitled to the money, subject to any valid setoff of
the oil company.
The Court stated the case as follows:
This was an intervening petition by the Sunflower Oil Company to
enforce the specific performance of a contract by the railway
company to purchase certain engines and cars until a balance of
$6,732.15, claimed to be due, should have been paid and discharged,
and a cross-petition by the receiver to recover freights earned, in
the sum of $10,258.86, in excess of the rental of such engines and
cars.
The case arises upon the following facts. In 1877, the Mobile
and Northwestern Railway Company, for the purpose of raising money
to build its road, executed a trust deed upon all its property, in
the amount of $250,000, to secure a series of bonds in that amount,
to be negotiated. The railway company made early default in the
payment of its interest upon these bonds, but notwithstanding its
default, the bondholders suffered the property to remain in its
hands and under the uninterrupted control and management of the
company until November 15, 1886, when the original bill in this
case was filed. During the continuance of such default, and in
January, 1883, the president of the railway company contracted with
the Baldwin Locomotive Works for two locomotives at a cost of
$7,600 each, to be completed in the autumn of that year. Just
preceding their completion, the only locomotive the railway then
had became permanently disabled, and, though the new locomotives
ordered were nearing completion, the company had no money, nor
means of raising money, to pay for them. In this strait, the
bondholders being unwilling to extend their assistance, application
was made to the Sunflower Oil Company, appellant, for the means
necessary to purchase the rolling stock and avert a total
suspension of the company's business. Under these circumstances, a
contract was executed October 6, 1883, between the oil company and
the rail way company to the following effect: the oil company
agreed to purchase from the Baldwin Locomotive Works two
Page 142 U. S. 315
locomotives and tenders complete, named, respectively, "La
Flour" and "Yazoo," at the price of $7,600 each, and to invest the
further sum of $2,400 in box and flat cars, and to lease the same
to the railroad to January 1, 1886, for $1,408 per annum, payable
in monthly installments. This was exactly eight percent upon the
amount invested. The La Flour and the cars were to be paid for by
the oil company in cash, and were at once to be and to continue its
property until purchased by the railway company in the manner
hereinafter provided. The Yazoo was to be purchased upon the
obligation of the railway company, payable in six months from date,
guaranteed by the mercantile firm of Fargason and Co., of Memphis,
which guaranty the oil company agreed to procure, and until payment
the title to the Yazoo was to remain in the Baldwin Locomotive
Works. Should the railway company pay the obligation at maturity,
the title to the engine was to vest in it; but should the same be
paid by Fargason and Co., the title was to be and remain in the
Sunflower Oil Company until the railway company should acquire
title to it and the other property in the manner hereinafter set
forth. Should the railway company promptly meet its obligation to
the locomotive works for the Yazoo, then the rents payable to the
oil company were to be reduced to $800 per annum, payable monthly.
The railway company agreed to take all proper care of the rolling
stock and turn the same over in good order to the oil company at
the end of the contract, "should said railroad company be then
unable to purchase the same at the price hereinafter mentioned,"
and agreed to use the same upon its line of road and to turn the
same over at the demand of the oil company should it at any time
violate its agreement.
The railway company further agreed that it would, on or before
January 1, 1886, purchase all said property from the oil company
and pay for it in cash at the cost price, and should also have the
right at any time before that date to purchase the whole by paying
the cash price thereof, in which event the contract for rent should
immediately cease and determine, but the other terms of the
contract were to remain unimpaired. The railway company
Page 142 U. S. 316
houses at several of its depots for the purpose houses at
several of its deports for the purpose of receiving cottonseed in
bulk for the oil company, and would provide scales for weighing
seed, and would haul seed in bulk from various points along the
line of its road for the oil company; that the agents of the
railway company would weigh the cottonseed and purchase the same,
if desired, free of cost for any such services; that it would haul
all sacks for the oil company free of charge; that it would receive
and haul all freights for the oil company at the Mississippi River,
opposite Helena, free of charge for storage or commission, and that
the freight paid should be at reasonable rates to be fixed at
various times by the presidents of the two companies, but the
freight on seed in bulk was not to exceed $1.75 per ton, and that
on seed in sacks was not to exceed $2.00 per ton. It was further
agreed that the railway company would not haul cottonseed in bulk
for any other corporation or person, nor permit its agents to
purchase or pay for cottonseed for any other corporation or person,
and that it would give all needed facilities and preferences to the
oil company to enable it to control all the cottonseed along the
line of its road, "as it now is, or as it may be while this
contract is in force." All freights earned were to be credited on
the rental of the property, and, should there remain a surplus
after paying the rent, it was to remain in the hands of the oil
company and go as a credit upon the purchase money of said
property. Interest was to be allowed said railway company on said
surplus at the rate of eight percent per annum. The railway company
was to furnish a monthly statement of freights at the end of each
month while the contract continued, to be credited in the manner
above stated. The contract was to continue in force until January
1, 1886, and on this day, January 1, 1886, a further contract was
made extending the time for one year from that date for the
purchase by the railway company of such engines and cars.
In November, 1886, Moses H. Katzenberger and others, holders of
a majority of the bonds, filed a bill in the District Court of the
United States for the Northern District of Mississippi to enforce a
sale of the property and franchises covered by the trust deed, and
praying for a receiver pending the proceedings.
Page 142 U. S. 317
Subsequently the bill was amended, and on December 16, 1886,
Benjamin Wilson, the defendant and appellee in this case, was
appointed receiver of the company. Having duly qualified, the
receiver took charge of the road and began to operate the same
under the orders of the court, using the rolling stock under an
arrangement for that purpose. The same day the receiver was
appointed, an order was made that the receiver continue any
existing contract for the purchase or use of the rolling stock then
used on said road until, for sufficient cause shown, such contract
should be annulled. A subsequent order permitted him to "make any
change in the contract heretofore existing" in relation to the
rolling stock.
On February 14, 1887, the Sunflower Oil Company, appellant,
which was not a party to the original bill, interposed by petition,
setting up its contract with the railway company, alleging a
balance due it of $6,732.15 on the purchase of said engines and
cars, and praying that the receiver be required to carry out the
terms of said contract by continuing to carry freights for the
appellant, and by allowing it to retain all moneys due or to become
due the receiver for such services, as credits on such rental and
purchase money accounts, until the full indebtedness of the railway
company was discharged. The receiver answered denying that the
railway company had ever made any binding contract to purchase such
rolling stock and that the contract was a contract of rental with a
mere option to buy; that appellant had retained of the freights
earned by said railway the sum of $10,258.86 in excess of the
agreed rental of the property, and for the recovery of the same
filed his answer in the nature of a cross-petition. The court was
of the opinion that the relation between the parties was one of
lessor and lessee, and decreed that the oil company pay to the
receiver the amount above named, being the excess of the earnings
of the road in the hands of the oil company over the amounts due
for rents. From that decree, the first appeal was taken. At the
same time, an account was taken of the amount due the receiver for
the surplus of freights earned by the railroad, while in his hands,
over the rents due the oil company during the same period,
which
Page 142 U. S. 318
resulted in a further decree against the oil company, in favor
of the receiver, for $3,729.82. From that decree, the second appeal
was taken to this Court.
Page 142 U. S. 320
MR. JUSTICE BROWN, after stating the facts in the foregoing
language, delivered the opinion of the Court.
(1) This case turns upon the construction of the contract of
October 6, 1883, between the Sunflower Oil Company and the Mobile
and North western Railway Company, the substantial provisions of
which were that the oil company should purchase of a manufacturer
certain rolling stock, which it should lease to the railway company
at a rent equal to eight percent upon the cost price, the latter
agreeing to purchase the same of the oil company on or before
January 1, 1886, and pay for it in cash, with a proviso that in
case it should be unable to purchase the same, it should turn it
over to the oil company, in good order and condition at the
expiration of the contract.
Page 142 U. S. 321
There is no doubt of the general proposition that mere inability
to pay is no defense to the performance of a contract or to a
promise to pay. A person making purchase of an article is
conclusively presumed to intend to pay for it and to have had his
ability to pay in contemplation when he made the purchase, and if
this proviso had not been inserted, no doubt could have arisen
regarding the proper interpretation of this contract. But here was
a contingency carefully introduced into this contract upon the
happening of which the railway company was to be discharged of its
obligation to the oil company by returning to it the rolling stock
in good order and condition. We are bound to assume that this
provision was inserted for some purpose, and are bound to give it
its proper effect. At the time the contract was entered into, the
railway company was financially embarrassed, its only locomotive
had been crippled beyond repair, and it had neither money nor
credit with which to purchase another. In this extremity, it
entered into negotiations with the oil company, which was itself
desirous of increasing its facilities for obtaining cottonseed and
a monopoly of that article along the line of said road. But in
making the advance necessary to secure the requisite amount of
rolling stock, the oil company naturally sought to protect itself
in every possible way against loss. This it did (1) by retaining to
itself the title and ownership of such rolling stock until the same
should be fully paid for; (2) by leasing it to the road at a rental
equal to eight percent upon the value of the property; (3) by
retaining the freights due the road for carriage of cottonseed, and
crediting them first, upon the rent, and second upon the purchase
price of the property; (4) by providing for the return of the
property in good order and condition in case the road was unable to
purchase the same for cash by January 1, 1886, subsequently
extended to January 1, 1887. The last was a proviso doubtless
inserted out of abundant caution in order to put beyond question
the return of the property in case the road should fail to pay for
it in full before the expiration of the contract. Under these
circumstances, we find it difficult to give these words any other
than their ordinary meaning --
viz., that if the
Page 142 U. S. 322
railway company became so deeply involved as to be unable to pay
its current debts in the ordinary course of business, it should be
released from its obligation upon returning the property. In
ordinary speech, a person is said to be unable to make a purchase
when he has neither money nor credit sufficient for that purpose,
though the entire value of his assets may be greater than the
purchase price of the property. It is unnecessary to decide,
however, whether the proviso in question created a mere option, or
whether anything less than the total insolvency of the company
constituted an inability to purchase within the meaning of the
contract, since the appointment of a receiver at the suit of
bondholders seems to be most conclusive evidence of inability to
carry out its contracts, and indeed to have been the very
contingency contemplated in the proviso. It is unnecessary even to
decide whether this inability to purchase could be asserted at all
by the railway company, since the defense in this case is set up by
the receiver, acting in the interest of all the creditors, and
claiming that, in view of the insolvency of the company, the
oppressive character of the contract and the greatly reduced price
at which he could secure similar property, payment ought not to be
compelled from the funds in his hands.
The receiver did not, simply by virtue of his appointment,
become liable upon the covenants and agreements of the railway
company. High on Receivers § 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.
Turner v. Richardson, 7 East 335;
Commonwealth v. Franklin Insurance Co., 115 Mass. 278;
Sparhawk v. Yerkes, ante, 142 U. S. 1. Of
course, if he elects to take property subject to a condition, he is
bound to perform the condition before he can obtain title to the
property. He may, however, decline to assume this obligation and
return the property to the purchaser upon complying with the terms
of the contract with respect to such return. The case is not
Page 142 U. S. 323
unlike that of
Express Company v. Railroad Company,
99 U. S. 191. In
that case, the express company agreed to loan the railroad company
$20,000 upon its notes, to be expended in repairs and equipments.
In consideration of this, the railroad company agreed to provide
the necessary privileges and facilities for the transaction of all
the business of the express company over its road, and to charge a
certain sum for transportation, which was to be credited monthly
toward the payment of the loan with a proviso that, if the loan
were not paid within a year, the contract should continue in force
for a further period or until the whole had been repaid. A mortgage
upon the road having been foreclosed, the receiver repudiated the
contract, forbade the express company from further using the cars
of the railroad company unless upon conditions whereby the contract
was virtually surrendered or ignored, and the express company was
compelled to abandon the road, although the money loaned, with a
portion of the interest thereon, was still due and unpaid. It filed
a bill for specific performance, alleging that, the railroad
company having conveyed away its property and being in part
insolvent, the violation of the contract could not be compensated
by any damages that might be recovered at law. This Court dismissed
the bill, holding that, as the plaintiff had no lien and the
contract was simply for the transportation of persons and property,
the Court could not require either a specific performance by the
receive or the satisfaction of the plaintiff's demand by money, and
that the express company had therefore no standing in a court of
equity.
The case of
Coe v. New Jersey Midland Railway, 27
N.J.Eq. 37, is also instructive in this connection. In that case,
the Rhode Island Locomotive Works Company entered into an agreement
with the railway company to furnish the latter certain locomotives
and tenders, as upon lease but with the agreement that upon payment
in full of the rent reserved, they should become the property of
the railway. The rent was payable in installments, for which the
company gave its notes. At the time of the appointment of the
receiver, there was due for rent about $120,000, and the
locomotives
Page 142 U. S. 324
were then in possession of the receiver and in use upon the
road. Petitioners based their claim to relief upon the ground that
the receiver requested them to leave the locomotives in his
possession for use on the road, he guarantying to keep them in good
order and promising to apply for authority to pay the claim. In
defense, the receiver alleged a notice by bondholders not to pay
the rent or deliver the certificates therefor, which had been
issued upon his application, because the property was not worth the
amount agreed to be paid, and it was not for the interest of the
trust that the rent should be paid. It was held that petitioners
had no equity arising from the conduct of the receiver to have the
contract specifically performed, without regard to the advantage or
disadvantage of the trust fund; that although they appeared to be
willing, up to the time they were warned not to do so, to pay for
the property according to the agreement, it might have been an
improvident act on their part; that the fact that the receiver had
applied for leave to issue the certificates to pay the rent did not
bind them, and that the court would not grant the prayer of the
petitioners until satisfied that it was for the interest of the
trust that it should be done; but that the petitioners would be
allowed just compensation for the use of the property while held by
the receiver.
(2) Notwithstanding the absence of a provision in the contract
forfeiting payments already made in case of a failure to complete
the purchase, it is open to doubt whether an action at common law
would lie to recover such payments. The courts of Massachusetts,
Maine, and Illinois hold that partial payments are forfeited, while
those of Connecticut, Michigan, Minnesota, and Georgia hold that
upon equitable grounds, the buyer is entitled to a return of the
money. There seems to be no doubt, however, that a court of equity
may require the return of the money paid, less the amount of any
damage sustained to the property and a reasonable compensation for
the use of the same, particularly if there be a clause in the
contract providing that upon a certain contingency the property
shall be returned to the seller.
(3) Under the circumstances of this case and in view of the
Page 142 U. S. 325
fact that a court of equity takes jurisdiction of all questions
with respect to this property as ancillary to its jurisdiction over
the main case, the dismissal of the intervening petition does not
necessarily involve a dismissal of the cross-petition, and the
court, having jurisdiction of the entire proceeding, may proceed to
do complete justice between the parties.
(4) In the view we have taken of this case, it is unnecessary to
consider whether the manifestly illegal stipulations in this
contract had the effect of vitiating the entire agreement. It bears
evidence upon its face of having been extorted from the necessities
of the railway company, and contains many provisions which fail to
commend it to the consideration of a court of equity.
There is no practical distinction between these two appeals. By
his order of appointment, the receiver was authorized to take
possession of the money and assets and all other rights and
property of the railway company, wherever the same might be found,
including its equitable interests, things in action, and other
effects, and he is as much entitled to recover moneys due upon
contracts made with the railway company as with himself. No
question arises with regard to the rights of other creditors, as
was the case in
Galveston Railroad v.
Cowdrey, 11 Wall. 459;
American Bridge Co. v.
Heidelbach, 94 U. S. 798, and
Gilman v. Telegraph Co., 91 U. S. 603, and,
as between the railway company and the receiver, the latter was
entitled to the money, subject to any valid set-off of the oil
company.
There was no error in the disposition of either of these two
cases by the court below, and both decrees are therefore
Affirmed.
MR. JUSTICE LAMAR was not present at the argument, and took no
part in the decision of this case.
