On the 10th of February, 1879, the Council Bluffs and St. Louis
Railway Company leased their projected railway from Council Bluffs
to the state line to the St. Louis, Kansas City and Northern
Railway Company for the term of 91 years. Together, the lines
formed the Omaha Division of the Wabash system. On the 15th of
February, 1879, the lessee issued bonds to the amount of
$2,350,000, secured by a mortgage to the United States Trust
Company, to complete and equip the division. In November, 1819, the
lessee was consolidated with the Wabash Railway Company under the
name of the Wabash, St. Louis and Pacific Railway Company. The new
corporation assumed all the obligations of the old ones, entered
into possession of all the property, issued bonds to the amount of
$17,000,000, secured by a general mortgage to the Central Trust
Company, and other bonds, and continued to operate the property
down to May, 1884, when it filed a bill alleging its own insolvency
and asking the court to appoint receivers of all its property,
which was done. A preferential indebtedness was recognized by the
court to the extent of $4,378,233.49, which the receivers were
directed to pay. The rentals and interest amounted to $2,175,062,
of which $82,250 was for the rent of the Omaha Division. These also
were ordered to be paid by the receivers. It turned out,
practically, that so far from being able to make all these payments
out of earnings, they were never enough to pay the preferential
debts, and that the Omaha Division was operated at an actual loss
without taking the rental into account. These facts were made known
to the court by the receivers in March, 1880, whereupon it ordered,
in April, 1885, that the subdivisional accounts be kept separately,
and that no rent or subdivisional interest be paid where a
subdivision earned no surplus. It also ordered the preferential
debts to be paid before rentals. The installment of rent or
interest on the Omaha Division due in April, 1885, not being paid,
a bill was filed to foreclose the mortgage upon it, and when a
default took place in the payments due in October, 1885, a receiver
was asked for. In the following March, a receiver was appointed
Page 150 U. S. 288
as asked for, and the Omaha Division was surrendered to him by
the general receivers of the Wabash system. He intervened in the
Wabash suit, praying for payment by the general receivers of the
overdue rent on the Omaha Division, amounting to $222,075.77. A
decree of foreclosure and sale of the Wabash system under the
general mortgage was entered which reserved specially all rights
under the Omaha Division, and under this decree a sale was made and
the property was transferred to a new corporation culled the Wabash
Western Railway Company. The petition for the payment of rent of
the Omaha Division, after reference to a master and report by him,
resulted in a decree for the payment of one month's rent with
interest, instead of 16 months, as prayed for.
Held:
(1) That the court was bound to take into consideration the
peculiar circumstances under which the receivers took possession of
and operated the Wabash system.
(2) That, following
Quincy, Missouri &c. Railroad v.
Humphreys, 145 U. S. 82, the
court did not bind itself or its receivers to pay the agreed rent
eo instanti by the mere act of taking possession, but that
reasonable time had to be taken to ascertain the situation of
affairs.
(3) That the order made by the court below to pay the rents only
after the discharge of the preferential debts was correct.
(4) That the owners of the Omaha branch, or the trustees of its
mortgage, knowing that that branch was in the hands of the general
receivers, might have intervened in that suit for the protection of
their property, and were bound by the order for payment of the
preferential debts, as it is settled that whenever, in the course
of a receivership, the court makes an order which the parties to
the suit consider injurious to their interests, it is their duty to
file a motion at once asking the court to cancel or to modify
it.
(5) That the petition of the receivers of March, 1885, and the
order of the court thereupon touching subdivision earnings, was
notice to the branch lines that they must not expect payment of
their rent, when the subdivision earned nothing beyond operating
expenses.
(6) That as the mortgage to the United States Trust Company did
not convey the income or earnings of the road to it, but only
authorized it to take possession in case of default, the trustee
could only secure the earnings by taking possession in such
case.
(7) That until the mortgagee asserted its rights under the
mortgage to the possession of the road by filing a bill of
foreclosure and by demanding possession, it had no right to receive
the earnings and profits.
(8) That the judgment of the court below awarding a recovery of
only one month's rent was right.
The general rule applicable to this class of cases is that an
assignee or receiver is not bound to adopt the contracts, accept
the leases, or otherwise
Page 150 U. S. 289
step into the shoes of his assignor if, in his opinion, it would
be unprofitable or undesirable to do so.
In such case, a receiver is entitled to a reasonable time in
which to elect whether he will adopt or repudiate such
contracts.
If a receiver in a suit for foreclosing a railway mortgage
elects to adopt a lease, he becomes vested with the title to the
leasehold interest, and a priority of estate is thereby created
between the lessor and the receiver, by which the latter becomes
liable upon the covenant to pay rent.
These were cross-appeals from a final decree entered September
25, 1889, overruling the exceptions of the appellant the United
States Trust Company to a master's report, overruling in part the
exceptions of the appellant the Wabash Western Railway Company to
the same report, and adjudging that the trust company, as trustee
under the mortgage of what is known as the "Omaha Division of the
Wabash, St. Louis & Pacific Railway," recover from the Wabash
Western Railway Company the sum of $13,708.33, with interest
thereon from January 6, 1886, amounting in all to $16,765.51, as
rental for that division during the period in which it was operated
by the receivers of the Wabash Company.
At the time the petition in this case was filed, the Wabash, St.
Louis & Pacific Railway Company, a corporation formed by the
consolidation of a large number of railway companies, extending
from Detroit and Toledo in the east, to Omaha and Kansas City in
the west, with a total mileage of 3,600 miles, of which railway the
St. Louis, Kansas City, and Northern Railway was a branch, was in
process of winding up and reorganizing under two bills, namely: 1.
a bill filed May 27, 1884, by the Wabash, St. Louis and Pacific
Railway Company itself, wherein it set forth its own insolvency,
its inability to meet various pressing debts, including interest
due June 1, 1884, on its general mortgage and certain other of its
bonds, the consequent danger of a breaking up of its system of
railroads, and the irreparable damage that might result from it
disruption, and praying for the appointment of receivers to take
possession of, preserve, and operate its lines of railroad for the
benefit of its creditors according to their respective legal and
equitable rights. To this bill the Central Trust Company of New
York and James Cheney, trustees under the Wabash
Page 150 U. S. 290
general mortgage, the United States Trust Company of New York,
trustee of the Omaha Division mortgage, as well as the trustees in
all the underlying and divisional mortgages on the various lines of
the Wabash system, were made defendants; (2) a cross-bill filed
June 9, 1884, by the trustees of the Wabash Company, under its
general mortgage, for the foreclosure of that mortgage and
appointment of receivers of the mortgages premises.
The petition in this case was filed April 23, 1886, and the case
referred to a master upon a stipulations as to the facts, of which
the following is a summary: on February 10, 1879, the Council
Bluffs and St. Louis Railway Company, an Iowa corporation, the
owner of a projected railway sixty-five miles in length, from
Council Bluffs, Iowa, in a southeasterly easterly direction, to a
point on the state line between Iowa and Missouri, leased its road
to the St. Louis, Kansas City and Northern Railway Company, the
owner of another railway extending from that point on the state
line about seventy-eight miles to Pattonsburg, Missouri, for the
term of ninety-one years. These roads formed a line from
Pattonsburg, Missouri, to Council Bluffs, Iowa, and are known in
this litigation as the "Omaha Division of the Wabash System." On
the 15th day of February, 1879, the said St. Louis, Kansas City,
and Northern Railway Company, for the purpose of raising funds
necessary to complete and equip the Omaha Division, issued and sold
$2,350,000 in bonds, or at the rate of $16,000 for each mile, and,
to secure the payment thereof, mortgaged its interest and estate in
the whole of such division, being an estate in fee in that portion
of the line situated in Missouri and its leasehold estate in that
part located in Iowa, to the United States Trust Company.
In November, 1879, the St. Louis, Kansas City, and Northern
Railway Company, of Missouri, was consolidated with the Wabash
Railway Company, under the corporate name of the Wabash, St. Louis,
and Pacific Railway Company. By the terms of such consolidation,
the new corporation assumed all the obligations of both the
constituent companies. Immediately upon such consolidation, the
Wabash, St. Louis, and Pacific Railway Company entered upon the
sole use of the
Page 150 U. S. 291
premises demised by said lease, and upon June 1, 1880, issued
$17,000,000 of what were known as its "general mortgage bonds,"
secured by a mortgage to the Central Trust Company of New York and
James Cheney, as trustees. This mortgage covered all its railway,
leasehold, and other property. By a later mortgage dated May 1,
1883, to the Mercantile Trust Company of New York, 11,089 shares of
stock of the Council Bluffs and St. Louis Railway Company were
pledged with a large amount of other property of secure $10,000,000
of what were called the "collateral trust bonds" of the Wabash
Company.
From 1879 to May 27, 1884, the Omaha Division was successfully
and profitably operated, and the terms of the lease were complied
with. Upon presentation to the court of the first bill above
stated, filed by the Wabash Company, alleging its own insolvency,
and on May 27, 1884, an order was entered appointing Solon
Humphreys and Thomas E. Tutt receivers of all the property of the
said Wabash Company. This order appointing the receivers directed
them to take possession of, operate, and preserve all of said lines
of railroad, and from their earnings pay their operating expenses;
the balance due to other railroad and transportation companies
growing out of the interchange of traffic during the preceding six
months; all rentals accrued, or which should thereafter accrue, on
all leased lines for the use of terminals or track facilities, and
for all rentals due or to become due upon rolling stock therefore
purchased by the company and partially paid for; likewise, all just
claims and accounts for labor, supplies, professional services,
salaries of officers, and employees that has been earned or matured
during the preceding six months. The receivers were also directed
by the order to keep such accounts as might be necessary to show
the sources from which all such incomes and revenues were derived,
with reference to the interest of all parties to the suit and the
expenditures made by them.
On June 26, 1884, within one month after their appointment, the
receivers made a report and petition to the court in which they
stated to the best of their information and belief that each and
all of certain lines of railroad constituting the
Page 150 U. S. 292
consolidated Wabash, St. Louis, and Pacific Railway Company
had
"at all times during the five years last past, or ever since
their construction, earned more than enough to pay their operating
expenses, the cost of maintenance, and interest upon the several
series of bonds"
that were secured upon them by their mortgages or deeds of
trust, and prayed the court to instruct them as to what they should
do with respect to the payment of interest, as the same from time
to time matured, on the mortgage bonds on the several lines and
divisions of the road as they existed at and before the date of the
consolidation. On June 28th, two days after the filing of this
petition, the court ordered the receivers, from the incoming rents
and profits of the property, after meeting such other obligations
as they had been directed to discharge by former orders, to pay
from whatever balance might remain in their hands the interest
maturing upon the bonds or other mortgage obligations on the
several lines or divisions of the Wabash Company before its
consolidation. Under this order, the rental for the use of the
Omaha Division falling due on October 1, 1884, and amounting to
$82,250, was paid by the receivers. Rentals and interest on other
lines accruing for the same and various subsequent periods, and
aggregating $2,175,062, were paid under the same order.
The record shows that at the time the receivers were appointed,
the labor and supply claims and other preferential indebtedness of
the Wabash Company, which the receivers were, by their order of
appointment, directed to pay, amounted to $4,378,233.49. It also
appeared that the net earnings of all the lines operated by the
receivers were never sufficient to discharge the preferential
debts.
On March 20, 1885, the receivers made another application to the
court in which they set forth in detail the earnings and expenses
of the various lines of the system up to November 30, 1884, and
prayed the court for instruction with respect to the future
operation by them of the several branch lines that had failed to
earn their operating expenses. Notice was given to the solicitor of
the trustee of the Omaha Division that this petition would be
called up on the 14th of April. In the
Page 150 U. S. 293
application, it was stated that the expenses of operating the
Council Bluffs and St. Louis Railway -- that is, the Omaha Division
-- had exceeded its earnings by $5,288.64, not including any charge
for rental, and, including such charge, there was a deficit of
$87,538.64. On April 16th, the court made an order upon this
petition to the effect that subdivisional accounts should be kept
separately; that
"where a subdivision earns no surplus, simply pays operating
expenses, no rent or subdivisional interest will be paid. If the
lessor or subdivisional mortgagee desires possession or
foreclosure, he may proceed at once to assert his rights. While the
court will continue to operate such subdivision until some
application be made, yet the right of a lessor or mortgagee whose
rent or interest is unpaid to insist upon possession or foreclosure
will be promptly recognized."
The semiannual installment of interest or rent of the Omaha
Division falling due April 1, 1885, being unpaid, a bill for the
foreclosure of the mortgage upon that division was filed by the
intervener in the Circuit Court of Pottawatomie County, Iowa. The
Wabash receivers were made defendants to the bill. This suit was
removed to the Circuit Court of the United States for the Southern
District of Iowa. Another default occurring October 1, 1885, the
intervener filed a second petition, and requested the transfer of
the division to a receiver.
On December 2, 1885, the United States Trust Company filed
another petition, in which it recited the defaults which had
occurred in the payment of interest on the bonds secured on the
Omaha Division and prayed that the receivers of the Wabash system,
Humphreys and Tutt, be ordered to surrender to the receivers,
appointed or to be appointed in the foreclosure suits of the Omaha
Division, all its property.
On January 6, 1886, the matter was called to the attention of
the court, and the court thereupon entered an order directing the
receivers, Humphreys and Tutt, to surrender within thirty days the
Omaha Division to the United States Trust Company or to any person
or receiver appointed at their instance by the circuit court for
the Southern District of
Page 150 U. S. 294
Iowa or by the state courts. There was a further clause in the
order which authorized Humphreys and Tutt to retain possession of
the Omaha Division for an additional thirty days if the Wabash, St.
Louis, and Pacific Railway Company, or anyone on its behalf, would
pay to the United States Trust Company $13,708.33, which sum was
equal to the interest for one month on the Omaha bonds. That amount
was paid by the receivers, and there is no controversy here
concerning it.
On March 3, 1886, Thomas McKissick was appointed receiver of the
Omaha Division, and on March 6, the division was surrendered to him
by Humphreys and Tutt. On April 23, the petition in this case was
filed by the intervener for the rental which accrued from October
1, 1884, to February 6, 1886, amounting to $222,075.77.
On the same day, the order of surrender was made -- namely,
January 6, 1886 -- a decree of foreclosure and sale under the
Wabash general and collateral mortgages was entered. This sale
specially reserved all rights under the Omaha Division and other
leases and mortgages and adjudged that the receivers' surrender of
any leased branch terminated the lease as of the date of the
surrender. The sale of the road having been made and confirmed, the
receivers were directed to transfer all the property to the Wabash
Western Railway Company, a new corporation organized to take the
property, the latter company agreeing to pay all claims and
demands
"growing out of the operation by said receivers of the railway
property lately in their charge, which have been or may be adjudged
to be superior in equity to the mortgages foreclosed by said
decree."
The transfer of the entire property was thereupon made to that
company, and it has since assumed the defense of the intervener's
claim.
The master to whom the petition of the trust company for rent
was referred made two reports. By the first report, the trust
company was allowed a rental of $77,237.06, being a sum equal to
the interest on the bonds from October 1, 1884, the date of the
last payment, to April 16, 1885, the date on which the court
ordered that no rent or subdivisional
Page 150 U. S. 295
interest would be paid on lines that did not earn a surplus.
To this report the receivers filed exceptions, which were
sustained by the court, and the case referred back to the master,
with instructions to report first whether the Omaha Division has
been retained by the receivers at the instance or for the benefit
of the mortgagees under the Wabash general mortgage, after the
United States Trust Company had demanded possession thereof, and
second to ascertain and report what would be a reasonable rental
for the line for the time it was so withheld. In his second report,
the master reviewed at some length the record in the case, and
concluded that the value of the use and occupation of the property
during the time it was withheld from the intervener was the
pro
rata amount of the rental provided for in the lease -- namely,
$13,708.33 per month; that the intervener had received the rental
for thirty days of the period of detention, and was entitled to
receive pay for two months more, or the sum of $27,416.66.
To this report both parties, the receivers and the trust
company, excepted, and, these exceptions having been filed, the
court, on September 25, 1889, entered a decree that the exceptions
should be sustained insofar as the report found that the intervener
was entitled to recover two months' rent of the mortgage property
at the rate of $13,708.33 per month, but insofar as the report
found that the intervener was entitled to recover one month's rent,
it was confirmed, and a final decree was entered for $13,708.33,
and interest from January 6, 1886, making an aggregate amount of
$16,765.51.
Page 150 U. S. 299
MR. JUSTICE BROWN, after stating the facts in the foregoing
language, delivered the opinion of the Court.
Stripped of its complications, this case involves to a certain
extent the same question disposed of by this Court in
Missouri
& Pacific Railroad v. Humphreys, 145 U. S.
82 -- namely, whether the receivers of the Wabash system
took possession of the leased lines under such circumstances as to
charge them with the payment of the agreed rental so long as they
retained possession of the lines.
The general rule applicable to this class of cases is undisputed
that an assignee or receiver is not bound to adopt the contracts,
accept the leases, or otherwise step into the shoes of his assignor
if, in his opinion, it would be unprofitable or undesirable to do
so, and he is entitled to a reasonable time
Page 150 U. S. 300
to elect whether to adopt or repudiate such contracts. If he
elect to adopt a lease, the receiver becomes vested with the title
to the leasehold interest, and a privity of estate is thereby
created between the lessor and the receiver by which the latter
becomes liable upon the covenant to pay rent.
Sparhawk v.
Yerkes, 142 U. S. 1,
142 U. S. 13;
Sunflower Oil Company v. Wilson, 142 U.
S. 313,
142 U. S. 322;
Woodruff v. Erie Railway, 93 N.Y. 609;
In re
Otis, 101 N.Y. 580, 585.
In this case, however, we are bound to consider the somewhat
peculiar circumstances under which the receivers took possession of
and operated the branch lines of the Wabash system. The bill was
not an ordinary bill of foreclosure, but a bill filed by the
mortgagor corporation for the purpose of preventing the disruption
of the system and securing a winding up of the old corporation and
the organization of a new one, to which the various properties of
the road should be transferred. The bill, which was certainly one
of unusual character, purported to be filed not only for the
benefit and in the interest of the mortgagor and the mortgagee, but
also in the interest of the large number of branch corporations
which were operated under one general management, and were a part
and parcel of the Wabash system. Indeed, the bill expressly averred
that defaults in the payment of interest were anticipated, and as
soon as they should occur, a number of suits would be commenced for
the appointment of receivers under the original sectional
mortgagees executed by the leased corporations; that under the
terms of such leases, the lessor companies would declare a
forfeiture of the rights of the complainant; that its road would be
broken into fragments, and would ultimately be sold in small
sections, and a reestablishment of its unity rendered
impossible.
This Court has already held in
Quincy &c. Railway Co. v.
Humphreys, 145 U. S. 82,
145 U. S. 101,
that, after the appointment of receivers made in pursuance of the
prayer of this bill, "the court did not bind itself or its
receivers" to pay the agreed rentals of a leased line
"
eo instanti, by the mere act of taking possession.
Reasonable time necessarily had to be taken to ascertain the
situation of affairs. The Quincy Company
Page 150 U. S. 301
[and the same remark may be made of the Omaha Division], 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 services 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.'"
On May 27, 1884, Humphreys and Tutt were appointed receivers of
the property, and were directed to pay certain preferred claims,
including rentals accrued, or which might thereafter accrue, upon
leased lines. On June 26, the receivers reported to the court that,
from the incoming rents and profits of the property, they were
unable to pay on June 1 the interest falling due upon certain
divisional bonds, and prayed the advice of the court as to paying
the interest on these bonds, and as to how they should dispose of
the earnings of the other lines or divisions which had not and
would not for the present be enough to pay the operating expenses,
the cost of maintenance, and the interest upon the bonds. This
petition was referred to a master, who made a report on June 28,
upon which an order of court was entered that the receivers,
"from the incoming rents and profits of said property, after
meeting such other obligations as they have been directed to
discharge by the former order of this court, pay from whatever
balance may remain in their hands the interest, as the same may
from time to time mature upon the following bonds,"
including those of the Omaha Division.
If this order of June 28 had been, as the court below seems at
first to have construed it (
Central Trust Co. v. Wabash &c.
Railway, 34 F. 259, 266), as "couched in such language that
the intervener had a right to rely upon it, and expect the payment
of his rent, until some other order was made," there
Page 150 U. S. 302
would be strong reason for saying that the receivers would be
obligated to pay this interest as it matured. But upon a more
careful examination of this order upon a rehearing, the court came
to the conclusion that it was not an absolute order to pay, but
only an order to pay
after the preferential debts had been
discharged. 38 F. 63. We have no doubt of the correctness of
this conclusion. The language of the order was that the
receivers,
"from the incoming rents and profits of said property,
after
meeting such other obligations as they have been directed to
discharge by the former order of this Court, pay from whatever
balance may remain in their hands."
The other obligations they had been directed to discharge were
fixed by the order of their appointment of May 27th, as traffic
balances, rentals accrued or to accrue upon leased lines, and for
the use of terminal facilities and rolling stock, claims for labor,
supplies, professional services, and salaries, maturing within six
months before making the order, and current expenses for the
operation of the road. It is true, as argued by the interveners,
that among the preferred claims mentioned in this order were the
rentals due and to become due on leased lines, and that there was
no order of payment or relative rank fixed between the preferred
claims themselves, the court evidently supposing that the income of
the road would be sufficient to pay all the preferred debts. It was
impossible, however, for the court, in making the order of June 28,
to have contemplated that the rental due the Omaha Division should
be a preferred claim, inasmuch as the whole object of the order of
June 28 was to provide for the payment of the interest due upon the
bonds of this division after the payment of preferred claims. There
is an apparent incongruity between the two orders, but we think it
clear that the object of the order of June 28 was, as stated, to
pay only from the balance after the payment of the preferred
claims, not including as a preferred claim the claim for
rental.
The owners of the leased lines were fully apprised by this order
of the fact that payment of interest upon their bonds was
conditional upon such balance's existing, and the fact was that,
after paying the operating expenses of the lines and the
Page 150 U. S. 303
labor and supply debts of the Wabash Company, there was never a
balance in the hands of the receivers out of which they could pay
either interest or rentals. In fact, the preferential indebtedness
which the receivers were by the order of May 27th directed to pay
amounted to over $4,000,000, and the total gross earnings of all
the lines of the system, from the day the receivers were appointed
to the time the Omaha Division was surrendered to its trustee,
lacked over $2,000,000 of being sufficient to pay the operating
expenses and the labor and supply debts of the Wabash Company. The
receivers did in fact pay the agreed rental of the Omaha Division
up to October 1, 1884, to the amount of $82,250. Now if the owners
of the Omaha branch or the trustees of its mortgage, knowing as
they did that system of which their road was a part had gone into
the hands of receivers and was being operated by them, had desired
to repossess themselves of their property or to object to the order
of June 28, they should have intervened and asked the court to
protect their interests. While they may not have been parties to
this order directly, they were parties to the bill, and were bound
to know that their property, in the hands of the receivers, would
or might be affected by orders which the court would make in the
course of the administration of the insolvent estate, and should
have made themselves parties to the proceedings that their rights
might be protected. As was said in
Miltenberger v. Logansport
Railway, 106 U. S. 286, of
certain mortgage creditors who had intervened to claim that certain
expenditures had been made by receivers without authority:
"It did not comport with the principles of equity for the
appellants to lie by and see the court and the receiver dealing
with the property in the manner now complained of, and content
themselves with merely protesting generally, and disclaiming all
interest under the receivership, and yet assert . . . that the
other property acquired by the receiver, and now alleged to have
been acquired by him without authority, was subject to the lien of
the first mortgage, and now claim the proceeds of all that
property, without paying the debts incurred in acquiring it. A
court of equity, however it might act on the question of
Page 150 U. S. 304
original authority or discretion, if presented in season and
under circumstances of good faith, will not visit upon innocent
parties, dealing with a receiver within the authority of its
orders, consequences which result from the inequitable negligence
and supineness of a party to the suit, or of those represented by
him."
So, in
Meyer v. Johnston, 53 Ala. 350, it is stated,
inferentially at least, that whenever, in the course of a
receivership, the court makes an order which the parties to the
suit consider injurious to their interests, it is their duty to
file a motion at once asking the court to cancel or modify it.
See also Wallace v. Loomis, 97 U. S.
146;
Post v. Dorr, 4 Edw.Ch. 1st ed. 412; 2d
ed. 425.
It is well understood that in the foreclosure of railroad
mortgages, it often becomes necessary to provide for the payment of
preferred claims and to postpone all rights of ordinary creditors,
and even of mortgagees, to these preferred classes, and that this
is sometimes done, from the necessities of the case, without notice
to all who may be affected thereby.
Nor is this aspect of the case changed by the fact that the
earnings on the Omaha Division had previously been sufficient to
pay the operating expenses, cost of maintenance, and interest upon
its bonds, and that the receivers thought and believed such
earnings would be sufficient to pay the interest as well as the
preferred claims. Various things had occurred or might occur, such
as failure of crops, injury from floods, or other disasters, to
affect its earning capacity, and the trustees were bound to know
that the insolvency of the entire system of which their road was a
part could hardly fail to affect the value of their securities.
On March 20, 1885, the receivers filed another petition, stating
that the earnings of many of the lines had not been sufficient to
pay the operating expenses, interest on bonds, and the rentals
contracted to be paid, among which lines was the Omaha Division,
the expenses of which, not including any charge for rental, had
exceeded its earnings by $5,288.64, and praying the court to make
such orders with respect to the future operation of such lines and
the payment of the respective rentals as should seem proper to the
court. In response thereto, the
Page 150 U. S. 305
court, on April 16, ordered that subdivisional accounts should
be kept separately; that where any subdivision earned a surplus
over expenses, the rental or subdivisional interest would be paid
to the extent of the surplus. Where it earned no surplus, but
simply operating expenses, no rent or subdivisional interest would
be paid, and where not only was no surplus earned, but an actual
deficiency existed, operating expenses would be reduced to a
minimum. At the time this order was granted, there was some
conversation between counsel in which it was said to be the wish of
the receivers not to include in this proceeding the Omaha Division,
but it was qualified by the express statement of the receivers that
they did not wish to be understood as promising the bondholders the
payment of the interest on the bonds within a short period of time
under the circumstances.
The order was certainly notice to the branch lines that they
must not expect payment of their rental where the subdivision
earned nothing beyond operating expenses. The trust company;
however, did not at this time see fit to intervene and demand
possession of the property, but upon default in the payment of the
interest due April 1, 1885, filed a bill of foreclosure in the
state court, making the receivers parties to the bill. This suit
was removed, upon petition of the receivers, to the circuit court
of the United States. It was not until December 2 that the trust
company petitioned the court for the surrender of the property.
Under these circumstances, we do not think the receivers are
chargeable with the unpaid rent. It is possible that the trust
company acted under a misapprehension of its rights, but it is more
probable that they expected the earnings of the road would be
sufficient to entitle them to their interest under the orders of
June 28 and April 16. There appears to have been no good reason why
demand was not made long before for the surrender of the property.
It is true the receivers filed in the state court an answer,
consisting of a single sentence, denying generally the allegations
of the bill, and, in November following, they removed the case to
the circuit court of the United States; but there was nothing in
all this to prevent the trust company from
Page 150 U. S. 306
applying to the United States court for possession of the
property.
There is another reason, however, why the trust company is not
entitled to the rental of this property prior to demanding
possession thereof in its bill of foreclosure. The petition avers
that by reason of the defaults in the payment of the rentals, the
receivers "are indebted to your petitioner for the use and
occupation of the said demised premises under the said lease." But
the mortgage or deed of trust to the trust company, the petitioner,
did not purport to convey any of the incomes or earnings of the
road, but provided that if default should at any time occur in the
payment of interest, the trustee should, when requested so to do,
take possession of the mortgaged property and operate the same and
collect and receive all the tolls and income thereof. It was also
provided that until such default, the mortgagors should be entitled
to have and to hold the possession of the railroad and collect,
receive, and retain all the revenues arising from its use.
There was also a guaranty mortgage executed by the Council
Bluffs and St. Louis Railroad Company to the same trustee,
conveying all its right, title, interest, and estate in the demised
premises, with all the mortgagor's rights, privileges, and
franchises, acquired or to be acquired, subject only to the lease.
Now if the mortgage had covered the earnings and rentals of the
property, and those had constituted a part of the estate conveyed
to the trust company as security for the bonds, there would be some
reason for saying that it would be entitled to recover these
earnings and rentals in this action before it demanded possession
of the road. But where the mortgage provides that the mortgagor
shall remain in possession until default, but, when default occurs,
the trustee may enter, this Court has held that the trustee can
only secure the earnings of the mortgaged property by taking or
demanding possession. And in
Galveston Railway v.
Cowdrey, 11 Wall. 459,
78 U. S. 483,
it was held that even where the mortgage covered the tolls, income,
and profits of the railroad whenever the company should be in
default of payment, but a subsequent clause provided that in case
the company should be in default
Page 150 U. S. 307
in payments of principal or interest for three months, the
trustees should take possession of the road and collect and receive
the tolls, income, and profits, etc., until regular demand was made
for the payment of tolls and income, the defendants were not bound
to account therefor. So in
Gilman v. Illinois & Mississippi
Telegraph Co., 91 U. S. 603, the
trustee in a mortgage which covered a road with its revenues and
incomes sought to recover as against a general creditor a fund that
had been earned before the trustee took possession of the mortgaged
property. The deed of trust in that case provided that if default
occurred in the payment of interest, the trustee might take
possession and receive the income and earnings of the road and
apply them to the debt secured. The Court held that the trustees
had no claim upon the fund. In delivering the opinion of the Court,
Mr. Justice Swayne observed:
"It is clearly implied in these mortgages that the railroad
company should hold possession and receive the earnings until the
mortgagee should take possession, or the proper judicial authority
should interpose. Possession draws after it the right to receive
and apply the income. . . . In this condition of things, the whole
fund belonged to the company, and was subject to its control. It
was therefore liable to the creditors of the company as if the
mortgages did not exist. They in no wise affected it. If the
mortgagees were not satisfied, they had the remedy in their own
hands, and could at any moment invoke the aid of the law or
interpose themselves without it."
In
American Bridge Co. v. Heidelbach, 94 U. S.
798, the mortgage included the rents, issues, and
profits of a certain bridge, insofar as the same were not necessary
to pay its operating expenses and the cost of keeping it in repair.
The question in the case was whether earnings that had accrued from
the use of the bridge before the bill of foreclosure was filed by
the trustees were covered by the mortgage and prevailed over the
rights of a judgment creditor. In this case, it was said that
"the mortgage could have no retrospective effect as to previous
income and earnings. The bill of the trustees does not affect the
rights of the parties. It is an
Page 150 U. S. 308
attempt to extend the mortgage to what it cannot be made to
reach. Such a proceeding does not create any new right. It can only
enforce those which exist already."
There are a number of other cases in this Court to the same
effect.
Kountze v. Omaha Hotel Company, 107
U. S. 392;
Freedman's Savings Co. v. Shepherd,
127 U. S. 494;
Sage v. Memphis & Little Rock Railroad, 125 U.
S. 361;
Dow v. Memphis & Little Rock
Railroad, 124 U. S. 652;
Teal v. Walker, 111 U. S. 242.
The substance of these rulings is that until the mortgagee
asserts his rights under the mortgage to the possession of the road
by filing a bill of foreclosure, or, if the road be in the hands of
a third party, by demanding possession of such party, he has no
right to its earnings and profits. In other words, there is no
privity of contract or of estate between the mortgagee and lessee,
at least until the mortgagee has taken possession of the property
and become the assignee of the rights of the mortgagor.
On December 2, 1885, the trust company made formal application
to the court for the transfer and surrender of the Omaha Division
to a receiver to be appointed in the suits then pending for the
foreclosure of the mortgage. The motion was called to the attention
of the court on December 8, and was opposed by counsel for the
Central Trust Company of New York, the trustee of the Wabash
general mortgage, upon the ground that the application should be
postponed until January 4, 1886, when the decree in the Wabash suit
would be presented to the court for settlement, and the matter of
this petition as well as all other questions could be presented and
passed upon. This application for the postponement was resisted by
the counsel for the United States Trust Company, but was granted by
the court, which expressed an unwillingness to permit the further
disintegration of the system. No order was made at this time with
respect to the rental. Upon the renewal of the application, on
January 6, the court ordered a surrender to be made within thirty
days, with an option to the Wabash receivers to retain the division
for an additional thirty days, on the payment of one month's rent
-- namely
Page 150 U. S. 309
$13,708.33. The receivers availed themselves of this option and
paid the rent with the hope that during that time some arrangement
might be made to keep the line within the system, so that the
surrender did not actually take place until March, 1886. As the
rent for the last thirty days was paid, the sole remaining
questions are as to the rent from December 9 to February 6.
The master to whom the case was referred reported that the trust
company was entitled to the two-months rental at $13,708.33 per
month. But the court, upon hearing exceptions to such report, was
of the opinion that while the receivers were liable for the first
month's rental, namely, from December 7 to January 6, upon the
ground that the delay upon the consideration of the motion was
opposed by the counsel of the trust company, the further delay of
thirty days was with their consent; hence that they were equitably
estopped from claiming rental for the second month.
We agree with the court below in this conclusion. When the
motion was called up on December 6, the trust company insisted upon
its right to have an immediate surrender of the road, and opposed
even a postponement of thirty days. Possession of the road being
withheld from them without their assent, they are equitably
entitled to rent for this month. But the order entered on January 6
directing the receivers, at the expiration of thirty days from that
date, to surrender possession to a receiver to be appointed by the
United States circuit court, having been entered by consent of the
parties -- in other words, the trust company having waived the
delivery of the road for thirty days -- it ought not now insist
upon payment for that period. Indeed, as the receiver of the Omaha
Division had not then been appointed, it is difficult to see to
whom the road could have been immediately turned over.
As bearing upon the general equities of the case, it may be
remarked that while the proceedings in the foreclosure of the
Wabash mortgage did undoubtedly result in the detention of the road
from its lawful owners for about fifteen months without the payment
of the agreed rent, the road during this time earned nothing beyond
its operating expenses, and there
Page 150 U. S. 310
is nothing to indicate that it would have done so in the hands
of its owners, so that in fact they lost nothing. Indeed it is
scarcely credible that they would have delayed so long to demand
possession of the road if in their opinion it could have been
operated at a profit.
The decree of the court below is therefore
Affirmed.
