Coder v. Arts, post, p.
213 U. S. 223,
followed as to the jurisdiction of this Court of appeals from the
circuit court of appeals in bankruptcy proceedings where the amount
in controversy exceeds $2,000 and the question involved is one
which might have been taken on writ of error from the highest court
of a state to this Court.
Equity looks at substance, and not at form. An advance payment
for coal yet to be mined may be a pledge on the coal and, in that
event, as in this case, the trustee in bankruptcy takes the mine
subject to the obligation to deliver the coal as mined to the
extent of the advancement.
153 F. 503 affirmed.
There is practically no controversy in respect to the facts in
this case. We take the following statement from the opinion of the
circuit court of appeals: in 1896, the Osage Carbon Company and the
Cherokee & Pittsburg Coal & Mining Company, as parties of
the first part, and Charles J. Devlin, as party of the second part,
and the railway company as party of the third part, entered into an
agreement whereby the parties of the first part leased to Devlin,
for a term of three years, certain coal lands located in the State
of Kansas, with the right to mine coal therefrom, and Devlin, the
party of the second part, agreed
Page 213 U. S. 127
to sell and deliver to the railway company, and the latter to
buy from him daily, all the coal required by it in the operation of
certain of its lines of railroad in the State of Kansas at prices
stated in the lease, payment to be made by the railway company on
the 15th day of each month for all coal delivered to it during the
preceding calendar month. Power was conferred upon the railway
company to terminate the lease for failure by Devlin to perform any
of his undertakings, and the right to assign the lease was made
subject to the consent of the railway company. Subsequently, Devlin
duly assigned to the Mount Carmel Coal Company all his right under
the lease. By two successive agreements, this contract was extended
until June, 1906. All the parties continued in the performance of
their respective obligations until July, 1905, when the Mount
Carmel Company was adjudicated a bankrupt. Receivers were appointed
and authorized to conduct the business of the bankrupt in the usual
course until trustees should be chosen. The receivers and the
subsequently appointed trustees successively continued to operate
the mines under the orders of the court, and to deliver the coal as
required by the contract. While the receivers were in charge, the
railway company and the two coal companies, the original lessors,
filed their joint intervening petition, setting forth their
relations to the bankrupt under the contract, their rights
thereunder, as already stated, and, in substance, that, by an
agreement between them and the bankrupt, the contract had been
modified to the extent that the railway company had agreed that,
without waiting until the 15th day of the month to make its payment
for coal theretofore purchased, it would, in order to accommodate
the Mount Carmel Coal Company, and enable it to pay off laborers
and keep the mines going, make advance payments from time to time
when necessary for those purposes. In pursuance of that agreement,
and for the purposes stated, it had advanced $57,304.16, with the
understanding that it should be repaid by the subsequent delivery
of coal; that the intervening bankruptcy proceedings of July 7 and
the appointment of receivers by the
Page 213 U. S. 128
court alone prevented the bankrupt from carrying out its
agreement and delivering the coal as required by the contract. The
petitioners prayed that the lease be declared forfeited and void
and the mines delivered back to them, or that the receivers be
directed to deliver to the railway company the amount of coal so
paid for in advance.
A referee, to whom the intervening petition was referred,
reported unfavorably to the granting of any relief. His report was
afterwards confirmed by the district court and the petition
dismissed. The referee found and reported that the amount claimed
by the railway company was as stated in the intervening petition,
and was advanced to enable the bankrupt to meet its payrolls, but
found that there was no testimony indicating an intention to modify
the written lease. The district court, in reviewing the action of
the referee, said:
"True, at the time the sums of money were advanced, it was no
doubt contemplated and agreed by the parties that the bankrupt
would repay the money by furnishing the coal at the price of the
coal, measured in money by the terms of the contract, and would
furnish such coal in July and August, as claimed; but at the time
of the failure of the bankrupt, the coal remained in the ground,
unmined."
Both the referee and the district court found that the agreement
for the advance of the money was a separate, independent, parol
contract, and had nothing to do with the original written contract,
as shown by the lease, and that, being such an independent parol
contract, there was no lien upon any of the property for its
payment.
The circuit court of appeals, 153 F. 503, reversed the judgment
of the district court, and held that that court should have
directed a surrender of the leased premises, or required the
trustees, upon assumption of the lease, to mine and deliver to the
railway company sufficient coal to cover its advances, and it
further held that, the lease having expired, the assets of the
estate, consisting in part of the money received for coal delivered
to the railway company, should be subject to the payment of such
debt as a preferential claim.
Page 213 U. S. 131
MR. JUSTICE BREWER delivered the opinion of the Court.
We shall not stop to discuss the question of jurisdiction. That
whole subject has been so fully considered in the case just decided
of
Coder v. Arts, post, p.
213 U. S. 223,
that any further discussion of the subject would be
superfluous.
We pass directly to the merits, and, in order to a clear
understanding of them, the facts of the dealings between the coal
company and the railway company must be borne in mind. The railway
company entered into its original contract for the sake of securing
the constant supply of coal necessary for the operation of part of
its railway. It was to take from the coal company daily all the
coal required therefor at prices fixed in the contract, and to make
payment therefor on the fifteenth day of each month for all coal
delivered to it during the preceding calendar month. It was not
engaged in the business of money
Page 213 U. S. 132
lending. Its entire arrangement was for the purpose of securing
daily its needed coal, and that was fully understood by all the
parties. After a while the coal company became embarrassed, found
difficulty in securing money for the payment of its employees,
whereupon, and in order to prevent any delay on the part of the
coal company, or any embarrassment which it, the railway company,
might suffer from failing to receive from the coal company the
needed amount of coal, it advanced money to the coal company to
enable it to pay its employees, and thus to continue the
performance of its obligation to mine and deliver the coal. The
railway company was simply paying in advance instead of waiting
until the fifteenth day of the succeeding month, and the money by
it loaned was not loaned as an independent pendent transaction --
such as would be made by an ordinary money lender -- but an
advancement made in anticipation of the delivery of the coal. To
ignore this element and make the bankruptcy proceedings operate to
discharge this obligation of the coal company, and leave the
transaction as one of an independent loan of money to the coal
company, would result in destroying the full, equitable obligations
of the coal company, and place the parties in their relations to
each other on an entirely different basis from what had been
contemplated by them when they entered into this original
arrangement. While decisions directly in point may not be found,
yet,
see Ketchum v. St. Louis, 101 U.
S. 306,
101 U. S. 317;
Hauselt v. Harrison, 105 U. S. 401;
Carr v. Hamilton, 129 U. S. 252;
Fourth Street Bank v. Yardley, 165 U.
S. 634. In
In re Chase, 124 F. 753, 755,
Circuit Judge Putnam, delivering the opinion of the Circuit Court
of Appeals of the First Circuit, says:
"It is settled that a trustee in bankruptcy has no equities
greater than those of the bankrupt, and that he will be ordered to
do full justice, even in some cases where the circumstances would
give rise to no legal right, and, perhaps, not even to a right
which could be enforced in a court of equity as against an ordinary
litigant. Williams' Law of Bankruptcy (7th ed.) 191. Indeed,
bankruptcy proceeds on equitable principles so
Page 213 U. S. 133
broad that it will order a repayment when such principles
require it, notwithstanding the court or the trustee may have
received the fund without such compulsion or protest as is
ordinarily required for recovery in the courts either of common law
or chancery."
In
Thompson v. Fairbanks, 196 U.
S. 516,
196 U. S. 526,
this Court said:
"Under the present Bankrupt Act, the trustee takes the property
of the bankrupt, in cases unaffected by fraud, in the same plight
and condition that the bankrupt himself held it, and subject to all
the equities impressed upon it in the hands of the bankrupt, except
in cases where there has been a conveyance or encumbrance of the
property which is void as against the trustee by some positive
provision of the act."
The purpose of the parties is very clearly expressed in the
following quotation from the opinion of the court of appeals:
"It appears that the coal company, while the contract was still
in force and being executed, became embarrassed and unable to meet
its payrolls; as a result, it might not be able to mine or deliver
the coal which it had agreed to mine and deliver to the railway
company, and which the latter imperatively required for its daily
consumption. In this state of things, the railway company agreed to
waive its right to withhold payment for fifteen days after coal was
delivered to it, and pay for some of it before it was delivered,
and the coal company agreed, as found by the trial court, to repay
such advances, not in money, but by furnishing coal in the months
of July and August following at the price fixed by the original
contract. This arrangement, made when the coal company was in
embarrassed circumstances and obviously inspired by the necessity
of meeting the payrolls, and for the ultimate purpose of securing
performance of the only part of the original contract in which the
railway company was interested, namely, securing its supply of
coal, is so intimately and vitally related to the original contract
that we are unable to agree with the trial court that it was
intended to be independent and separate from it. It was not, in our
opinion, a modification of any of the substantive
Page 213 U. S. 134
provisions of the contract, but was a change rendered necessary
by subsequent events in the method of its execution only. It was an
arrangement in no manner inconsistent with any of the provisions of
the original contract, but only in aid of its execution."
"The contract, after the new arrangement, remained as before.
The coal company still had a right to mine coal on the same terms
and conditions as before, and was bound to supply the daily needs
of the railway company as before. The money paid in advance
entitled the railway company to an amount of coal which the money
so advanced would pay for according to the terms of the original
contract. We think the inevitable meaning of the new arrangement,
interpreted in the light of the conditions surrounding the parties,
and as necessarily intended by them, was to set apart a sufficient
amount of coal after it should be mined as security for the payment
of advances made. This result is not expressed in the conventional
form of a mortgage or pledge, but the method of producing it was
devised for the purpose of acquiring the needed money by the coal
company, and of furnishing security for its repayment. If the
parties intended the arrangement to be one for borrowing and
securing the repayment of money, we ought, as between them, to so
regard it, and to treat it as creating an equitable charge or lien,
however inartificially it may have been expressed."
We fully approve of this interpretation of the transaction.
Equity looks at the substance, and not at the form. That the coal
for which this money was advanced was not yet mined, but remained
in the ground to be mined and delivered from day to day, as
required, does not change the transaction into one of an ordinary
independent loan on the credit of the coal company or upon express
mortgage security. It implies a purpose that the coal, as mined,
should be delivered, and is, from an equitable standpoint, to be
considered as a pledge of the unmined coal to the extent of the
advancement. The equitable rights of the parties were not changed
by the commencement of bankruptcy proceedings. All obligations of a
legal and equitable nature
Page 213 U. S. 135
remained undisturbed thereby. If there had been no bankruptcy
proceedings, the coal as mined was, according to the understanding
of the parties, to be delivered as already paid for by the
advancement.
We think the conclusions of the circuit court of appeals are
right, and its judgment is affirmed.
MR. JUSTICE HOLMES concurs in the judgment.
