Whatever may have been the English and early American rule, the
present tendency in this country is to allow interest on contracts
to pay money from the date the debt becomes due, and so
held as to goods sold in Virginia on a credit of thirty
days.
The acceptance of goods sold on a credit of a specified number
of days is equivalent to a promise to pay the money on that day,
Atlantic Phosphate Co. v. Grafflin, 114 U.
S. 492, and interest accrues as an incident of the debt,
and not merely as damages.
The general rule that interest is not allowed after property of
the insolvent is
in custodia legis is not based on loss of
interest-bearing quality, but is a necessary and enforced rule
incident to equality of distribution between creditors of assets
which, in most cases, are insufficient to pay all debts in
full.
On the facts certified in this case,
held that interest
was recoverable on a debt for goods sold on a thirty day credit at
the legal rate of interest from the expiration of the credit until
payment, including the period that the assets of the debtor were in
the hands of a receiver in a suit to foreclose a mortgage.
Under the provisions of § 6 of the Act of March 3, 1891, 26
Stat. 828, c. 517, the Circuit Court of Appeals of the Fourth
Circuit certified to this Court a question on which it desired
instruction, and in that connection made the following statement of
facts:
"Upon a bill filed by a railway company alleging its insolvency
and consequent inability to maintain itself as a going concern
except through the medium of a receivership, receivers were
appointed. The bill alleged that a receivership would enable the
property of the railway company to be preserved and maintained as a
whole,
Page 233 U. S. 262
and the sums due and to become due to the bondholders and
creditors to be secured and ultimately paid in full."
"The trustee in the first mortgage answered the bill, admitting
its allegations, and afterwards filed a cross-bill again admitting
the allegations of the bill in regard to the insolvency of the
company. The suit was not a creditors' suit. The trustee
subsequently filed a bill in the same court to foreclose the
mortgage, seeking a sale of the equity of redemption, and the two
suits were consolidated. No prior encumbrancers were made parties
to either suit. Prior to the receivership, the claimant furnished
supplies to the railway company, for which, shortly after the
receivers were appointed, a lien was duly perfected under the
statute of Virginia known as the labor and supply lien statute,
Code of Va. § 2485. The supplies were sold on a credit of '30
days, one percent discount allowed for payment in ten days.'
Claimant filed its claim before the special master in the
receivership proceedings, relying upon a statutory lien under the
statute above mentioned. The special master reported against the
allowance of interest on the claim, to which report in that
particular claimant excepted."
"Subsequently, on the petition of the railway company, a decree
was entered approving 'a plan of adjustment' of the finances of the
company, and providing for turning back to the company its
property, and for ending the receivership at a certain time. From
time to time during the receivership and at the ratification of the
plan of adjustment, and as a part thereof, all interest due at the
time of the appointment of the receivers and accruing during the
receivership on all the funded and many of the floating obligations
of the railway company were paid in full. The amount so paid for
interest aggregated some millions of dollars."
"The decree approving the plan of adjustment provided that the
company should pay in due course of business all
Page 233 U. S. 263
its obligations, liabilities, and indebtedness, and reserved the
right, in the event of default in that regard, to any claimant
aggrieved by such default, to present his petition to the court to
have his claim enforced 'to the same extent as though the
receivership had continued.'"
"After the receivership had been thus terminated, claimant filed
its petition in the court, praying that its exceptions to the
special master's report should be sustained, and for the
enforcement of its claims, including interest thereon during the
period of the receivership, and seeking to enforce it not upon the
doctrine of an equitable lien, but as a statutory lien. The circuit
court refused to allow interest for the period of the receivership,
and from that ruling an appeal was taken."
QUESTION
Is interest recoverable on such a claim for the period of the
receivership?
MR. JUSTICE LAMAR delivered the opinion of the Court.
The statement of facts made by the Circuit Court of Appeals of
the Fourth Circuit shows that supplies were sold to a railway
company on thirty days' credit. Before the credit period expired,
the road, alleged to be insolvent, was, on its own application,
placed in the hands of receivers, their appointment being
subsequently continued under a bill for foreclosure filed by
mortgage trustees. The
Page 233 U. S. 264
railway company succeeded in making a readjustment of its bonded
indebtedness, and the property was returned to the owners. The
court, however, retained jurisdiction for the purpose of passing
upon the claims of creditors aggrieved by the company's default in
paying its obligations. Among those presented was the American Iron
& Steel Manufacturing Company's claim for supplies secured by a
lien which by statute took priority over mortgages. The matter was
referred to a master on pleadings not before us. He made a report
(not in the record) and on exceptions thereto the circuit court
refused to allow interest. From that statement, in connection with
the briefs and arguments of both counsel, we infer that the railway
was directed to pay the principal of the claim. The case was then
taken to the Circuit Court of Appeals for the Fourth Circuit, which
certifies to this Court the question, "is interest recoverable on
such a claim for the period of receivership?"
Both parties agree that the matter is controlled by the law in
Virginia, but no light is thrown on the subject by the statute of
the state, which merely declares that legal interest shall continue
to be at the rate of six percent. Pollard's Code, § 2817. No
Virginia case directly in point is cited in either of the briefs,
and there is a complete disagreement between counsel as to the
bearing of the state decisions on the question here involved.
On the part of the railway company, it is contended that
interest could not have been recovered on this claim even in an
action at law. On the authority of
Calton v. Bragg, 15
East 223;
Newton v. Wilson, 3 Hen. & M. 470;
Quincy v. Humphreys, 145 U. S. 82, and
other like cases, it is argued that the right to interest is a
matter of agreement, and can be recovered as a part of the debt
only where it has been reserved in the contract, or where a promise
is implied from the character of the note or instrument evidencing
the debt. The railway therefore
Page 233 U. S. 265
insists that, as the intervener sold the supplies without taking
a note and without securing a promise to pay interest, there was no
right to recover interest as an incident of the debt, although a
jury, as a matter of discretion, might have allowed it by way of
damages for unreasonable delay in making payment.
On the other hand, counsel for the Iron & Steel Company
contend that, as these supplies were sold on a credit of thirty
days, a promise was implied to pay interest after that date as an
incident of the debt itself. From
Chapman v. Shepherd, 24
Gratt. 383;
Craufurd v. Smith, 93 Va. 623(2);
Tidball
v. Shenandoah Bank, 100 Va. 741;
Butler Co. v. Virginian
Railway Co., 113 Va. 28(7);
Roberts v. Cocke, 28
Gratt. 207, and
Cooper v.
Coates, 21 Wall. 111, we reach the conclusion that
whatever may have been the English and early American rule, the
tendency in Virginia, as elsewhere in this country, is to allow
interest on contracts to pay money from the date that the debt
becomes due. 2 Minor's Institute 381. The sale here of supplies on
thirty days' credit was not, as argued, a mere agreement for the
benefit of the buyer that it should not be sued before the
expiration of that time, but was the fixing of a definite date for
payment of the purchase money. The acceptance of the supplies, sold
on those terms, was equivalent to a promise to pay the money on
that day.
Atlantic Phosphate Co. v. Grafflin, 114
U. S. 500. As payment was not then made, the railway
company was in default, and interest began to accrue as an incident
of the debt, recoverable as such, and not merely as damages to be
allowed in the discretion of court or jury. This appears to have
been the view of the circuit court of appeals, since the
interest-bearing quality of the debt seems to be assumed in the
question "Is interest recoverable on such a claim for the period of
receivership?"
In the discussion as to the answer which should be
Page 233 U. S. 266
given that question, the railway company insists that, whether
treated as part of the debt or allowed as damages, interest can
only be charged against the railway because of delay due to its own
fault, while here, the failure to pay was due to the act of the law
in taking its property into custody and operating the same by
receivers in order to prevent the disruption of a great public
utility. And it is true, as held in
Tredegar Co. v. Seaboard
Ry., 183 F. 290, that as a general rule, after property of an
insolvent is
in custodia legis, interest thereafter
accruing is not allowed on debts payable out of the fund realized
by a sale of the property. But that is not because the claims had
lost their interest-bearing quality during that period, but is a
necessary and enforced rule of distribution, due to the fact that,
in case of receiverships, the assets are generally insufficient to
pay debts in full. If all claims were of equal dignity and all bore
the same rate of interest, from the date of the receivership to the
date of final distribution, it would be immaterial whether the
dividend was calculated on the basis of the principal alone or of
principal and interest combined. But some of the debts might carry
a high rate and some a low rate, and hence inequality would result
in the payment of interest which accrued during the delay incident
to collecting and distributing the funds. As this delay was the act
of the law, no one should thereby gain an advantage of suffer a
loss. For that and like reasons, in case funds are not sufficient
to pay claims of equal dignity, the distribution is made only on
the basis of the principal of the debt. But that rule did not
prevent the running of interest during the receivership, and if, as
a result of good fortune or good management, the estate proved
sufficient to discharge the claims in full, interest as well as
principal should be paid. Even in bankruptcy, and in the face of
the argument that the debtor's liability on the debt and its
incidents terminated at the date of adjudication, and as a fixed
liability
Page 233 U. S. 267
was transferred to the fund, it has been held, in the rare
instances where the assets ultimately proved sufficient for the
purpose, that creditors were entitled to interest accruing after
adjudication. 2 Blackstone's Comm. 488;
Cf. Johnson v.
Norris, 190 F. 460 (5).
The principle is not limited to cases of technical bankruptcy,
where the assets ultimately prove sufficient to pay all debts in
full, but principal as well as interest, accruing during a
receivership, is paid on debts of the highest dignity, even though
what remains is not sufficient to pay claims of a lower rank in
full.
Central Co. v. Condon, 67 F. 84;
Richmond Co. v.
Richmond R. Co., 68 F. 116;
First National Bank v.
Ewing, 103 Fed.190.
The railway company relies on the statement in
Thomas v.
Western Car Co., 149 U. S. 96,
149 U. S. 116,
that, "as a general rule, after property of an insolvent passes
into the hands of a receiver, interest is not allowed on claims
against the fund." The Court there refused to allow interest on car
rentals accruing during the receivership under an old contract,
because the funds were not sufficient to pay the bonds, saying (
149 U. S.
117):
"We see no reason in departing from that [general] rule in a
case like the present where the claim [for car rentals] would be
paid out of the moneys that fall far short of paying the mortgage
debt."
But here, interest was paid on mortgage bonds, and should
therefore have been paid on a claim which by statute was given
priority over the bonds. This was specially true where the property
was in the hands of a receiver on the application of the debtor and
of the mortgage trustees. For manifestly the law does not
contemplate that either the debtor or the trustees can, by securing
the appointment of receiver, stop the running of interest on claims
of the highest dignity.
In the brief for the railway company, attention is called to the
fact that the road was not
in custodia legis
Page 233 U. S. 268
under a creditors' suit, but in a proceeding to foreclose the
equity of redemption. In view of that fact, it is argued that the
Iron and Steel Company should be remitted to its action at law
against the company which is now in possession of the property. But
this seems to involve matters not within the question certified by
the circuit court of appeals. The property was returned to the
railway company on condition that any creditor aggrieved by the
failure to pay his claim might present his petition to the court
and have it enforced "to the same extent as though the receivership
had continued." As a fact, interest was paid on the floating
indebtedness, out of earnings made by the receivers appointed first
under a bill which asked that the property be taken in charge by
the court so that ultimately all creditors would be paid in full.
We must assume that the court had the right to make these payments,
and if so, it had a like right in the case of the claim for railway
supplies. No question is raised as to the power of the court to
require payment of the principal of appellant's debt, and if the
court could require a payment of the principal, it could also
enforce the payment of the interest, which was but an incident of
that debt. If the property had remained in the hands of the
receiver, the lienor might have been permitted to intervene and
share in the fund realized by the sale of property in the hands of
receivers appointed, first, on the application of the railway, in
the interest of all creditors, and continued by an order entered in
the bill to foreclose the mortgage.
It is, however, not necessary to discuss that matter further
than to say that, on the facts stated, interest was recoverable on
the American Iron and Steel Company's claim for the period of
receivership.
The question certified by the circuit court of appeals is
answered in the affirmative.
