'178
FEDERAL REPORTER.
'with itsripatian rights to such submerged land east of this strip of way'ground. I do not deem this question,as to where the fee of the wayground at present rests, at all material to the disposition of the cases now before us, as I fully concur in all the findings which bear upon the disposition of the cases in hand; but this question of the fee in the wayground, which now seems to me purely speculative, may become material hereafter. and hence I prefer to put on record this memorandum of dissent upon this single point.
FARMERS'LoAN
&:
TRUST
Co. ".
VICKSBURG
&:M. R. Co. et aL'
«(}Wouit
(Jourt,
8. D. MillJuaippi. January 23,1888.)
iRAn.RO.\P'COMPANIES-MORTGAGES-VALIDITY AS AGAINST CERTAIN DEBTS, 'CODEMI8S.§ 1038. .,
,
: Code Miss. 1038, which p"ovides that no mortgage of the income, future earDing",',or tlierollinglltock of a railroad corporation shall be valid against debts contracted in carrying on the business of a corporation, etc., does not give. prior lien to the holderiJ of such claims, but. merely prevents those Claiming, _prior lien under IUch mortgage from settJDg it up to defeat such claims,. :' .' ,
A :Whose property wall heavily mortgaged, made ar· rangemanta its road in connection with other roads. The management ot t,hese roa(ls ;was under the same general officers, although the busiDe·· of each Wall kept separate. Sums were loaned by the corporations controlling the conne6tin¥ lines to enable the indebted railroad corporation to pay its taxeS, to pay its employes,and to pay balanoes due themselves. Held, that these loans were debts contracted in carrying on the business of the corporation, within the provisions of Code Miss. §lOSS. provid,ing that no mortgage on the income, fn'tnre earnings, or rolling stock of a railroad shall be valid as against'such,debts. ': . 8., SUfE-MORTGAGES--VALInITY. AGAINST .OTHER DEBTS-PAYMENT. OUT 011' IN· Where current are incurred by a railroad company in the operation of its cnrrent business. they are chargeable upon the current income,as against holders of mortgage bonds of lIuch railroad, whether they accrued railroad went into the hands of a r,eceiver, and the faCl before or aftpr that.such debts were incurred for betterments does notaifect the right to have them pa.id out of thecurren\'income, when the proofs show such betterments . to have been necessary. " SAME. COME.... .
t.
SAXE..
Such claims accruing from within a year to six months before the appoiD'ment ofa receiver are not presented too late in time.
'In Equity. On cross-bills. :-iBill by the Farmers' Loan & Trust:Company, trustee, complainant, against the Vicksburg: & Meridian Railroad Company, and others, defendants, to foreclose a secondmottgage given to secure the payment of bonds. The Cindnnati,NewOdeans & Texas Pacific Railway Company, tbe Alabama Great Southern Railroad Company , and the New Orleans &; Northeastern Railroad Company filed cross-bills for payment ot'certain claims in priority. , '
FARMERS'LOAN &:TRUST CO. V. VICKSBURG &: M. R. CO.
779
Turner, Lei «·McClure and" Lamar« Mayes, for complainant. EdwardOJlstcm andW. L.Nugent, for all the cross-complainants. HILL, J. The original bill in this cause was filed by the Alabama, New Orleans & Texas Pacific Junction Railways Company, Limited, against the Vicksburg & Meridian Railroad Company,and under it a receiver was appointed to take charge of and manage the road and property connected therewith. The bill was filed, and the appointment made, on the twenty-sixth day of October, 1885, and the receiver, F. S. Bond, immediately took possession of said railroad, and of the property belonging to and connected therewith, and has ever since operated and managed the same under the orders of this court, having been by consent continued as such receiver upon the filing of the present bill by the Farmers' Loan & Trust Company, on the thirteenth day of August, 1886, for the foreclosure :>f the mortgage given to secure the payment of the second mortgage bonds hereinafter mentioned. The complainants in the cross-bills had, before that date, filed in the former suit their petitions claiming payment out· of the income of said road in the hands of the receiver of the claims set forth in the cross-bills; but, by consent, these claims are set out, and the payment thereof demanded in the cross-bills filed by them in this· cause on the ninth day of May, 1887, which have been answered by the defendants thereto, issue joined, and proof taken,and the cause, as to all matters therein, is now submitted for the decision of the court. all other matters arising between the parties to this consolidated suit being reserved. To a proper understanding of the questions presented it is necessary to state the condition of the Vicksburg & Meridian Railroad Company, and the transactions in which the claims set out in the cross-bills arose and were created, as well as the circumstances in which the second series of mortgage bonds, and the mortgage given to secure their payment, were executed. The Vicksburg & Meridian Railroad Company, which had, by different acts of the legislature of this state, been created and con'solidated, and had, under that corporate name, operated said railroad .from the city of Vicksburg to the city of Meridian, in this state, for a number of years priortothetEmth day of January, 1881, found itself on that date in a very embarrassed financial condition, owing a large indebtedness, partly upon bonds secured by mortgage and otherwise, with its road-bed in a very dilapidated condition, the bridges. cross-ties, and trestling decayed and in a very unsafe condition, the rolling stock worn out and unfit for use, with few exceptions. It was ascertained that something had·· to be done to meet these heavy liabilities, and to repair the road-bed, supply Clesarne with new rails, many of those in the tracks being worn out, supply new cross-ties in place of the rotten ones, repair the.bridges and trestling, repair the rolling stock, so far as it could be done, andaupply the placedf that which could not be repaired with such as might be neCessary for the safe operation of the road. To this -end a reorganization Wll.S effected. :8; new board of directors was elected by the stockholders, and new officers were chosen and placed. in possession of the road, and
the property connected with it and used in its operation. The company as thus reorganized issued,under authority vested in it, three series of mortgage bonds, (the first and second having interest coupons attached,) as follows: The first series, known as" First Six Per cent. Gold Bonds," to run 40 years, to the amount of $1,000,000; the second series, amounting to $1,100,000, with interest at 3 per cent. for the first two years, at 4 per cent. for the next two years, at 5 per cent. for the next year, and at 6 per cent. for the next 35 years, these bonds to run 40 years; a.nd the third series, amounting to $1,920,000, to bear interest at 7 per cent. per aunu:m, if earned, and known as "Third Mortgage Income Bonds." At the same time the reorganized company issued capital stock in lieu of its original stock, and as a means of increasing its capital stock, as follows: stock known as "Preferred Stock," to the amount of $1,937,889; and stock known as "Common Stock," to the amount of $3>937,189. To and bridges, to supply new cross-ties raise means to repair the andrails;andtQ repair and supply rolling stock, etc., a portion of these bonds and stock were sold,and the proceeds so applied. When the mortgage bonds were issued, said reorganized compllny, to secure the 'payment thereof, with the interest coupons attached, executed mortgages, which were duly acknowledged and recorded. That to secure the first ,mortgage bonds, conveyed the road-bed and all the .property, real and personal, then owned by the company or thereafter to be quired; used and employed in the operation of said road, together with the future income of the road and the franchises; certain lands mentioned in the mortgage being excepted. The mortgage executed to secure the payment of the second mortgage bonds, with interest, conveyed the same property, franchises, income, etc., as were embraced in the first mortgage, constituting a second lien, and included, also, the lands mentioned above as not embraced in the first mortgage, upon which the second mortgage constituted a first lien. The mortgage executed to. secure the payment of the third series of bonds conveyed the same property, rights, etc., as the former, and constituted a third lien. The holders of the bonds issued by the company and its predecessors, and those holding other debtedness, received these new bonds in lien thereof, the old bonds, as well as tbacertificates issued in place or in payment of the old indebtedness, behlg surrendered and canceled when the new bonds were delivered. The purpose of the present bill, filed by the Farmers' Loan & Trust Company ,as trustee, is the foreclosure of the second mortgage to pay the indebtedness secured thereby, the debtor company having made fault in the payment of the interest thereon, whereby, by the terms of these bonds, the whole of the indebtedness secured thereby is become due and payable. When the reorganization was had, it was agreed that the V. & M. R., as it will be designated, was to be operated and run in connectiort with the Cincinnati,New Orleans & Texas Pacific Railway, the Alabama Great Southern Railroad, which will be designated as the A. G. S. R.,and the New Orleans & North-Eastern Railroad, to be designated as the N. O. & N. E. R., and WaB to be under the management of the same general officers, but that the business, with, its in-
FARMERS' LOAN & TRUST CO. V. VICKSBURG & Y. R. CO.
781
come and outlay, was to be kept separately as though no such arrangement existed; each company having its separate secretary and treasurer, book-keeper, and other officers, all, however, subject to the same general officers, who were elected alike and paid for their services by each company; the accounts between these several companies to be settled and balanced at stated periods. It was ascertained that the amount of funds raised by the sale of bonds and stocks, as before stated, was insufficient to pay the cost of the repairs and all that was necessary to be done to put the road-bed, rolling stock, etc., in condition to be operated safely for the transportation of persons and freight, and to make extensions of the road at Vicksburg, including an incline, so as to connect the rood with the Mississippi steam-boat transportation, and with the Vicksburg, Shreveport & Pacific Railroad. And it being to the interest of all.these railroad companies that theY. & M. R. should be put in a condition to transport persons and freight safely over its line, the companies complainantin the cross-bills continued, from. time totime, to furnish the V. &M. R.·Co.supplies and money to purchase supplies and to pa,y for material and labor, and to pay the V. & M. Co.'s proportion ofthe salaries of the general officers. And when, upon an accounting between the V.· & M. R. Co. and the cross-complainant companies, balances were found due from the V. & M. Co. to those companies respectively, payment of such balances was, in orderto enable the managers of the V. & M. Co. to apply its income to the payment of these improvements, operating expenses, etc., not demanded or insisted upon. The question of how much was so furnished and paid, including ticket and freight balances, and when it was so furnished, was by consent of aU parties referred to J. M. McKee, Esq., as special commissioner, to take proof and report thereon, which he has done, and his report is on file herein, with the evidence upon which it is based; and this report, not being excepted to, has been confirmed by the court, and will be considered as true and correct. This report shows that after giving credit for all payments and charges made by the V. & M. R. Co. to the other companies, the indebtedness so due to the C. N. O. & T. P. Ry. Co., on the first day on November, 1885, amounted to the sum of $79,373.42, all of which accrued after the thirty-first day of December, 1884, and on the following accounts: For transportation expenses, .. freight claims balances, .. car mileage, .. loss and damage, .. ticket balances, .. steel rails furnished, On account incline at Vicksburg, In all, - $33,878 84 8,069 18 13,202 64 526 46 16,939 41 6,754 41 2 75 · $79,37342
-And that of this sum there was expended in betterments of the property the sum of $6,757.16, which inured to the benefit of the bondholders. The report further shows· that, after applying as a credit on the
782
account of the A. G. S. R. Co. against the V. &. M. R. Co. all payments and balarices due the V. & M. R. CO., accrued subsequent to thethirtieth day ofJune, 1885, there were ba;}atlces due the A. G. S. R. Co. on the first day of November, 1885, as follows: expenses. · $28,797 74 .. freight claim balancps, · 33,600 07 .. loss and damage account. 16 03 .. ticket balances, 562 20 ... amount paid on account of incline, .' 217 99 .account of change of gaQge. . 245 37 $63,439 40' -And that of the said· amount there was expended for betterments the sum of $463.36, which resulted to the benefit of the bondholders. The said report further shows that, after applying to the credit of the V. & M. Co. upon its account with the N. 0.& N.E. Co. aU payments and balances accrued after the thirtieth day of April, 1885, there were due to the N.O. & N. E. Co. from the V; & M. Co. upon the. first day of November; 1885, the following: For transportation expenses. $60.31946.. amount paid taxl'8, . 1,788 82 , 532 . " freight claims balances. 216 99.. 10S8 and damage, 820 90 .. steel rail (urnished. 176 91 .. on aecount of incline. 47 29On account' change gauge. In all.
.
'.'
or
..
In all. .
·'
$63.903 16
-And that of the sum soexpended the sum of$1,045.10 waafor betterDlEmtS to said railroad, and inured to the benefit of the bondholders. ,For tl1e ,above balances ,with interest thereon, the cross-complainants respectivelyclahn a lien on the income of said railroad, and, if that be not sufticienttherefor, tlIen upon the proceeds of the sale of said railroad and the property belonging thereto, before the payment of the amount due, upon the bonds and coupons for the payment of which the trustee has filed this bill. And they base their claim-Jiirst, upon section 1033, of the (Mississippi) Code of 1880; and, 8econdly,upon the rule laid down by the supreme court of the United States in the decisions hereinafter referred to. The claim is resisted by the tru.stee on the following grouncl,s: (1) Because the claimants were mere loaners of money; (2) becausetheirmoI?ey was largely used fo"r betterments; (3) because their claims are too old; (4) because they advanced the money iIi theirown interest, and to their own associate; (5) because, their loans were made without the consent, or even the knowledge, of the bondholders or their trustee. The' first question to be considered is, do these bonds, and the mortgage given to secure tl1eirpayment, come within the provisions of section 1033, of the Code of lS80? ' Tbeywere executed more than a year after the Code?f 1880 we,nt into operation, be unless.
FARMERS' LOAN & TRUST CO. V. VICKSBURG & M. R, CO.
783
they were givenbnly inrElIiewal of the former bonds and mortgage, and for no other purpose,which I am satisfied they were 'not. They were executed in part to payoff the indebtedness then existing, and in part to put the road, with ita rolling stock, in such a condition tbat it could be safely operated in the transportation of persons and property, and should yield a fair profit to ita owners, and, being so, the claim in avoidance of the operation of this provision of the Cone cannot be maintained. The section (1033) of the Code is as follows: "No mortgage or deed of trust conveying the income or future earnings of any COl'pol'atioD, or the rolling stock of any railroad company, shall be valid against debts contracted in carrying on the business of the corporation, nor against liabilities incurred by railroad companies as carriers of freight and passengel'8, or for damages sustained by pel'80nS or property; but such mortgage or deed of trust shall be valid as against any claim in excess of fivetbousand dollars for damages to any Person."
lam not that this statute has ever been construed by the supreme courtof the.state,' but I suppose the proper construction is to render such mortgages or deeds of trust void only so far as they convey the income or future earnings of the corporation orthe rolling stock of'S railroad COIX)panyas again$t dElots contracted in carrying on the busineBB of the corporation, or for liiLbilities incurred by railroad companies as earriers of fr!light or passengers, or for damage to persons or property. I am of the opinion that the statute does not give a prior lien to'those holding such clailOs, but inhibits those claiming a prior lien upon such property or rights from setting it up as against such claims. The question, therefore; is, did the claimants in, this 'cause, by their proceedinga, acquire any prior right to have the income of their debtor, the V. & Y. R. Co., or its. rolling stock, applied to the payment of the debt due them coritradted' in 'carrying on the business of the corporation or for liabilities 'as a carrier offreight and passengers? The property of the V. &M. placed in the hands ofa receiver, and therefore could be time br:8ihce, only in the manner pursued; that is, by an intervening petition.' The mode was ohiLnged, by consent, for convenience, into the proceeding by so that I am of opinion that, byfiIing their interVening petitions, they did obtain apriority whioh the court will work out so far as their rights iLre embraced under section 1033, ofthe Code; but these claims can only be satisfied out of the income and rolling stock, and not out of the proceeds of the other property conveyed under this provision of the Code. The nextquestioD t and one of great importance, is, are these crOSBcomplainants entitled to payment of their claims or of any part thereof, under the rules laid down by the SUpreme court of the United States, commencing'with the case,of' Schall, 99 U. S. 235, and since followed and approved in the cases of Miltenberger v. Railway 0,., 106 U. s. 286,'1'S1.:lp. Ot.Rep. 140; 7htst Co. v. Souther, 107 U. S. 591, 2 Sup. Ct. Rep. 295j BurnMJ:m v. Bowfin,lll U. S. 776,4 Sup. Ct. Rep. 675j and 7WtstCo. v; Railway Co., 434, 6 Sup. Ct. Rep. 809? From a careful examitiationof these cases, lam satisfied that all of them
784
takep together establish the following propositions, which are binding on rules to be found in the decisions of any this C.ourt irrespllctive of other court, or in the text books, namely: First, that the purpose of .buildingand operating railroads is of a two-fold character-(a) to afford to the public speedy and safe transportation of persons and property from one point to another; and (b) that, being common carriers, the owners of and those. operating these railroads are held to all the liabilities and obligations imposed upon common carriers, and .are entitled to the same privileges. Secondly, that thosewho invest their means and ,'bllstOW, their labor in the. construction and operation of these railroads are.entitled to a fair and just compensation and return therefor. Thirdly, thatrai:lroad mortgages, and the rights of railroad mortgagees, are petheir character, and affect peculiar interests; that the officers· of a'rai11'b'ad company are trustees of the earnings for the benefit of the different classes of creditors and of the stockholders, and if they give to one class oiclteditors that which properly belongs to another, the court may, upon adjustment of the accounts, so use the income which comes into its hands as, if practicable,' to restore the ,parties to their original equitable tights., And while, ordinarily, this power is confined to the appropriation of the income of the receivership anq., the proceeds of moneyed assets. that have belln taken from, the cOIppany. cases may arise where ;equity will, require the use of the proceeds of the sale of the mortgaged prl;lperty in the same way· Fourthly, that the current debts incurred in operating the railroad are to be paid out of the currentearnings; that the class of debts to be so paid includes ,the payment of taxes on, the property,ofthe offiCers and employes of every grade employed in the operation of the railroad, for materials and supplies furnished necessary to put and keep the railroad and the necessary rolling stock iu a safe conditionforthe transportation of persons and property ,for all ticket and freight balances due to other railroads and Hnesof transportation, and damages ,which may be incurred in operating the road, and, in a word, whatever may be necessary in the successful maintenance and operation of the railroad. Fifthly, that every railroad mortgagee, in accepting his security, impliedly agrees that the current debts made in the ordinary course of business ,shall be paid froJ;ll the current receipts before he has. any claim on the income. Sixthly, that when the income to which the class of creditors abovementioned is entitled has,by the officers of the railroad, been applied to. payment for the purchase of necessary additional grounds and rolling stock, and in making permanent repairs and improvements, such sum so diverted will be refUllded out of the subsequent earnings of the road. And if, by means of taking the. railroad and property out of the .hands Of. the company, and selling them, before .the amount so due is paid, its payrnent Qut of the income is, made impossible, it may, ina propercase,bepaid out of the proceeds of. the sale of the property. The items tOT which prior compensation is claimed by the plainafiisin'their cross-bills, as,reported by the special commissioner, whose report has not been excepted to, and is confirmed, all fall within the chisB ·of cases which are chargeable upon the current income uuder
FARMERS' LOAN
&;
TRUS'r CO. V. VICKSBURG
M. R. CO.
785
the above..:stated rule, and should be allowed out of the income whether accrued before or since the railroad came into the hands of the receiver. And if the income which should have been so applied was used in the purchase of property which was necessary to putting the line of railroad and the rolling stock in a condition for the safe transportation of persons and property over the line of railway, and in making permanent repairs and improvements, then such sum will be paid out of the proceeds of sale. of the property, if the income shall prove insufficient, unless prevented by the objections insisted upon by counsel for the trustee complainant. These objections will be considered in the order stated. First, because the claimants were mere loaners of money. This objection would have been maintainable if the facts were as assumed, but the assumption is not sustained by the report of the special commissioner, which· has not been excepted to, and has been confirmed. An examination of the accounts exhibited with the cross-bills, with the evidence taken thereon,. shows thatin the account of the N. O. & N. E. R. Co., the following items are charged as cash loaned, t0 wit: .May 31, 18l:l5, the SU.ID of . · $5.48544 .lune 30, 18SI:i, tbe. sum of · 5,300'00 4
9ctoper., 1l:l85, In all,
1885,
·
75000 1,083 09
$12,618 53
-And that in the account of the A. G. S. R. Co., against said V. & M. R. Co., there appear the following cash items: June 30, 1885, · $11,234 23 August 31, 1885, 11.200 00 Ma,kingtogether the sum of · $22,434 23 The proof shows that these sums were loaned to the V. & M. R. Co., to enable it to pay taxes imposed upon the railroad property; to .pay balances due the C. N. O. & T. P. Ry. Co., and to enable the said V. & M., R. Co., to payoff its employes; all of which claims, if held by the persons and corporations to whom they were due, would have been chargeable upon the income of the V. & M. R. The proof further shows that the money was advanced or loaned for the purpose stated, and was so applied. If the corporations had purchased these claims, then they would have occupied the same position that the creditors oc. cupied before such sale; but the proof shows the transaction to have been· a loan of money, and I am not aware of any rule that gives to these companies any more favorable position than that of a general . under the rule announced by the supreme court in the cases referred to. Yet I am of opinion that these debts were contracted in carrying on the business of tile V. & M. R., and consequently the mortgage is void as to them sofar.as it relates to the income and rolling·stock. The second objection is that the money was largely used for better, ments. This objection is untenable, for if these betterments were necessary, and added to the value of the security held by the bondholders, v.33F.no.14-50
786
FECHHEIMER V. SLOM:iUi.
FECHHED[ER.V. SUOMAN (Otrcuit Court, D. Nebraska. January 31, 1888,)
FRAUDULENT CONVEYANCES-PREFERENCES TO CREDITORS.
2. SAME.
A of a failing debtor had retired from a partnership with the latter only a few months previous to the failure of the latter. and continued about the store, and to engage at times in the latter's business. and it appeared that a large sum of money bad been fraudulently concealed by the failing brother. Held, l;hat the former should not be preferred as a bona fide secured creditor.
In Equity. Bill in equity by Herman C. Fechheimer who claitDed a preference over other creditors of Morris H. Sloman, a merchant doing business under the firm name ofSIOlnan Bros., arid filed this bill to foreclose his mortgage security. .Other creditors filed cross-bills, and this contest between secured and unsecured creditors arose. BREWER, J. The controversy in this case is between the secured arid the. unsecured creditors of Morris H. Sloman, a merchant doing business in the city pf Omaha, under the firm name of Sloman Bros. While there are several pleadings by different parties there is but the one controversy, in which the secured creditors may be known as the complainants, and the unsecured as the defendants. The debtor disputes none of the claims, so that, as ag!1inst him, all are to be treated as just debts. The trouble arises by reason of these facts: On the twenty-ninth of May, 1886, Herman Fechheimer, a' creditor living in Detroit, came to Omaha and demanded security. The debtor consented to give a chattel mortgage, but at the same time insisted on giving like security to othl'lr holders of what he considered confidential debts. Thereupon rilOrtgages to each of said creditors were executed. Immediately thereafter, and on the same day, Fechheimer filed his bill to foreclose his chattel mortgage, and obtained the appointment of'a receiver. The other secured creditors filed. their cross-bill,and thereafter three unsecured creditors, having obtained judgtilent, filed their cross-bill in behalf of themselves and all othertm13ecured creditors. The entire stock was Bold by the receiver, and ·the money is now in the registry ot this court, which fund is the object of pursuit by the various creditors. Now, going back to the history of Morris Sloman's affairs, we find that prior to January, 1886, he was in partnership with his brother Siun.llel A. Sloman carrying on business under the same firm namej that· of Sl6mlUl Bros. They' had two houses; one in Omaha, and one in Chicago.' Eugene Sloman, a younger brother! ,was in .charge of the Chicago houfle, having an interest in the profits oftha concern. On that day Mon-ill Sloman bought out his brother Samuel A. SloIl,lan. The latter 'was firiai:lcially responsiblej thf;l condition of the former will appear