[454]

er of a court of equity to appoint managing re-
ceivers of such property as a railroad, when
taken under its charge as a trust fund for the
payment of incumbrances, and to authorize such
receivers to raise money necessary for the pres-
ervation and management of the property,
and make the same chargeable as a lien thereon
for its repayment, cannot at this day, be seri-
ously disputed. It is a part of that jurisdic
tion, always exercised by the court, by which
it is its duty to protect and preserve the trust
funds in its hands. It is, undoubtedly, a power
to be exercised with great caution, and if possi-
ble with the consent or acquiescence of the par-
ties interested in the fund." It is true that the

a larger amount than $63,097.88, in the usual
operation of the line and in ordinary repairs of
the permanent way. The order approved and
confirmed the appropriation of the $63,037.98
out of the earnings in payment for betterments;
declared that that sum was a special charge and
lien on the several portions of the line in pro
portion to the amounts expended on the respec-
tive portions; and authorized the receiver to is-
sue certificates to the amount of $38,288.98, at
8 per cent interest, as representing so much of
the $63,037.98 as was expended for betterments
on the line between Paris and Decatur, the
same to be a special charge and lien on the line
and railroad property between Paris and Deca-
tur, superior to all liens and debts except re-second mortgage trustees in that case were par-
ceiver's debts before declared by order of court
to be special charges and liens on that portion
of the railway; and the certificates to be sold
at not less than ninety cents on the dollar. The
certificates were sold at a discount within that
permitted.

Simon Borg and others appeal because of the priority awarded to the above named sixteen receiver's certificates.

ties to the suit when the order was made, and
had due notice of the application, and made no
objection. As to that the court said that the
bondholders were represented by their trustees
and must be regarded as bound by their acts,
at least so far as concerned "the power of the
court to act, in making the order, and so far as
the interest of third persons acting upon the
faith of it might be affected." It also said that
when the appellant became a party, he sug
gested no objection to the terms of the order
appointing the receivers, and that there was no
just exception to the order or the decree.

When the order of October 9, 1876, was made,
under which the six certificates of the 8th series
were issued, neither the trustee nor any of the
bondholders of the Paris and Decatur Com-
pany were parties to the suit. But before any Property subject to liens and claims and
other order was made under which any of the debts of various characters and ranks, which is
sixteen certificates referred to were issued, the brought within the cognizance of a court of
Union Trust Company had become a party to equity for administration and conversion into
the Hervey suit as trustee in the Paris and De- money, and distribution, is a trust fund. It is
catur mortgage, and the default in the pay-to be preserved for those entitled to it. This
ment of the interest on the Paris and Decatur
bonds had occurred by January 1, 1876.

Im

must be done by the hands of the court, through
officers. The character of the property gives
The certificates of the 8th and 14th series character to the particular species of preserva-
were issued for necessary repairs; that of the tion which it requires. Unimprove land may
12th to pay tax liens; those of the 16th and 17th lie idle, with only payment of taxes.
for betterments; and those of the 18th to re-proved property should be rented. Movable
place earnings diverted from paying for opera- property that is not perishable may be locked
ting expenses and ordinary repairs, to pay for up and kept; but if perishable, it must be sold,
betterments, while debts to a larger amount had by way of preservation. A railroad, and its
been incurred for the operating expenses and appurtenances is a peculiar species of property.
ordinary repairs.
Not only will its structures deteriorate and de-
In regard to the certificates issued for neces- cay and perish if not cared for and kept up,
sary repairs there can be no doubt, either on but its business and good will will pass away if
authority or on principle. In Wallace v. Loomis, it is not run and kept in good order. More
97 U. S. 146 [Bk. 24, L. ed. 895], on the filing over, a railroad is a matter of public concern.
of a bill by the trustees of the first mortgage on The franchises and rights of the corporation
a railroad, to foreclose it, the court appointed which constructed it were given not merely for
receivers, "with power to put the road and private gain to the corporators, but to furnish
property in repair, and to complete any uncom- a public highway; and all persons who deal
pleted portions thereof, and to procure rolling with the corporation as creditors or holders of
stock, and to manage and operate the road to its obligations, must necessarily be held to do
the best advantage, so as to prevent the prop- so in the view, that, if it falls into insolvency
erty from further deteriorating, and to save and and its affairs come into a court of equity for
preserve it for the benefit and interest of the adjustment, involving the transfer of its fran-
first mortgage bondholders and all others hav-chises and property by a sale, into other hands,
ing an interest therein;" and with power, also, to have the purposes of its creation still carried
for those purposes, to raise money, by loan, to out, the court, while in charge of the property,
an amount limited in the order, by issuing cer- has the power, and, under some circumstances
tificates "which should be a first lien on the it may be its duty, to make such repairs as are
property." The final decree declared that the necessary to keep the road and its structures in
moneys raised by loan, or advanced by the re- a safe and proper condition to serve the public.
ceivers and expended on the road pursuant to Its power to do this does not depend on con-
the order, were a lien paramount to the first sent, nor on prior notice. Consent is desirable
mortgage, and should be paid out of the pro- but is seldom practicable, where the debts ex-
ceeds of sale before the first mortgage bonds ceed the value of the property. Though prior
were paid. A holder of second mortgage bonds notice to persons interested, by notifying them
bjected to such priority. On that subject, this as parties, first requiring them to be made
court said, by Mr. Justice Bradley: "The pow- parties if they are not, is generally the better

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[450

general consequence involving largely, also,
the interests and accommodation of travel and
traffic, may well place such payments in the
category of payments to preserve the mortgaged
property in a large sense, by maintaining the
good will and integrity of the enterprise, and
entitle them to be made a first lien. This view
of the public interest in such a highway for
public use as a railroad is, as bearing on the
maintenance and use of its franchises and prop-
erty in the hands of a receiver, with a view to
public convenience, was the subject of appro-
val by this court, speaking by Mr. Justice
Woods, in Barton v. Barbour, 104 U. S. 126
[Bk. 26, L. ed. 672]."

way, yet many circumstances may be judicially | which accrued before the appointment of a reequivalent to prior notice. A full opportunity,ceiver can be allowed in any case. Many ciras in this case, to be heard, on evidence as to cumstances may exist which may make it nethe propriety of the expenditures and of mak-cessary and indispensable to the business of the ing them a first lien, is judicially equivalent. road and the preservation of the property, for The receiver, and those lending money to him the receiver to pay pre-existing debts of certain on certificates issued on orders made without classes, out of the earnings of the receivership, prior notice to parties interested, take the risk or even the corpus of the property, under the of the final action of the court in regard to the order of the court, with a priority of lien. Yet loans. The court always retains control of the the discretion to do so should be exercised with matter, its records are accessible to lenders and very great care. The payment of such debts subsequent holders, and the certificates are not stands, prima facie, on a different basis from negotiable instruments. the payment of claims arising under the reThe principle laid down in Wallace v. Loomis ceivership, while it may be brought within the was applied in Miltenberger v. Logansport R. principle of the latter by special circumstances. Co. 106 U. S. 286 [Bk. 27, L. ed. 117]. In that It is easy to see that the payment of unpaid case a bill was filed by a second mortgagee, debts for operating expenses, accrued within against the mortgagor, and a first mortgagee, ninety days, due by a railroad company sudand judgment creditors of the mortgagor, to denly deprived of the control of its property, foreclose a mortgage on a railroad. On the day due to operatives in its employ, whose cessation the bill was filed, and without notice to the first from work simultaneously is to be deprecated, mortgagee, a receiver was appointed and power the interests both of the property and of the given him to operate and manage the road, public, and the payment of limited amounts receive its revenues, pay its operating ex- due to other and connecting lines of road for penses, make repairs, and manage its entire materials and repairs, and for unpaid ticket and business; and to pay the arrears due for operat- freight balances, the outcome of indispensable ing expenses for a period in the past not ex-business relations, where a stoppage of the conceeding ninety days, and to pay into the court tinuance of such business relations would be 457] all revenue over operating expenses."After a probable result, in case of nonpayment, the that, and without notice to the first mortgagee, who had not appeared, although notified of the order appointing the receiver, and of the pendency of the suit, the court authorized the receiver to purchase engines and cars, and to adjust liens on cars owned by the mortgagor, and to pay indebtedness not exceeding $10,000, to other connecting lines of road, in settlement of ticket and freight accounts and balances, and for materials and repairs, which had accrued in part more than ninety days before the order appointing the receiver was made, and to construct five miles of new road, and a bridge. The petition for the order stated the necessity for the rolling stock and for the adjustment of the liens; that the payment to the connecting lines was indispensable to the business of the road, and it would suffer great detriment unless that was provided for; and that the new road and the bridge would come under the mortgages, and their construction would be to the advantage of the bondholders. After the first mortgagee had appeared and answered, an order was made, but not on prior notice to it, authorizing the receiver to issue certificates to pay for rolling stock he had bought under orders of the court, and to pay debts incurred for building the five miles of road and the bridge, under those orders, and to pay debts incurred for taxes, and rights of way, and back pay and supplies in operating the road, the certificates to be payable out of income, and, if not so paid, to be provided for by the court in its final order. Claims thus arising were afterwards allowed, to be paid out of the proceeds of sale, before the mortgage bonds. This court upheld such priority, as to the debts for the purchase of rolling stock and for the adjustment of liens and for the construction of the five miles of road and the bridge and for the amount due connecting lines, some of which was incurred more than ninety days before the receiver was appointed. On the latter branch of the subject it said: "It cannot be affirmed that no items

In allowing the certificates of the 8th and 14th series, for necessary repairs, with priority, the master acted, and we think properly, on the authority of the cases of Wallace v. Loomis and Miltenberger v. Logansport Railway Co.

In this connection it is objected that in those cases the suits were foreclosure suits brought by trustees under mortgages, and that a different rule should obtain in a case where the trustees or the bondholders do not come into court initially, asking the aid of equity in the appointment of a receiver. It is said that the Hervey suit was not such a suit. But the coplaintiffs with Hervey were judgment creditors of the Paris and Decatur Company, with executions returned unsatisfied The bill set out the precarious condition of all the property held and used by the Illinois Midland Company, and the necessity for a receiver in the interest of all the creditors of all four of the corporations, to prevent the levy of executions on such property; and it prayed for a judicial ascer tainment and marshaling of all the debts of all the corporations, and their payment and adjustment as the respective rights and interests of the creditors might appear, and for general relief. The plaintiffs set forth that they represented a majority of the stock in all the corporations. This bill was quite sufficient to enable

[458]

[459)

[460]

In regard to the fact that neither the Paris and Decatur bondholders nor their trustee were parties to the suit when the order of October 9, 1876, was made, the commissioner took the view, which the circuit court confirmed, that while they ought to be heard before the order was made conclusive against them, yet, as the objections to the merits of the order would not have been availing if_made before it was entered, and the money had been actually and faithfully applied, under the order of the court, to the improvement of the mortgaged property, no equitable reason appeared why the bondholders should keep the benefits and escape the burden.

a court of equity to administer the property | appears that they ought not to have been inade
and marshal the debts, including those due the a charge upon the property, superior to the
mortgage bondholders, making proper parties lien created by the mortgages, then the con-
before adjudging the merits.
tract rights of the prior lienholders must be
protected. On the other hand, if it appears
that the court did what ought to have been
done, even had the trustee and the bondholders
been before it when the certificates were author-
ized to be issued, the property should not be
relieved from the charge made upon it, in good
faith, for its protection and preservation. Of
these rules or principles the parties who in-
augurated this litigation cannot justly com-
plain. They were not ignorant of the fact that
there were existing mortgages upon this prop
erty, and that fact should have been brought
to the attention of the court at the very outset.
Nor have the bondholders any ground of com-
plaint if the court charges upon the property
such expenditures as now appear to have been
rightfully made in the interest of all concerned
in its management, while in the hands of a re-
ceiver. As to receiver's certificates issued, with
the sanction of the court, after the trustees be-
came parties, the purchasers and holders should
be accorded such rights as, by the settled prin-
ciples of equity, are accorded to those who deal
with judicial tribunals having jurisdiction in
the premises."

The certificate of the fourteenth series was issued not only under the order of October 9th, 1876, but under that of January 29, 1881. The Union Trust Company was admitted, on its own petition, to be a party defendant in the Hervey suit in September, 1877. That petition stated that the interest on the Paris and Decatur bonds had been in default since July 1, 1875. The order of January 29, 1881, was made by the federal court. The Union Trust Company had removed the Hervey suit into the federal court in April, 1878, and had filed in that court a foreclosure bill on the Paris and Decatur mortgage as early as December, 1876, and another such bill in February, 1878. The interest on the Paris and Decatur bonds had been in default, as the latter bill alleged, since January 1 1876, and the receiver was in open possession of the entire line of road and running it, and exercising the powers which the orders of the courts had conferred upon him. Under these circumstances, the Paris and Decatur trustee and its bondholders in court, through it, can be heard to make no other objections to the orders except such as arise as to the merits of the expenditures made under them. The view of the commissioner and the circuit court was that the bondholders should have such rights and equities as they could have properly claimed as parties ab initio, and that this view should apply against them as well as for them. In this we concur.

The principles properly applicable to this branch of the case were well expressed by Mr. Justice Harlan in his opinion of February 29, 1884, as follows: "Those who take receiver's certificates must be deemed to have taken them subject to the rights of parties who have prior liens upon the property, and who have not, but should have, been brought before the court. While the court, under some circumstances, and for some purposes, and in advance of the prior lienholders being made parties, may have jurisdiction to charge the property with the amount of receiver's certificates issued by its authority, it cannot, without giving such parties their day in court, deprive them of their priority of lien. When such prior lienholders are brought before the court, they become entitled, upon the plainest principles of justice and equity, to contest the necessity, validity, effect, and amount of all such certificates, as fully as if such questions were then, for the first time, presented for determination. If it

The propriety of the allowance of the certifi cate of the twelfth series for tax liens needs no argument, and we think the interest, as allowed, was proper.

As to the $35,000 of certificates of the sixteenth and seventeenth series, issued to pay for betterments, the present holders, who bought them directly from the receiver, had no connection with the case or with the parties. A question was made before the commissioner that the receiver did not faithfully apply the money as directed by the court. He held, and the circuit court sustained him, that these purchasers were not bound to see to the application of the proceeds, citing the decision to that effect by Mr. Justice Woods, in Stanton v. Alabama, etc. R. R. Co. 2 Woods, 506. In this view we concur.

[46]

It was also contended before the commissioner that all that the holders of these certificates were equitably entitled to was the money they paid, and without interest, and not the face of the certificates and interest. The view taken by the commissioner, and confirmed by the circuit court, was that as the certificates were issued for debts contracted by the court, when it had jurisdiction of the parties and of the subject matter, to persons who in good faith invested their money, for the benefit of the property in the possession of the court, the certificates should be paid according to their tenor, as authorized. We concur in these views. It may be added that as the order of June 29. 1881, authorized the certificates to be sold at not more than 10 per cent discount, it must le presumed that the parties taking the certificates relied on the promise to pay their face, and would not otherwise have trusted the receiver [462 or the fund. The court which made that order thought the limit of discount a reasonable one, and the certificates were sold within that limit.

In regard to what the order calls "betterments," it appears from the petition of the re ceiver, on which the order was made, that the

$35,000 were to be expended for ties, rails, new turn table and foundations, bridges and fences, on the existing line of road, and not for any new extent of road. An affidavit annexed to he petition, made by the road master of the Illinois Midland Company, states that in order to place the railway in a suitable condition for the safe transportation of business, the expenditure contemplated was absolutely necessary. The commissioner finds that the money was expended in substantial compliance with the order of the court, and that the improvements made by the receiver no more than made up for the deterioration of the road, especially in view of its imperfect construction and inferior material from the beginning. This finding was approved by the circuit court.

and the trustee might enter on the property and operate it till sold, and make all needful repairs and replacements, and such useful alterations, additions and improvements to the road as might be necessary for its proper working, and pay for them out of the income; and also that in case of a default so continuing, the trustee might foreclose the mortgage by legal proceedings or sell the property by public auction; and should, in case of such sale, deduct from the proceeds all expenses incurred in operating, managing or maintaining the road or in managing its business, and thereafter apply the proceeds to pay the bonds. In the face of these provisions of the mortgage under which the bonds are held, and of the facts before recited as to the negligence of the trustee all the As to the certificates of the eighteenth series, while the property was in the hands of the issued to replace earnings diverted from paying court, it does not at all comport with the prinfor operating expenses and ordinary repairs, to ciples of equity for the bondholders now to inpay for betterments, while debts to a large sist that the want of affirmative consent by them [464] amount had been incurred for the operating or their trustee could paralyze the arm of the expenses and ordinary repairs,-it appears by court in the discharge of its duty. The want of the petition of the receiver, and the affidavit of that aid which it was the duty of the trustee the road master annexed to it, on which the and the bondholders to give to the court in disorder of June 29, 1881, under which the cer- charging its responsible functions, with the tificates were issued, was made, that the ex-road openly in charge of the receiver and bependitures for new side tracks and betterments so paid for out of earnings consisted principally of expenditures for roadbed, bridges, iron and ties, which were in a worn out and insufficient

condition.

The commissioner and the circuit court rested the allowance of these certificates on what was

said by this court in the case of Fosdick v. Schall, 99 U. S. 235, 253, 254 [Bk. 25, L. ed. 339, 343], which views were applied in Burnham v. Bowen, 111 U. S. 776 [Bk. 28, L. ed. 596], to the effect that when the current income of a railroad in the hands of a receiver is diverted 631 to the improvement of the property by the receiver, and debts for operating expenses are not paid, provision should be made, in foreclosing a mortgage on the road, to pay such debts out of the proceeds of the sale of the property. See also Union Trust Co. v. Souther, 107 U. S. 591 [Bk. 27, L. ed. 488].

ing run by him, and his acts plain to view, and
the interest on the bonds in arrear, cannot be
urged to a court of equity as a ground for de-
nying its power to do what was thought by it
best for the interests of all concerned, includ-
ing even those who thus willfully stood aloof.

The appellants Borg and others also complain of provisions in the final decree, giving priority over the Paris and Decatur bonds to just and equitable proportions of the following items: 1, amount of wages due employés of receivers Dole, Rees and Genis, as shown by schedules J and K of the report of the commissioner, the total amount being $76,820.90; 2, the indebtedness due from the receivership to railroad companies, as shown by schedule L of the report, amounting to $84,615.21; 3, the general indebtedness of the receivership, as shown by schedule M of the report, under the head of supplies, amounting to $67,787.76, and under The general principles herein before stated the head of "damages" amounting to $5,871.04, on which the receiver's certificates referred to and forty-four items under the head of "misare allowed, are those sanctioned in Meyer v.cellaneous," amounting to $32,937.49; 4, seven Johnston, 53 Ala. 237, and Hoover v. Montclair etc. R. Co. 29 N. J. Eq. 4.

The strenuous contention on the part of the Paris and Decatur bondholders is that a court of chancery had no power, by a receiver and without their consent, to create, on the corpus of the property, any lien taking priority over the mortgage lien. But these bondholders were represented by their trustee, the Union Trust Company. It filed a bill in the federal court as early as December, 1876, to foreclose the Paris and Decatur mortgage; and it was made a party, on its own petition, to the suit in the state court, in September, 1877. The Paris and Decatur mortgage provided that in case of default for six months in paying interest on the bonds (and such default occurred at latest on January 1, 1876, and the six months expired July 1, 1876, more than three months before any order was made on which any of the certificates were issued), all the bonds should become due and the lien might be enforced,

claims theretofore allowed and ordered to be
paid by the court, amounting to $1,493.18; 5,
four claims on intervening petitions, allowed
at $11,642.29; 6, amount of wages due em-
ployés of the Illinois Midland Company within
six months immediately preceding the appoint-
ment of the first receiver, as shown by sched-
ule H of the report; such equitable proportions
of the receivers' indebtedness and of the six
months' labor claims to be ascertained in the
manner provided by the decree.

As to items 1, 2, 3, 4 and 5; while it is ad-
mitted that these debts were incurred for the
ordinary expenses of the receivers in operating
the road, it is contended that they are entitled
to priority only out of the income of the road,
and not out of the proceeds of the property it-
self. Of course, such items are payable out of
income, if any, before the corpus is resorted to,
but that may be resorted to when the items are
proper ones to be allowed for operating ex-
penses, after scrutiny and opportunity for those

[465]

[466]

It is contended, however, that, in the order of September 11, 1875, appointing Dole receiver, while authority was given to him to carry on the business of the road and to make repairs and additions essential to its interests and safety, it was provided that, out of the moneys he should receive from its operations, he should pay for the expenses of operation; that he was not authorized by that order to contract any debt which the receipts of the road would not pay; that the terms of the order were such as to exclude the payment of any of the expenses embraced in the six items above named out of any fund other than the receipts from the operation of the road; and that the orders appointing Rees and Genis were equally limited. But we think this view is not correct. The terms of these orders do not impair or exclude the ample authority which the court would other-points nor the City of Decatur, which was wise have, and otherwise has, to order the claims in question to be paid out of the property itself, with priority.

[46