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foreclose a mortgage. On complainant's application, a receiver was appointed on condition that priority should be given to certain described claims, to which condition the complainant assented. Certain of the bondholders were thereafter, on their own application, allowed to become parties defendant, and they now move to strike from the decree the part awarding priority to such claims. At the same time a motion is made to vacate the order making such bondholders parties. The former motion denied, and the latter granted.
Turner, McClure & Rolston and Rossington, Smith & Dallas, for complainant. Wheeler H. Peckham, for intervener. M. Summerfield, for defendant and receiver.
CALDWELL, Circuit Judge. On the 2d day of January, 1888, the Kansas City, Wyandotte & Northwestern Railroad Company executed a mortgage on its railroad and appurtenant property to the Farmers' Loan & Trust Company, of New York, as trustee, to secure the payment of a series of bonds issued by the railroad company, atuounting to $3,750,000. On the 21st day of March, 1890, the trustee named in the mortgage filed in this court its bill to foreclose the mortgage. The bill, among other things, alleged that the company was insolvent, and had made default in the payment of the interest coupons, and that the plaintiff had been requested by the holders of the requisite amount of bonds to bring suit to foreclose the mortgage. The bill prayed for the appointment of a receiver. When the motion for receiver was brought on for hearing it appeared that the road had been recently constructed, was probably not then fully completed and equipped, and that the company owed some debts for work done, and for labor, materials, machinery, and supplies furnished, in the construction, extension, equipment, and operation of the road and its branches. These debts, it appeared, were contracted after the execution of the mortgage, and most of them accrued or matured not many months before the filing of the bill. They were contracted to create or conserve the mortgaged property, and were extremely meritorious. The bill alleged, in terms, that the defendants are financially embarrassed, and that they owe a large amount of foating and unsecured debts for labor, material, and supplies, which they are unable to pay:" and “that certain of the creditors of the said defendants, to whom they are indebted for labor and material employed and used in the construction of said roads, are threatening to, and your orator believes will, file liens thereon upon the property of said defendants, and to cause attachments to be issued and levied upon the same, which, if done, will embarrass the operation of said roads, diminish their earnings and income, and impair the value of the property conveyed by said mortgage to your orator, and endanger the security thereunder to the holders of said bonds."
It was apparent that these creditors, by proceeding under the local law, in the state courts, could secure and collect all or a portion of their debts. It appeared that some of these creditors were entitled
to liens on the property, or parts of it, and all of them had the right to subject the income and earnings of the road to the payment of their debts by a proper proceeding for that purpose; for, while the mortgage may in terms give a lien upon the income and earnings of the road, it is well settled that, until the mortgagee takes possession, or a receiver is appointed, the income and earņings belong to the company, and any judgment creditor may subject the same to the pay. ment of his judgment. Bridge Co. v. Heidelbach, 94 U. S. 798; Fosdick v. Schall, 99 U. S. 235, 253; Dow v. Railroad Co., 124 U. S. 652, s Sup. Ct. Rep. 673; Sage v. Railroad Co., 125 U. S. 361, 8 Sup. Ct. Rep. 887. Under the circumstances of the case, it was obvious that it would be extremely unjust and inequitable for the court to deprive these creditors, whose labor and materials had contributed to the creation and preservation of the mortgaged property, of their right to establish their liens and collect their debts without making some just provision for the ultimate payment of the same. The court therefore l'equired as a condition of the appointment of a receiver that the plaintiff should consent upon the record that these debts should be declared to be a prior lien on the mortgaged property, and paid out of the proceeds of the foreclosure sale, if not sooner paid out of the earnings of the road. Profiting by its experience in previous cases, the court declined to act upon the assent of counsel appearing for the plaintiff, until the plaintiff had been advised of the condition which the court proposed to impose, and expressly instructed its counsel to assent thereto. After being advised of its terms, the plaintiff instructed its counsel to assent to the condition, and the court thereupon appointed a receiver, the order of appointment containing the following conditions:
"The foregoing order appointing a receiver in this cause is made upon this express condition: That the slid plaintiff, as trustee and mortgagee representing the mortgage bondholders whose bonds are secured by the said mortgage, consents and agrees that the debts due from the railroad company for ticket and freight balances, and for work, labor, materials, machinery, fixtures, and supplies of every kind and character, done, performed or furnished in the construction, extension, repair, equipment, or operation of said road and its branches in the state of Kansas, and liabilities incurred by suid company in the transportation of freight and passengers, including damage to person and property, which have accrued since the execution of the mortgage set out in the bill of complaint, being the 2d day of January, 1888, together with all debts and liabilities which the said receiver may incur in operating said road, mcluding claims for injury to person and property, shall constitute ar lien on said railroad and all property appurtenant thereto superior and par. amount to the lien of the mortgage set out in the bill, and said railroad shall not be released or discharged from said lien until said debts and liabilities are paid. The receiver is authorized and directed to pay all such debts and liabilities out of the earnings of the road or out of any funds in his hands applicable to that purpose, and, if not sooner discharged, then the same shall be paid out of the proceeds of the sale of the road."
Among the well-settled rules applicable to the appointment of a receiver in a suit for the foreclosure of a mortgage on a railroad are the following:
1. That the appointment of such a receiver is not a matter of right, but rests in the sound discretion of the court, and is a power to be exercised sparingly, and with great caution. Railroad Co. v. Howard, 131 U.S. Append. lxxxi; Fosdick v. Schall, 99 U.S. 235, 253; Sage v. Railroad Co., 125 U. S. 361, 376, 8 Sup. Ct. Rep. 887.
2. That the court appointing a receiver may impose such conditions as appear to be just and equitable, and the party asking for and accepting the appointment of a receiver on the conditions imposed will be bound thereby. In Fosdick v. Schall, supra, Chief Justice Waite, speaking for the court, said:
"The mortgagee has his strict rights, which he may enforce in the ordinary way. If he asks no favors, he need grant none. But if he calls upon a court of chancery to put forth its extraordinary powers, and grant him purely equitable relief, he may, with propriety, be required to submit to the operation of a rule which always applies in such cases, and do equity in order to get equity. The appointment of a receiver is not a matter of strict right. Such an application always calls for the exercise of judicial discretion, and the chancellor should so mold his order that, while favoring one, injustice is not done to another."
And see Trust Co. v. Souther, 107 U. S. 591, 2 Sup. Ct. Rep. 295.
3. The trustee in a railroad mortgage represents the bondholders in all legal proceedings carried on by it to enforce the trust. The bondholders claiming under the mortgage have no interest in the security except that which the trustee holds and represents, and, if the trustee acts in good faith, whatever binds it in any legal proceedings it begins and carries on to enforce the trust, to which they are not actual parties, binds them. Kerrison v. Stewart, 93 U. S. 155; Corcoran v. Canal Co., 94 U. S. 741, 745; Shaw v. Railroad Co., 100 U. S. 605, 611; Richter v. Jerome, 123 U. S. 233, 8 Sup. Ct. Rep. 106. In the case last cited the court say: "Whatever forecloses the trustee, in the absence of fraud or bad faith, forecloses them. This is the undoubted rule.” And where the trustee in good faith assents to terms imposed by the court as a condition for appointing a receiver, the bondholders are bound by such assent as fully and absolutely as if it had been given by them in person. In Kneeland v. Luce, 141 U. S. 491, 509, 12 Sup. Ct. Rep. 32, the trustees consented that receiver's certificates might be issued, and made a prior lien on the mortgaged property. Afterwards the bondholders denied the right of the trustees to give such consent, and contested the validity of the receiver's certificates and the priority of lien given them, and the supreme court said: “The consent of the trustees to the issue of the certificates bound every bondholder. There is nothing to show that the trustees acted corruptly or fraudulently.” And see, to the same effect, Kent v. Iron Co., 144 U. S. 75, 12 Sup. Ct. Rep. 650. In the case of Elwell v. Fosdick, 134 U. S. 500, 512, 10 Sup. Ct. Rep. 598, the trustees executed a release of errors, and, their authority to do so being questioned by the bondholders, the supreme court said: "The trustee represented the bondholders, not only in the proceeding which resulted in the entry of the decree so that the bondholders were not necessary parties, but he also bound them by his release of errors.”
Some time after the appointment of the receiver, August Wolff, claiming to be the holder of some of the stock and mortgage bonds of the company, filed a petition asking to be made a defendant in the suit, and the prayer of his petition was granted by the district judge, Wolff filed no answer or other pleading in the cause, and subsequently withdrew his appearance in the case, and the order permitting him to intervene as a defendant has been vacated, and his petition dismissed. On the 1st of September, 1890, Andrew Haes and four others, claiming to be holders and bearers of 1,119 of the mortgage bonds, filed their petition to be made defendants in the suit, and the prayer of their pe. tition was granted by the district judge, and they afterwards filed an answer in the suit, and a motion to strike out of the order appointing the receiver that portion relating to the payment of certain debts of the defendant company. A motion was filed on the 19th of December, 1890, to vacate the order allowing said Haes and others to intervene as defendants. This motion has been continued from time to time, and will now be disposed of, together with the motion to vacate that portion of the order appointing the receiver relating to the pay. ment of certain debts of the company.
These bondholders do not allege that the trustee acted fraudulently or in bad faith in agreeing to the conditions upon which the receiver was appointed, or that the trustee has in any manner failed or neg. lected to discharge its trust intelligently and in good faith. No reason whatever is shown why these bondholders should be permitted to become parties on the record either as plaintiffs or defendants. If bondholders could become parties for the asking, we should have as many parties to these suits as there are bondholders, and the court would be compelled to listen in turn to the views of every bondholder on every question arising in the case. This is wholly inadmissible. Unless fraud or bad faith is alleged against the trustee, the individual bondholders will not be permitted to intervene, and will not be heard to complain of any action of the court based upon the consent of the trustee acting in good faith. In a cause decided by Mr. Justice Bradley on the circuit (Forbes v. Railroad Co., 2 Woods, 323, 335) he said:
"And it is in the discretion of the court whether or not to permit a stockholder to become a party defendant in any cause where he is not made such by the bill. And, as it is held to be an extreme remedy, to be admitted by the court with hesitation and caution, I think I ought not to have allowed it in this case, and ought now to vacate the order for such allowance. 'Generally speaking,' says Calvert, ‘a stranger can take no part at all, and cannot even be heard by counsel in a claim of interest in the suit except by consent of parties.' Caly. Parties, 58."
The order granting these bondholders leave to become parties was improvidently made, and will be vacated, and their petition dismissed. The trustee is quite as capable of defending the estate against any unfounded claim as these bondholders, and it is apparent that it is acting in good faith in that regard. The contrary is not alleged. When any unfounded or fraudulent claim shall be presented, and the trustee shall fail to make a proper defense thereto, or whenever it fails in any other respect to discharge its trust honestly and faithfully, it will be time to consider the question of making the bondholders parties for their own protection. It is obvious the real purpose of these persons in having themselves made defendants was to attack that portion of the order of the court appointing the receiver relating to the payment of debts. This condition was imposed after full consideration by the court, upon its own motion, and assented to by the trustee. If that assent had not been given, the receiver would not have been appointed. It was clear to the court then, as it is now, that the condition imposed was equitable and just, and in the interest of all parties. If the creditors whose debts are preferred by the order had been permitted to proceed to enforce their liens and collect their debts at law, the trust estate would have suffered losses much in excess of the debts which are made a charge upon it by the order appointing the receiver; and the trustee acted wisely and in the interest of the bondholders in assenting to the appointment of the receiver on the conditions imposed by the court. The court declined to appoint the receiver upon any other terms.
Preferential debts, it is commonly said, are those which have aided to conserve the property, and have been contracted within some reasonable period. But just what debts aid to conserve the property, and what length of time will bar them, is not very clear upon the authorities, and depends largely upon the circumstances of each particular case.
There is no fixed rule barring preferential debts contracted more than six months before the appointment of the receiver. There is no "six months' rule.” In the case of Hale v. Frost, 99 U. S. 389, the supreme court gave priority to a claim for materials furnished 3 years before the appointment of the receiver, and for which a note had been given 16 months before the receiver was appointed. In the case of Burnham v. Bowen, 111 U. S. 776, 4 Sup. Ct. Rep. 675, the court gave priority to a claim for coal supplied 11 months before the appointment of a receiver. There are cases in the state courts also where priority has been given to debts contracted much more than 6 months before the appointment of the receiver. See note to Blair v. Railway Co., 22 Fed. Rep. 471, 475.. In the case of Central Trust Co. v. St. Louis, A. & T. Ry. Co., 41 Fed. Rep. 551, the mortgages in suit were executed in 1886 and 1887, and the receiver was appointed in 1889 by Mr. Justice Brewer, then circuit judge; and afterwards, when the question arose as to what debts should have priority, Justice Brewer said:
"I do not understand from the parties making the application for the receiver that there was any desire or thought of cutting off any just claims accruing during the brief period which has elapsed since their mortgage was given, and, if counsel or party had any such idea, they much mistake my judgment in the premises."
The period that elapsed between the giving of the mortgage and the appointment of the receiver in that case was the same that it is in this.
In the case of Central Trust Co. v. Wabash, St. L. & P. Ry. Co., 30 Fed. Rep. 332, 334, the same learned judge said:
“As a single corporation, it was also in debt to an amount exceeding $3,000,000 of floating indebtedness, and yet of that character of indebtedness which, by the decision of the supreme court, was preferred to all mortgages. Thus the preferential debts of three millions and over were a prior lien upon all the roads belonging to the Wabash; not a lien upon one division, and no lien upon another, but a lien upon each and all of them, prior in right to every mortgage, general or local, junior or senior.”
This was probably the largest amount of preferential debts ever al. lowed in a single railroad foreclosure. It is worthy of note that the