dorsed by persons of high financial standing, and these notes were held to be preferential debts. If a debt for money borrowed by the mortgagor within two years, for the purposes named, is a preferential debt, it is not perceived why the debts due to the persons who furnished the labor, materials, and supplies for these very purposes are not entitled to a like preference. It cannot be maintained that a debt due for materials, labor, and supplies is not a preferred debt so long as it is due to the person who furnished the labor, materials, and supplies, but that a note given for borrowed money to pay such debt at once becomes a preferred debt for the protection of the indorsers. The equity of the indorser cannot be greater than that of the creditor who furnished the materials.

And it is an error to suppose that such debts can only be given priority where there has been a diversion of the income of the road; nor is it true that they can only be paid out of the earnings of the road, and cannot be made a charge on the corpus of the property. A diversion of the income is not essential to give them priority, and they may be made a charge on the corpus of the estate if the earnings are not sufficient to pay them. Miltenberger v. Railway Co., 106 U. S. 286, 311, 312, 1 Sup. Ct. Rep. 140; Union Trust Co. v. Illinois M. Ry. Co., 117 U. S. 434, 457, 463, 6 Sup. Ct. Rep. 809; Thomas v. Railway Co., 36 Fed. Rep. 808. Nor is it essential that the order for the payment of preferential debts should be made at the time, and as a condition, of appointing a receiver. The better practice is to do so, but, if such an order is not then made, it may be made afterwards. Central Trust Co. v. St. Louis, A. & T. Ry. Co., 41 Fed. Rep. 551; Fosdick v. Schall, supra; Blair v. Railroad Co., 22 Fed. Rep. 471. It is not to be implied from what is here said that a mortgagee of a railroad can escape the payment of preferential debts by a foreclosure of his mortgage without asking for a receiver. Liabilities of a railroad company which fall within the definition of preferential debts have priority over a mortgage on its road, without regard to the question of receivership.

The order appointing the receiver in this case, by its terms, probably included some demands not in the category of preferential debts, as that term is usually construed. Some very nice distinctions have been taken between preferential and nonpreferential debts under the general rule, and the order was designedly made comprehensive enough to silence contention on that subject. As respects the character of the claims to be preferred, it is the same as the order of the court in the case of Dow v. Railway Co., 20 Fed. Rep. 260, 266, and the order made in that case was held by Mr. Justice Brewer, then circuit judge, not to be "in excess of the proper powers and discretion of a court appointing a receiver." Central Trust Co. of New York v. Texas & St. L. Ry. Co., 22 Fed. Rep. 135. It is believed no claim has been allowed as a preferential debt which is not such under the general rule on the subject; but, if the fact is otherwise, no one can complain, so long as the debts allowed come within the terms of the order. It is due to the trustee to say that it has not at any time shown the slightest disposition to break its faith with the creditors or the court in this matter, but, on the contrary, has at all times exhibited that high sense of business integrity and honor

which should always characterize those engaged in the management and execution of large financial trusts.

It is undoubtedly true that at common law the first lien acquired by contract or by operation of law has precedence, but that rule never had any application in the maritime law, and equity has largely modified it in its application to suits to foreclose railroad mortgages. By the maritime law, speaking generally, seamen's wages held the first rank, a bottomry bond next, the claims of material men next, and claims for damages to person and property are preferred to the lien of a mortgage, which holds the lowest rank. The ground upon which these rules proceed is that of giving preference to those last aiding to conserve the property. In Railroad Co. v. Cowdrey, 11 Wall. 459, the supreme court said the rule referred to "has never been introduced into our laws except in maritime cases;" and this was undoubtedly true; but that court, in numerous later cases for the foreclosure of railroad mortgages, has recognized the justice and necessity of modifying the common-law rule as to the priority of liens, and adopted to a limited extent, as applicable to suits for the foreclosure of railroad mortgages, some of the principles of the maritime law. This was first done in Fosdick v. Schall, supra, and that case has been followed, and its doctrine applied, in numerous later cases.

Railroads and railroad mortgages are of modern origin. The courts at first failed to distinguish between a mortgage on a railroad and a mortgage on a house and lot, and receivers were appointed without making any provision to pay even the current wages of the employes of the company, or to pay for the most essential supplies, however recently furnished. Experience and observation demonstrated the inequity of this mode of proceeding. Courts of equity were compelled to inquire into the nature of railroad property and railroad mortgages. It was perceived that, as a security for a debt, there was much more analogy between a railroad and a ship than there was between a railroad and a house and lot. It was perceived that railroads performed on land the same offices that ships did on the sea. They are both great and indispensable instruments of commerce. Their chief difference as such instruments is the chemical composition of the elements upon which they are operated. One moves in the water and the other on iron rails. It is said of ships that they are made to plow the seas, and not to rot at the wharfs, and railroads are built to be actually operated in carrying the commerce of the country, and not to rust out. Unless it is kept in operation, a railroad does not fulfill the purpose of its creation, and is comparatively valueless as a mortgage security; but, like a ship, it cannot be operated and made valuable as an instrument of commerce, or for any other purpose, without incurring daily expenses for work, supplies, and materials. These debts are never paid at the time they are contracted. That is impossible from the nature of the business. In the case of solvent companies, the time of payment varies, and it varies with the same company at different times. It is longer or shorter, depending on the financial condition of the company, the length of its line, and other causes. The labor, supplies, and materials are absolutely essential to the operation of the

road, and, as a matter of fact, are in most cases furnished on its credit, in the same sense that the supplies of a ship are furnished on the credit of the ship. For these and other like reasons there has been a growing tendency among the courts and legislatures in this country to give such debts of a railroad company priority over the lien of a mortgage. It seems probable that the courts will not have to deal with the question, on general principles of equity, much longer. Some of the states have already passed acts giving all obligations incurred in the construction and operation of a railroad priority over mortgages, and similar statutes will probably soon be passed in other states, unless the practice and decisions of their courts shall render them unnecessary. Undoubtedly, under the operation of these statutes, and the later and sounder practice of courts of equity, acting independently of any statute, in requiring as a condition of the appointment of a receiver for a railroad the payment of the class of debts mentioned, the ends of justice have been promoted, and a stop put to some practices which were extremely inequitable and injurious alike to the company, the mortgagee, and the general creditors. It occurs less frequently now than formerly, that railroad receivers are appointed and mortgages foreclosed leaving unpaid in whole or in part those whose labor and materials built the road and created the security,-for railroad mortgages are sometimes executed before a shovelful of earth has been thrown towards the construction of the road, or kept it in repair and operation after its construction. When it is known that a misapplication or fraudulent use of the proceeds of the bonds or the earnings of the road cannot be visited upon the innocent persons whose labor and materials build the road or keep it in repair and operation, the mortgagee will see to it that the revenues of the company, derived from these and all other sources, are expended for legitimate purposes. Honesty and economy in railroad building and management will thus be promoted, and the company, the mortgagee, and the public will alike be benefited.

In this case the court enjoined the creditors from proceeding to collect their debts by the customary methods. In compliance with the order of the court, the creditors have presented their claims, and they have been allowed, and proper certificates of indebtedness issued, which have in most cases been assigned to persons who purchased them in good faith, relying upon the order of the court. The creditors and the public had a right to rely upon the court's order. Kneeland v. Luce, 141 U. S. 491, 509, 12 Sup. Ct. Rep. 32. Courts should keep faith with suitors and the public if no one else does. If the question of the obligation of contracts is to be considered, it would seem that the agreement of the trustee with the court, and, through the court, with these creditors, constituted a contract of the very highest obligation. This obligation, so far as it relates to the court, is heightened by the consideration that for a breach thereof on the part of the court the law affords the citizen no redress. The court cannot be made to respond for a breach of its engagements.

Only honest and bona fide debts of the character named in the order will be allowed and made a charge upon the estate. As stated

before, no claim has thus far been allowed which would not be a preferential debt by the strictest rule on that subject, and none will be allowed which do not fall clearly within the provisions of the order. The motion to vacate the order of the court relating to the payment of debts is denied.

NOTE.

RAILROAD MORTGAGES-FORECLOSURE-RECEIVERS-PREFERENTIAL INDEBTED

NESS.

The opinion in the principal case contains the first vigorous protest against the disposition to put railroads upon the same plane as other species of property with reference to the effect of mortgages upon the rights of third persons; and, while the case does not turn upon this reasoning, it demonstrates the fact that, if the law of precedent were now as elastic as in the days when the maritime law of liens was created, railroads ought especially to be subjected to similar doctrines. The analogies drawn by the learned judge who delivered the opinion are rendered more forcible when, in connection with the commercial policy outlined by him, it is borne in mind that the home port of many railroad corporations, to which employes and material men are expected to look, is a port only in name, representing no more than a favorable field for obtaining the least onerous of corporate charters. In the case of U. S. v. Southern Pac. R. Co., 49 Fed. Rep. 298, it appears from the opinion of Mr. Justice Harlan that the Southern Pacific Company was a corporation of Kentucky, but that it had no property or business in that state, nor any office or agent there, except an assistant clerk, holding a subordinate position, and maintained for the purpose of preserving the charter of that company under the laws of that commonwealth. Its property was all in other states and territories, and its general offices were, and for many years had been, in San Francisco, Cal., and its principal executive officers resided there. This corporation was neither a citizen nor resident of any one of the states or territories in which its road was operated. The same may be said of the Choctaw Coal & Railroad Company, a railroad corporation incorporated in Minnesota, all of whose property and offices were in the Indian Territory or Pennsylvania. See Insurance Co. v. Cooper, 4 U. S. App. 631, 633, 2 C. C. A. 245, 51 Fed. Rep. 332. It "must dwell in the place of its creation," (Bank v. Earle, 13 Pet. 588,) and cannot be sued in a federal court where its road is operated by a citizen of another state. Here the home port Vas а mere sham. And the deluded employe or material man would have found it impracticable to reach anything there, although he was compelled, in order to get a judgment in the federal courts, to go to the state by whose laws it was created-to the home port-to sue the corporation. Shaw v. Mining Co., 145 U. S. 444, 12 Sup. Ct. Rep. 935, overruling the decision in U. S. v. Southern Pac. R. Co., 49 Fed. Rep. 297. See, also, Pendleton v. Russell, 144 U. S. 640, 12 Sup. Ct. Rep. 743. All that could have been in contemplation upon the part of those whose bone and sinew and means kept it a going concern was the property of the company at the place of its location.

Another reason for holding to a view such as that now under discussion is the fact that railroad companies have been treated as exceptional public bodies, who, unlike private enterprises, were entitled to the exercise of the sovereign prerogative of eminent domain, and who, because of their unique character, were entitled to be totally relieved from the doctrines of trespass to real estate, which, in the case of individuals and governmental bodies, gave to the true owner the improvements of a bona fide, but illegal, possessor. Justice v. Railroad Co., 87 Pa. St. 28; Jones v. Railroad Co., 70 Ala. 227; Navigation Co. v. Mosier, 14 Or. 519, 13 Pac. Rep. 300; Newgass v. Railroad Co., 54 Ark. 140, 146, 15 S. W. Rep. 188; Railroad Co. v. Dickson, 63 Miss. 380; State v. Baker, 20 Fla. 616; Cohen v. Railroad Co., 34 Kan. 158, 8 S. W. Rep. 138; Railway Co. v. Dunlap, 47 Mich. 456, 11 N. W. Rep. 271; Railway Co. v. Goodwin, 111 III. 273; Searl v. School District, 133 U. S. 553, 10 Sup. Ct. Rep. 374; Lyon v. Railroad Co., 42 Wis. 538,-with which compare U. S. v. A Certain Tract.of Land. 47 Cal. 515; Meigs v. McClung's Lessee, 9 Cranch, 11, 18; Price v. Ferry Co., 31 N. J. Eq. 31; Wilcox v. Jackson, 13 Pet. 498; Graham v. Railroad Co.,

36 Ind. 463; U. S. v. Lee, 106 U. S. 196, 1 Sup. Ct. Rep. 240; Hunt v. Iron Co., 97 Mass. 279; Railroad Co. v. Robbins, 35 Ohio St. 531.

Railroads are also essentially unique, in this: that while they require a right of way, rails, stations, machine shops, etc., these are but adjuncts to the running of cars. In its last analysis a railroad consists of trains of cars moving from station to station, from state to state, and, in some instances, from ocean to ocean. It is the operation of these trains which keeps the railroad a going concern, an operation which, more than ships, requires services and employes. Dow y. Railroad Co., 20 Fed. Rep. 264. One cannot refrain from thinking, in view of these reflections, that the supreme court of the United States took too narrow a view (a view they have since not rigorously adhered to) when they re fused to assimilate the claim for supplies of the material man furnished to a railroad to the lien of the material man in admiralty, as against a mortgagee. Railroad Co. v. Cowdrey, 11 Wall. 459, 482. But the flexibility of the law does not now seem to be equal to the task of stating and enforcing so equitable a rule, on these grounds, without the aid of legislation.

In many of the states of the Union the legislatures have taken up the matter more or less extensively. In California, Colorado, Connecticut, Dakota, Georgia, Idaho, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nevada, New Hampshire, New Mexico, Rhode Island, and Tennessee, the laws, in diverse ways, protect the laborer and material man who furnish labor and material in the construction of a railroad. In Maine, Mississippi, North Carolina, Vermont, and Wisconsin the lien law seems only to reach the laborer who expends labor in the construction of the road. In Utah and Washington the law protects the laborer and material man who furnish labor or inaterial in construction, equipment, or repairs, etc. In Alabama, Florida, and New Jersey the laborer and employe who expend labor and services in operating the road seem to be protected. In New York the laborer who expends work in the operation of the road seems to be protected. In Ohio, Pennsylvania, and Texas the law seems to cover labor expended in construction and operation of the road. In Arizona, Illinois, Indiana, and Virginia the mechanic, laborer, operative, and material man all seem to be protected, as well for work or material in operating as constructing the road. In Iowa the law does not seem to reach the employe, but otherwise is more comprehensive than the states last stated. It goes further in protecting with a lien parties who sustain injuries, and in making the lien of the lien creditor paramount to existing mortgages. Kentucky covers all the ground covered by the law in Arizona, Illinois, Indiana, or Virginia. The law of Arkansas seems to be the most comprehensive and simple of all. Under its provisions the mechanic, laborer, employe, material man, and the party damaged in person or property have a lien paramount to any mortgage, trust deed, lease, or other mode of transfer executed after the act was passed. 2 Jones, Liens, §§ 1634--1673, inclusive.

But, outside of lien laws, many courts have found a way to work out, with more or less dissent, a certain measure of justice to claimants against railroads in preference to the claims of mortgagees. Besides the authorities referred to in the principal case to sustain this contention, the following can be profitably consulted: Douglass v. Cline, 12 Bush, 608; Duncan v. Trustees, etc., (Va.) 9 Amer. Ry. R. 386; Williamson's Adm'r v. Railroad Co., 33 Grat. 624; Poland v. Railroad Co., 52 Vt. 144, 176, 177; Hervey v. Railroad Co., 28 Fed. Rep. 169; Blair v. Railway Co., 22 Fed. Rep. 471; Id., 23 Fed. Rep. 521; United States Trust Co. v. New York, W. S. & B. Ry. Co., 25 Fed. Rep. 797. Mercantile Trust Co. v. Pittsburgh & W. R. Co., 29 Fed. Rep. 732; Atkins v. Railroad Co., 3 Hughes, (U. S.) 307; Railroad Co. v. Johnston, 59 Pa. St. 290,-with which compare Addison v. Lewis, 75 Va. 701; Coe v. Railway Co., 31 N. J. Eq. 105, 130, et seq.; Porter v. Steel Co., 120 U. S. 649, 7 Sup. Ct. Rep. 1206; Fidelity, etc., Co. v. Shenandoah V. R. Co., (Va.) 9 S. E. Rep. 759; Farmers' Loan & Trust Co. v. Chicago, etc., Ry. Co., 42 Fed. Rep. 6; Jessup v. Railroad Co., 3 Woods, 441.

In Fidelity, etc., Co. v. Shenandoah V. R. Co., (Va.) 9 S. E. Rep. 759, 763, it was said, "No invariable rule is deducible from the authorities." In Blair v. Railroad Co., 22 Fed. Rep. 471, the right of claimants as against mortgagees was held not to depend upon a condition to that effect in the appointment of the receiver; and it was also held, Brewer, J., delivering the opinion, that "the idea which underlies claims of this nature is that the management of a large v.53F.no.2-13