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UNION TRUST COMPANY, 107 U. S. 591 (1883)

U.S. Supreme Court

Union Trust Company, 107 U.S. 591 (1883)

Union Trust Company

Decided March 12, 1883

107 U.S. 591


Where the complainant prays for the appointment of a receiver of mortgaged railroad property, pending proceedings for foreclosure, the court, in the exercise of a sound discretion, may, as a condition of granting the prayer, impose such terms touching the application of the income arising during the receivership to the payment of outstanding debts for labor, supplies, equipment, or permanent improvement of the property, as under the circumstances of the case appear reasonable. Fosdick v. Schall, 99 U. S. 235, and Miltenberger v. Logansport Railway Co., 108 U. S. 258, cited and approved.

This appeal was taken because of a difference of opinion between the circuit judge and the district judge, holding the circuit court, as to a matter decided, and the facts on which the questions certified depend may be stated as follows:

On the 7th of October, 1871, the Cairo and St. Louis Railroad Company mortgaged its property, franchises, tolls, incomes, and profits to the Union Trust Company of New York,

Page 107 U. S. 592

to secure an issue of bonds amounting in the aggregate to $2,500,000. Default was made in the payment of interest falling due October 1, 1873, and semiannually thereafter. On the 6th of December, 1877, the trust company filed its bill in the Circuit Court of the United States for the Southern District of Illinois to foreclose the mortgage. In the bill it is, among other things, averred that the company is insolvent;

"that many and large claims exist against said railroad company of the character known as floating debt, and that unless a receiver is appointed . . . great, irreparable damage to said bondholders will ensue, and the property will be liable to be greatly depreciated, and to be involved in useless litigation, and your orator and its bondholders will lose the benefit thereof as a security for the payment of said bonds."

Upon this allegation it was prayed that the "court will appoint a receiver according to the course and practice of this Court, with the usual powers of receivers in like cases."

As soon as the bill was filed a receiver was appointed, and in making the appointment the court, of its own motion, entered the following order:

"And said receiver, after paying the expenses of operating, maintaining, and repairing said railroad and property, and after making such other payments herein authorized as are or may be necessary for the conduct of such receivership, shall pay and discharge all amounts due and owing by said railroad company for labor, or supplies, that may have accrued in the operation and maintenance of such railroad property within six months immediately preceding the rendition of this decree."

In 1876, the railroad company paid $3,000 to the beneficiaries under the mortgage on account of their expenses, to a much larger amount, in keeping an agency in the United States, and in connection with the forbearance which they had given the company in respect to overdue interest. Previous to the appointment of the receiver none of the current income of the company, except this single amount, had been paid to the bondholders.

When the order in respect to debts for labor and supplies was entered, the court instituted no special inquiries in respect to the use which had been made of the income prior to that time.

The receiver thus appointed took possession of the property

Page 107 U. S. 593

and operated the road until the end of the year 1881, and after a sale had been perfected under a decree of foreclosure. During the receivership, the net earnings of the road, after paying all operating expenses, exceeded $200,000. The whole amount was, however, under the orders of the court, with the consent of the trust company, from time to time, expended

"in purchasing additional grounds, rolling stock, etc., and in making permanent repairs and improvements upon said railroad property, instead of discharging therewith the claims of [against] the railroad company for labor, materials, and supplies"

during the six months immediately preceding the appointment of the receiver, and when the property was finally sold over $65,000 of these debts remained unpaid. Among them was one to E. E. Souther & Brother amounting to $532.14 for supplies. On the 9th of May, 1878, after the receiver got into possession of the road, Souther & Brother filed in the suit for foreclosure an intervening petition praying for the allowance of their claim and its payment. On the 16th of May, the claim was allowed and the receiver directed to pay it out of the net earnings, "and before any improvements or ameliorations are made upon the property in his hands as receiver." On the 5th of June, both the trust company and receiver filed motions to set aside this order. These motions remaining undisposed of, the road was sold under a decree of foreclosure in 1881, and brought only $4,000,000, when the amount due under the mortgage was $4,300,000 and some more. After the report of the sale was made and a deficiency appeared, the court, on the 8th of September, 1882, set aside the order for the payment of the debt to the intervenors and allowed the trust company to answer. An answer was filed and proof taken which disclosed the foregoing facts. Upon the facts so established, one of the questions which arose was whether, under the circumstances, the court had the right to make an order directing the payment of the claim. The circuit judge was of the opinion that it had, and a decree was entered accordingly. From that decree this appeal was taken.

Page 107 U. S. 594

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