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pany. By this process a railroad company was enabled to escape the payment of its debts by what was little more than a mere change of its name, and often the only change made in that was from Railroad Company to Railway Company. A railroad company in my State has gone through this process three times. Originally its name was “ The Memphis & Little Rock Railroad Company.” After the first foreclosure, it changed its name to “ The Memphis & Little Rock Railway Company.” After the second foreclosure it began at the other end of its line, and called itself “ The Little Rock & Memphis Railroad Company," and after the third foreclosure it called itself - The Little Rock & Memphis Railway Company.” It is proper to say that the last two foreclosures profited it nothing in the way of getting rid of the class of debts we are now considering, on account of the rule adopted in that district on the subject.
A Kentucky chancellor, it is believed, was the first judge in the United States to insert in his order appointing a railroad receiver a provision to the effect that the receiver should pay out of the earnings of the road to the employés operating the same, so much of the wages due them as accrued within thirty days next before the appointment of the receiver. As restricted and limited as this order was, it was vehemently assailed in one of the law journals of the period as a flagrant violation of the constitutional rights of the mortgage bondholders. The judicial mind has gradually undergone a change on this subject.
When it appears it would be equitable and just to do so, a court appointing a receiver at the suit of mortgage bondholders may make it a condition of the appointment that certain debts and liabilities of the railroad company shall be paid by the receiver out of the tolls and earnings of the road, and if not thus paid, that they shall be paid out of the corpus of the property. In Fosdick v. Schall,2 Chief Justice Waite, speaking for the Supreme Court, said: “The mortgagee has his strict rights, which he may enforce in the ordinary way. If he asks no favors, he need grant pone. 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 bis order that while favoring one, injustice is not done to another."
The Supreme Court held in that case that it was competent “ for the court, when asked by the mortgagees to take possession of the future income and hold it for their benefit, to require as a condition of such an order that what is due from the earnings to the current debt shall be paid by the court from the future current receipts before anything derived from that source goes to the mortgagees.”
This case. furnishes the first utterance of that court on this subject. It has had occasion to consider the subject in many cases since and the doctrine announced has been expanded, extended and applied in a variety of cases. The cars are collected in Mr. Cohn's note to the case of Farmers' Loan & Trust Co. v. Kansas City W. & N. W. Ry, Co,, 53 Fed. Rep. 182, and in the case of St. Louis Trust Co, v. Riley, 70 Fed. Rep. 32.
The debts of a railroad company which take precedence of the mortgage are commonly termed “ preferential.” They are usually defined to be those which have aided to conserve the property and have been coạtracted within some reasonable time. But just what debts aid to conserve the property and just what length of time will bar them when their payment has not been made a condition of appointing the receiver, is not very clear upon the authorities. It has sometimes been said that preferential debts more than six months overdue when the receiver was appointed, thereby lost their rank as such, but there is no fixed rule barring preferential debts contracted more than six months before the appointment of the receiver. There is, in a word, no six months' rule. Sound reason and justice must sooner or later force the courts to adopt this view. The wit of
1 Farmers' Loan & Trust Co. v. K. C. W. & N. W.R. Co., supra; Northern
Pacific R. R. Co. v. Lamont, 69 Fed.
The Such etion:
jire as rologs fature
man cannot suggest a reason why an admittedly preferential debt should lose its preferential character because the creditor did not coerce its payment inside of six months from the date of its accrual. In such cases equity should follow the law, and the equitable right should not be barred short of the time required to bar the debt.
It is not to be implied from what bas been said that a mortgagee of a railroad company 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, whether : receiver has been appointed in the suit to foreclose the same or not. In a suit to foreclose a mortgage on a railroad where no receiver has been appointed, persons holding demands against the company which come within the definition of preferential debts, may intervene in the foreclosure suit and the court will decree that their demands shall be paid out of the proceeds of the sale of the mortgaged property.
It is not necessary to secure the payment of admittedly preferential debts that their payment should be made a condition of appointing the receiver. But in view of the doubt and uncertainty as to just what debts are preferential, and to silence contention on that subject, and to insure the payment of such demands as it appears to the chancellor ought justly and equitably to be preferred to the mortgage debt, the proper practice is for the court at the time of appointing the receiver, to make it a condition of the appointment, that the classes of debts and liabilities enumerated in the order shall be paid by the receiver out of the earnings of the road, and if they prove to be inadequate, then that they shall be paid out of the proceeds of the sale of the property. Such an order furnishes a clear guide and rule for the parties, the court and the public. The receiver will not be heard to complain of such an order, and if the complainant in the suit, after accepting the receiver on such a condition, should seek to break faith with the court by appealing from the order, the court should promptly discharge the receiver and dismiss the bill. Of course, under
such an order it is open to the complainant and the receiver to contest the question whether a particular claim falls within the provisions of the order, and in all cases to put the claimant to the proof of his debt or demand. The tendency of legislation and of the judicial mind is to apply to railroads so far as relates to debts and liabilities incurred in their operation, substantially the rule that obtains in admiralty, which gives to all such demands priority over a mortgage on the vessel. In some States this rule has been established in all its breadth by statute, and in others it has been partially adopted. It is competent for Congress to declare that a Federal court shall not appoint a receiver for a railroad without stipulating for the payment of the debts and liabilities of the railroad company, of the character we are considering. And to insure uniformity of practice in those courts, such an act ought to be passed. At present the practice varies in the different circuits and in some of them the rule is extremely indefinite and uncertain. It is settled by repeated judicial decisions that railroads, like ships and steamboats, are instruments of commerce, and as much subject to the regulation of Congress under the commercial clause of the constitution as the latter. In the Clinton Bridge case,1 Mr. Justice Miller said: “I have shown that railways are now means of interstate commerce as well as steamboats. Their iron tracks, extending from ocean to ocean, are no more limited by political boundaries than are the rivers which rise in one State and flow through others to the sea. Over the former, propelled by one application of the motive power of steam, roll many cars, laden with the products and fabrics of one section of the country for the supply of the wants of a distant section. Through the latter, propelled by another application of the same power, ply the steamers, laden in like manner, and discharging a like beneficent office. Where lies the difference between them? Why should not the power which regulates one extend to the control of the other?”
“Where lies the difference between them” in respect of the necessity and justice of the rule that makes the thing liable for the obligations which every bondholder knows, when he takes his
1 5 Fed. Cas., No. 2900, p. 1064 (1 Woolw. 150).
bond, must be incurred in maintaining and operating it as an
If it is not so maintained it is of no utility to the public and of
The following is a copy of such an order made by one of the circuit judges of this circuit in a suit to foreclose a railroad mortgage in which a receiver was appointed:
"And it appearing to the court that the defendant company owes debts and bas incurred liabilities to the residents and citizens of this district which the holders thereof could, without any interference with the legal or equitable rights of the complainant under the mortgage set out in the complaint, collect by proceedings at law from said defendant by seizing its rents, income and earnings and in other lawful modes, if not restrained from so doing by this court, and that it would be inequitable and unjust for the court to deny to said creditors and claimants their legal right to collect their several debts and demands by appointing, a receiver to take and receive the earnings of said road during the pendency of this suit, as prayed for in the complainant's bill, without providing for the payment of such debts and liabilities :