cured indebtedness. Indeed, we are advised that some courts have made the appointment of a receiver conditional upon the payment of all unsecured indebtedness in preference to the mortgage liens sought to be enforced. Can anything be conceived which more thoroughly destroys the sacredness of contract obligations? One holding a mortgage debt upon the railroad has the same right to demand and expect from the court respect for his vested and contracted priority as the holder of a mortgage on a farm or lot. So, when the court appoints a receiver of railroad property, it has no right to make that receivership conditional upon the payment of other than those few unsecured claims which, by the rulings of this court, have been declared to have an equitable priority.

It is the

exception and not the rule that such priority of liens can be displaced." This case, stripped of all verbiage, amounts to this: a court appointing a receiver of a railroad, at the instance of its mortgage bondholders, has no power to prefer general creditors of the road to the mortgage security, except in such particular instances as the previous decisions of this court have authorized. This simply throws us back upon the previous utterances of the Supreme Court. So that the case, while undoubtedly negative in its tendency, does not really furnish any assistance in ascertaining what claims are entitled to priority over the mortgage debts.

In Morgan's Co. v. Texas Ry., Chief Justice Fuller, while denying the intervenor in that case priority, summarizes the doctrine as developed by the previous decisions of the court: "The doctrine of Fosdick v. Schall,2 is that a court of equity may make it a condition of the issue of an order for the appointment of a receiver; that certain outstanding debts of the company shall be paid from the income that may be collected by the receiver, or from the proceeds of sale; that the property, being in the hands of the court for administration as a trust fund for the payment of incumbrances, the court in putting it in condition for sale may, if needed, recognize the claims of material men and laborers, and some few others of similar nature, accruing

1 11 Sup. Ct. Rep. 61; 137 U. S. 171 (1890).

2 99 U. S. 235.

for a brief period prior to its intervention, where current earnings have been used by the company to pay mortgage debt or improve the property, instead of to pay current expenses, under circumstances raising an equity for their restoration, as for instance, where the company, being insolvent and in default, is allowed by the mortgage bondholders to remain in possession and operate the road long after that default has become notorious, or where the company has been suddenly deprived of the control of its property, and the pursuit of any other course might lead to the cessation of operation."1 Chief Justice Fuller

then quotes the statement we have already given above from Fosdick v. Schall; that the existence of the equity depends upon diversion, and that if there has been, in reality, "no diversion there can be no restoration.'

Thomas v. Western Car Co.,2 is the latest utterance of the Supreme Court upon this subject. The case was an appeal from the decision of Judge Harlan at the circuit. In this case, like that of Kneeland v. Trust Co., a car company had sold cars, by a conditional sale, to the defendant road, and asked that the unpaid installments of purchase price be allowed from the sale in preference to the mortgage debt. The court held, on the authority of Miltenberger v. Ry. Co. and Kneeland v. Trust Co., that this claim was not entitled to preference, saying: "The case of a corporation for the manufacture and sale of cars dealing with a railroad company whose road is subject to a mortgage securing outstanding bonds, is very different from workmen or employés, or of those who furnish from day to day supplies necessary for the maintenance of a railroad."

In addition to the cases we have quoted, there are several others of the Supreme Court of less importance to this discussion.4

From the cases quoted we summarize the doctrine of the

1 Miltenberger v. Ry. Co., 1 Sup. Ct. Rep. 140; 106 U. S. 286, 311, 312.

2 13 Sup. Ct. Rep. 824 (1893); 149 U. S. 95.

3 See Thomas v. Peoria Ry., 36 Fed. 808 (1888).

4 See Hale v. Frost, 99 U. S. 389

(1878); Union Trust Co. v. Morrison, 8 Sup. Ct. Rep. 1004; 125 U. S. 591 (1888); St. Louis Ry. v. Cleveland Ry., 8 Sup. Ct. Rep. 1011; 125 U. S. 658 (1888); Kneeland v. Machine Co., 11 Sup. Ct. Rep. 857; 140 U. S. 592 (1891).

Supreme Court thus: A court, when asked by mortgage bondholders of a railroad to appoint a receiver pending foreclosure, may require, as a condition of this order, that the receiver pay out of the earnings of the receivership claims for labor and supplies accruing during a limited period prior to the receivership. If such an order is not made when the receiver is appointed, may be made at any later stage of the case.

it

Where there are no earnings in the hands of a receiver, the court may order these claims paid out of the corpus before anything is given the mortgagee.

Such claims may be preferred by the court under the following circumstances:

1st. Where it appears the bondholders have suffered the company to remain in possession long after it has defaulted in interest payments.1

2d. Where it appears that before the receivership the current income has been diverted by the company for the benefit of the bondholders by paying bonded interest, making permanent improvements, or purchasing additional equipment.?

3d. Where the receiver has used the current income for the benefit of the bondholders such action constitutes a "diversion and warrants the allowance of supply claims that have accrued before the receivership. 3

Although the language of the Supreme Court in many of these cases has been somewhat vague, and perhaps misleading, and the reasons upon which it preferred these claims difficult to ascertain, we think that an analysis of the cases will reveal in each instance the existence of a state of facts similar to those in some one of the three divisions above made, and in most instances, the facts of the case would bring it within two of those heads. In all the cases the bondholders have neglected to foreclose after default in the payment of interest, or else there has been a "diversion" either by the company before the receivership, or by the receiver. The only case which would

1 Hale v. Frost; Miltenberger v. Ry.; Union Trust Co. v. Souther; Burnham v. Bowen; Union Trust Co. v. Midland Ry.

2 Fosdick v. Schall.

8 Union Trust Co. v. Souther; Burnham v. Bowen; Union Trust Co. v. Midland Ry.

seem to be an exception is that of Miltenberger v. Ry., where, as we have already pointed out, Judge Blatchford seems to rest the allowance of these claims, not upon the fact of a "diversion," but upon the fact that their allowance is necessary in order to preserve the trust property for the interests of all concerned. The facts in that case, however, show that the first mortgage bondholders had neglected to foreclose after default in payment of interest, and the general language of the court must be considered in the light of those facts.

The decisions of the Federal Circuit Courts have reflected the uncertainty of the Supreme Court, and the fate of each claim has depended to quite an extent upon the ideas of the judge who happened to be sitting in the case. It would be impossible, within the limits of this article, to review these decisions. Most of them have required a showing of facts like those stated in some one of the divisions of the summary given above. But in Farmers L. & T. Co. v. Ry.,1 Judge Caldwell, in an opinion of characteristic frankness, declares that the Supreme Court by Fosdick v. Schall, and subsequent decisions, has modified Ry. Co. v. Cowdray,2 and has, in fact, applied to a limited extent the maritime law to railroad foreclosures, in preferring labor and supply claims to the mortgage indebtedness; that the allowance of these claims does not depend upon the fact of a "diversion," but upon the fact that their payment is necessary for the preservation of the trust property. To this opinion is appended a valuable note by Morris M. Cohn. Judge Caldwell's decision has been disapproved by Judge Jenkins in a dictum in Farmers L. & T. Co. v. Northern Pac. Ry.3 Other decisions of the United States Circuit Court are: Atkins v. Ry., Skiddy v. Ry.,5 Turner v. Ry., Taylor v. Reading Ry.,' Calhoun v. Ry., Blair v. Ry., Farmers Trust Co. v. Ry.,10 Thomas v. Peoria Ry.," Farmers T. Co. v. Ry.,12 Bound v. Ry.,12 Finance Co. v.

1 53 Fed. 182 (1892).

2 Supra.

8 68 Fed. 36 (1895)

4 3 Hughes, 307.

5 3 Hughes, 320.

68 Biss. 315.

7 7 Fed. 377.

6

8 14 Fed. 9.

922 Fed. 471, and note.

10 33 Fed. 778.

11 36 Fed. 808; s. c. on appeal, 13

Sup. Ct. Rep. 830.

12 45 Fed. 667.
13 47 Fed. 30.

Ry.,' ‚1 Finance Co. v. Ry.,2 Finance Co. v. Ry.,3 Finance Co. v. Charleston Ry., Farmers L. & T. Co.v. Ry.,5 Nat. Bank v. Carolina R. R., Central T. Co. v. Charlotte Ry.,' Farmers L. & T. Co. v. Nor. Pac. Ry., Central Trust Co. v. Chattanooga Ry., Wood v. New York Ry.10

9

8

There have been several decisions in the newly created Court of Appeals, and most of them seem to proceed upon the theory of a diversion." But in 1894 the Court of Appeals for the Fourth Circuit in the case of Finance Co. v. Charleston Ry.," Chief Justice Fuller writing the opinion, rendered a decision of a different character, and one of so much importance as to justify a careful statement of its conclusions. On December 10th, 1890, a temporary receiver was appointed for the defendant road, no provision being made at that time for the payment of any preferential claims. On February 26th, 1891, a permanent receiver was appointed, who was ordered to pay all labor and supply claims accrued within ninety days before the appointment of the temporary receiver, and also all ticket and freight balances due to other and connecting lines. At a later date the Richmond & Danville R. R. intervened, asking that it be allowed priority out of the corpus of the property for a balance due it for freight and supplies. It was admitted that the road was run at a loss both before and after the appointment of the receiver; also that there had been no "diversion" of income to payment of interest. On these facts Chief Justice Fuller says: "It must be regarded as settled that a court of equity may make it a condition of the issue of an order for the appointment of a receiver of a railroad company that certain outstanding debts of the company shall be paid from the income that may be collected by the receiver or from the proceeds of the sale; that preferential payments may be directed of unpaid debts for operating expenses accrued within ninety days, and all limited

1 48 Fed. 188. 249 Fed. 693.

8 52 Fed. 678.

4 52 Fed. 526. 553 Fed. 182.

663 Fed. 25.

765 Fed. 264.

8 68 Fed. 36.

69 Fed. 295.

10 70 Fed. 742, and cases there cited.

11 62 Fed. 207.