are proper, after scrutiny and opportunity for those opposing to be heard. Union Trust Co. v. Illinois Midland R. Co. (1886) 117 U. S. 434, 29 L. ed. 963, 6 Sup. Ct. Rep. 809.

The rule was laid down in Kneeland v. American Loan & T. Co. (1890) 136 U. S. 89, 34 L. ed. 379, 10 Sup. Ct. Rep. 950, as follows: "If, at the instance of any party rightfully entitled thereto, a court should appoint a receiver of property, the same being railroad property, and therefore under an obligation to the public of continued operation, it, in the administration of such receivership, might rightfully contract debts necessary for the operation of the road, either for labor, supplies, or rentals, and make such expenses a prior lien on the property itself."

And in Mercantile Trust Co. v. Tennessee C. R. Co. (1921; D. C.) 291 Fed. 462, it is said that a court of equity administering railroad property, either in a mortgage-foreclosure case or in a creditors' suit, is charged with the duty of conserving and operating the property, so far as can practically be done, for the benefit of both public and private interests, and, in the exercise of this duty of conservation and operation, may in a proper case make such repairs, replacements, and betterments, and incur such operating expenses, as are purely essential to such results, and may make the certificates issued for money borrowed by the receivers for such purposes a lien upon the corpus of the property, and, so far as necessary, prior to existing liens.

When all of the property of a railroad company is temporarily under control of a court of general jurisdiction and in the possession of a receiver, and it appears necessary to expend a sum of money not then available to maintain reasonably the property in its integrity as a railroad, the court may not only authorize the receiver to borrow the money for such expenditures, but may exercise the power which it possesses in equity over the property so within its control, and make the certificates of indebtedness therefor a lien thereon; and if it is necessary to enable the receiver so

to borrow the money, and it appears to be of sufficient importance to the public and the persons directly interested in the property, such receivers' certificates may be made a lien prior to all other liens on the property of the corporation. Central Trust Co. v. Pittsburg, S. & N. R. Co. (1918) 223 N. Y. 347, 119 N. E. 565. And the court took the view that the power of the court in this regard did not depend upon consent or notice. (See VI., infra.) This case was before the court on a later appeal in (1920) 229 N. Y. 68, 128 N. E. 114, in which it was said that the relief prayed for by the receiver (permission to issue receivers' certificates) was not a matter of strict right, but was addressed to the discretion of the court, guided by precedent, but controlled in its final exercise by a sense of equity and justice. III. Origin of and theories under which power is sustained.

The present doctrine under which existing liens on railroad property in the hands of a receiver may be displaced by necessary expenses for operation and upkeep appears to be a result of judicial lawmaking, originating and developed largely in the Federal courts, but now, as above indicated, firmly established not only there but also in the state courts. Various theories have been advanced to sustain it, but no one of these theories appears complete in itself. In some cases the fact that the prior lienors were parties to the suit in which the receiver was appointed, and, it may be, sought the appointment of the receiver, or at least did not object thereto, has been emphasized, but in other cases, where this circumstance did not exist, some other theory has been advanced, such as the public interest in the continued operation of the road. It should be borne in mind that the doctrine is an equitable one, and that a certain amount of discretion rests with the court as to whether the circumstances justify displacement of the prior liens.

It has been said that the equitable doctrine which sometimes accords a right of prior payment to the holders

of unsecured demands against insolvent railway companies over the owners of mortgage bonds departs widely from common-law rules concerning mortgage liens and the privilege of mortgagees to be satisfied before creditors at large take anything from their debtor's estate; that, however, it is so just and practicable, and so adapted to subserve the welfare of all parties affected by or interested in railway property, that it affords an excellent type of judicial "law-building" to meet new exigencies, according to the careful, safeguarding process of the courts; that the germ was probably borrowed from the admiralty law, which has always conceded a preference over mortgages to several classes of demands, on the theory of affording first security to those who have conserved the property by their services or supplies, for the benefit of both owner and encumbrancer,—the same theory which underlies the lien accorded by the written law to laborers and materialmen. Van Frank v. St. Louis, C. G. & Ft. S. R. Co. (1901) 89 Mo. App. 460. The claims which were awarded the priority in this instance were for traffic balances accruing within the year prior to the receivership; but the principle would obviously have been applied a fortiori to operating expenses incurred by the receiver.

Many of the cases supporting the general rule as to the power of a court of equity to allow operating expenses of a railroad in the hands of a receiver, priority over existing liens, payable, if necessary, out of the corpus of the property, are based on grounds peculiar to railroad property. The position is taken that the operation of the railroad is a matter of public concern, and that those who deal with such a corporation must be held to do so in view of the contingency that the railroad may become insolvent and pass into the hands of a receiver, and their liens thus be displaced by necessary expenses incurred in the operation of the road by the receiver. (See IV. d, infra, as to right-of-way claims.) To this effect, see the following cases: Union Trust Co. v. Illi

nois Midland R. Co. (1886) 117 U. S. 434, 29 L. ed. 963, 6 Sup. Ct. Rep. 809; Third Street & Suburban R. Co. v. Lewis (1897) 24 C. C. A. 482, 48 U. S. App. 373, 79 Fed. 196; Royal Trust Co. v. Washburn, B. & I. River R. Co. (1902) 57 C. C. A. 31, 120 Fed. 11; International Trust Co. v. Decker Bros. (1907) 11 L.R.A. (N.S.) 152, 81 C. C. A. 302, 152 Fed. 78 (obiter); Pennsylvania Steel Co. v. New York City R. Co. (1911; C. C.) 190 Fed. 609; Flint v. Danbury & B. Street R. Co. (1924) 101 Conn. 13, 40 A.L.R. 1, 125 Atl. 194; Townsend v. Oneonta, C. & R. S. R. Co. (1903) 88 App. Div. 208, 84 N. Y. Supp. 427.

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In holding that certificates issued by a receiver of railroad property for necessary repairs were entitled priority over the lien of bondholders, the court in Union Trust Co. v. Illinois Midland R. Co. (U. S.) supra, said: "Property subject to liens and claims and debts of various characters and ranks, which is brought within the cognizance of a court of equity for administration and conversion into money and distribution, is a trust fund. It is to be preserved for those entitled to it. This must be done by the hands of the court, through officers. The character of the property gives character to the particular species of preservation which it requires. . . A railroad and its appurtenances are a peculiar species of property. Not only will its structures deteriorate and decay and perish if not cared for and kept up, but its business and good will will pass away if it is not run and kept in good order. Moreover, a railroad is a matter of public concern. The franchises and rights of the corporation which constructed it were given not merely for private gain to the corporator, but to furnish a public highway; and all persons who deal with the corporation as creditors or holders of its obligations must necessarily be held to do so in the view that, if it falls into insolvency and its affairs come into a court of equity for adjustment, involving the transfer of its franchises and property by a sale, into other hands, to have the purposes of its creation still car

ried out, the court, while in charge of the property, has the power, and, under some circumstances it may be its duty, to make such repairs as are necessary to keep the road and its structures in a safe and proper condition to serve the public."

It was said in Townsend v. Oneonta, C. & R. S. R. Co. (N. Y.) supra, that the authority of the court to authorize a receiver of a railroad corporation to issue receivers' certificates, and to make the lien thereof prior to all other liens on the property held by the receiver, does not rest upon consent, when the issue of such certificates is absolutely necessary for the preservation of the property as a going concern pending litigation; that such authority to issue receivers' certificates has been so long recognized by the courts that mortgage bondholders are presumed to have received their bonds with knowledge of and acquiescence in such authority.

And in Pennsylvania Steel Co. v. New York City R. Co. (1911; C. C.) 190 Fed. 609, it is said that purchasers of securities of a railroad company must be held to have purchased with the fact in view that, if property is devoted to a public use, the demands of the public are first to be considered, and that such expenditures may be preferred, if the occasion arises.

It is said also (obiter) in International Trust Co. v. Decker Bros. (1907) 11 L.R.A. (N.S.) 152, 81 C. C. A. 302, 152 Fed. 78, that any person or corporation, in taking and accepting a mortgage on the property of a railroad, does so with reference to the law governing such corporations, and with knowledge presumably of the legal condition that, for the purpose of keeping the enterprise a going concern, receivers may be appointed and receivers' certificates issued in appropriate cases, which in their force and effect will supplant the mortgage, and hence with the understanding that the mortgage lien may be superseded by the necessary expenses for continuing the business and thereby preserving the security of the mortgage.

And in other cases the public nature of the enterprise has been emphasized

in holding that operating expenses may be made a prior lien. Thus, the position has been taken that as a railroad company owes a duty not only to its creditors and stockholders, but, by virtue of its franchise, to the public as well, a court which has undertaken the administration of railroad affairs is charged with the duty of conserving and operating the property, so far as can practically be done, for the benefit of both public and private interests; and, in the exercise of this duty of conservation and operation, the court may in a proper case make such repairs, replacements, and betterments as are purely essential to such results, and may make the certificates therefor a lien even upon the corpus of the property, and, so far as necessary, prior to existing liens. American Brake Shoe & Foundry Co. v. Pere Marquette R. Co. (1913) 123 C. C. A. 322, 205 Fed. 14, writ of certiorari denied in (1913) 229 U. S. 424, 57 L. ed. 1356, 33 Sup. Ct. Rep. 1051.

Regarding the reasons for the issuance of receivers' certificates for operating expenses of a railroad, which shall be a prior lien on the property, the court in Meyer v. Johnston (1875) 53 Ala. 237, said: "It was not necessary that the question of the power of a court to authorize the issue of first-lien certificates of indebtedness to enable a receiver to raise the money he might need should be decided before the introduction of railroads. But these properties, with their appurtenances, vast in extent and value, yet very perishable if unused and neglected, existing as the estates of private individuals associated into corporations, but essentially public works, in whose operations the public at large and the state are concerned, when drawn into litigation, must be dealt with by the courts according to the nature and circumstances of the subject. And anyone can understand that the best and cheapest mode of conserving a railroad may be by operating trains thereon, and keeping it in repair for their use. To preserve its value, it must generally be continued in operation, and be sold as a going concern. If it were

not for the public quality belonging to them, for the injury that would be done to the interests of whole communities that have become dependent on a railroad for accommodation in a thousand things, a chancellor might say to the parties most interested: 'Unless you furnish means for the protection of this property, which does not itself afford an adequate income for the purpose, it may become a dilapidated and useless wreck.' But the inconvenience and loss which this would inflict on the population of large districts, coupled with the benefit to parties who perhaps are powerless to take care of themselves, of preventing the rapid diminution of value and derangement and disorganization that would otherwise result, seem to require-not for the completion of an unfinished work, or the improvement, beyond what is necessary for its preservation, of an existing one, but to keep it up, to conserve it as a railroad property, if the court has been obliged to take possession of it, that the court should borrow money for that purpose, if it cannot otherwise do so in sufficiently large sums, by causing negotiable certificates of indebtedness to be issued constituting a first lien on the proceeds of the property, and redeemable when it is sold or disposed of by the court. Weighty objections, we know, may be alleged against such a transaction. It may be said: The property does not belong to the court or the receiver. It is in their hands only while proceedings are pending to determine the respective rights of parties litigant. What title can any instrument made by them transfer in that which belongs to others? Perhaps the correct reply would be: True the property is in the keeping of the court to be taken care of, but also to be sold, and out of the proceeds the expenses of taking care of it must be paid. The certificates may not follow the property out of the court. But they constitute a charge upon it in the particular cause enforceable in this court, and must be satisfied or provided for before the property, or the proceeds of it after the sale, shall pass out of its control."

And the rule has been laid down that when a court in a proper case, under circumstances apparently authorizing such action, takes property into its possession through a receiver, which is of such a character as to give the public a right to its continued operation and use (as in the case of railroad property), the court acquires a right and assumes the obligation of keeping the property in operation, and for that purpose is authorized to incur such expenses and create such obligations against the property as are necessary to keep it in repair and to pay operating expenses; that such expenses and obligations are burdens necessarily on the property taken possession of, irrespective of the question as to who may have the preferred lien, or who may invoke the receivership. Illinois Trust & Sav. Bank v. Pacific R. Co. (1896) 115 Cal. 298, 47 Pac. 60.

And in Flint v. Danbury & B. Street R. Co. (1924) 101 Conn. 13, 40 A.L.R. 1, 125 Atl. 194, which on facts is not within the scope of the annotation, the court took the view that whether the receivership suit was instituted by the mortgagees or by a creditor or stockholder was immaterial as regards rights to a preference over mortgage liens in case of a diversion of income, it being said that a railway mortgagee, in accepting his security, impliedly agrees that current debts shall be paid from current receipts before he has any claim on the income, and must equitably be restored, if diverted, for the benefit of mortgagees.

Even though the suit in which the receiver is appointed is not instituted by the prior lienor, if the latter is made a party to the suit, the necessary operating expenses of the receiver, in the case of a corporation affected with a public use, may be accorded priority to such lien. Gulf Pipe Line Co. v. Lasater (1917) Tex. Civ. App. —, 193 S. W. 773, writ of certiorari denied in (1919) 249 U. S. 599, 63 L. ed. 796, 39 Sup. Ct. Rep. 257 (involving receivership of a power company, and holding operating expenses incurred by the receiver superior to a vendor's lien.

In Fidelity Ins. Trust & S. D. Co. v. Roanoke Iron Co. (1895; C. C.) 68 Fed. 623, the court, in making a distinction on the present question between railroads and private corporations generally, says that the authority of a court of equity to issue receivers' certificates for the purpose of carrying on the business of a corporation of whose property the court has taken control is of recent origin, and is the outgrowth of the necessity of keeping in active operation a railroad corporation which has been brought into the possession and control of a court of equity by the appointment of a receiver; that, as applied to railroad corporations, no question can be raised in view of the numerous decisions of the Supreme and other Federal courts; and that receivers' certificates must necessarily have priority over all the liens of other creditors; that the principle on which the doctrine rests is that railroad companies are considered public corporations, which are not controlled and managed alone for the personal benefit of the individual stockholders.

And in International Trust Co. v. Decker Bros. (1907) 11 L.R.A. (N.S.) 152, 81 C. C. A. 302, 152 Fed. 78, in which the court was dealing with a mining receivership, it was said: "A practice has grown up incident to railroad receiverships, which, indeed, has become firmly established by judicial sanction, whereby the receiver is considered to be legally competent under conditions of insolvency, and perhaps for other causes peculiar to the business of public-service corporations, to issue receivers' certificates for the purpose of paying labor claims, within prescribed limits as to time, and other incidental and necessary expenses for carrying forward the business of the corporation, so that it may continue a going concern, and thereby to supplant or supersede the liens of mortgage claimants. The reasons, however, for the authority, are peculiar to railroad corporations, and to the enterprises in which they engage, the most salient of which are that railroads are quasi public concerns, through which the public interests and

convenience, as well as private ownership, are largely subserved, and that a maintenance of the roadway and equipment, and a continuation of the business and operation of the road, are essential to the preservation of the mortgage security."

It was said, also, in Wiggins v. Neversink Light & P. Co. (1905) 47 Misc. 315, 93 N. Y. Supp. 853, that in the case of corporations engaged in a public service, like railroad, water, and lighting companies, which service cannot be interrupted without inconvenience and harm to the community, courts of equity authorize receivers to issue certificates of indebtedness to raise money to make repairs or obtain supplies in order to keep the service going, and make such certificates liens prior to the mortgage indebtedness; but in case of corporations not engaged in such a service, there is no such practice; that the practice is justified only on the score of public necessity, and, even when so exercised, has become a great abuse and wrong to mortgage bondholders in many instances. See I., supra, as to distinction between public or quasi public and private corporations, with regard to the question under consideration.

Of course, the fact that the prior lienors are benefited through preservation of the property is frequently a matter of weight in courts of equity in passing on the question under consideration. And it has been said that the better doctrine on which to base the rights of a receiver to create debts, and to make them a charge on the corpus of the property, is that it is his duty to preserve the property, rather than to serve the public. WatersPierce Oil Co. v. United States & M. Trust Co. (1906) 44 Tex. Civ. App. 397, 99 S. W. 212.

And in First Nat. Bank v. Ewing (1900) 43 C. C. A. 150, 103 Fed. 168, petition for writ of certiorari denied in (1900) 179 U. S. 686, 45 L. ed. 386, 21 Sup. Ct. Rep. 919, the court said that, so far as the receivers' certificates were issued for work to be done and materials to be supplied during the period of the receivership, the authorities were clear that they were entitled