to priority over the mortgage bonds, on the theory that the expenditures resulted in the improvement and betterment of the railway property.

Where the receiver is appointed at the instance of the prior lienors, or they acquiesce in his appointment and operation of the road, the displacement of their liens in order to pay expenses of operation from the corpus of the property, in case of a deficiency of income, may be justified on the theory of assent.

See Woodruff v. Erie R. Co. (N. Y.) under V. b, infra. See also Lane v. Mason & A. R. Co. (1895) 96 Ga. 630, 24 S. E. 157, under V. b, infra, as to estoppel of mortgagees to deny that rental of cars was an expense of the receivership superior to the lien of the mortgage, where they resisted restoration of the cars to the lessor.

The doctrine of assent was applied in Miltonberger v. Logansport, C. & S. W. R. Co. (1882) 106 U. S. 287, 27 L. ed. 117, 1 Sup. Ct. Rep. 140, where a receiver was appointed under a second mortgage, to which suit the prior mortgagee was a party, and subsequently, on a cross bill of the first mortgagee, a second receiver was appointed and the first resigned, it being held that the expenses of the first receiver, under order of court, in putting the road in repair, and receivers' certificates issued therefor, were a first lien.

It has been held that the bondholders of a railroad are precluded from claiming priority over receivers' certificates issued for the purpose of preserving the mortgaged property, where the consent of the trustees to the issuance of the certificates is given, and there is nothing to show that they acted corruptly or fraudulently, the consent of the trustees in such a case being binding on all of the bondholders. Kneeland v. Luce (1891) 141 U. S. 491, 35 L. ed. 830, 12 Sup. Ct. Rep. 32. That the bondholders may be bound by the trustee's action in bringing a suit to foreclose the trust deed, and recognizing in his complaint the paramount lien on the property of receivers' certificates issued by order of the court in another suit, and asking that they be paid, see, for ex

ample, Kent v. Lake Superior Ship Canal R. & Iron Co. (1892) 144 U. S. 75, 36 L. ed. 352, 12 Sup. Ct. Rep. 650, where the certificates were issued for the completion of the construction of a canal.

So, it was held in Wallace v. Loomis (1878) 97 U. S. 146, 24 L. ed. 895, that a holder of second-mortgage railroad bonds could not properly object that the order appointing receivers of the railroad, and authorizing them to raise money for operating expenses by the issuance of certificates which would be a first lien on the property, was made without due notice to the second-mortgage bondholders, since the trustees under the second mortgage were parties to the suit, had due notice of the application for the receivers, and made no objection to the same being granted. It was held that the bondholders were represented by their trustees, and must be regarded as bound by the acts of the latter. The party making the objection in this instance did not seek to be made a party to the suit until several months after the order was made, and, when he became a party and filed his answer and cross bill, he prayed that the court would continue to hold the property by its receivers, and would con tinue to direct and control them in the administration thereof, without making any objection to the terms of the order by which the receivers had been appointed.

And in Kneeland v. American Loan & T. Co. (1890) 136 U. S. 89, 34 L. ed. 379, 10 Sup. Ct. Rep. 950 (allowing priority for rental of rolling stock used by railroad receiver), the court applied the doctrine of consent on the part of the prior lien holder, it being said: "When the holder of a first lien upon the realty alone asks the court of chancery to take possession not only of the real, but also of personal property used for the benefit of the real, that application is a consent on its part that the rental value of the personalty thus taken possession of and operated for the benefit of the realty shall be paid in preference to its own claim. The proposition is a simple The application may not be a

one.

consent that the contract price of the personalty shall be paid in preference to his lien; but it certainly is a consent that the rental value of that personalty, during the time of the possession by the receiver appointed at his instance, may have priority to his claim. If the holder of a lien upon the realty does not think that the continued rossession of the personalty is a benefit to his lien, he should simply omit the personalty from his bill, and ask the court to take possession of the realty alone. But either because he believed that the possession of the personalty was necessary for the operation of the railroad and the security of his claim, or else because, by virtue of his secondary right, he expected to pay for the personalty and retain both the personalty and the realty, he has had the court take possession of both by its receiver; and by that act, although subsequently the personalty was returned to the holder of the lien upon it, he consented to the payment of reasonable rental pending the receiver's possession. The conclusion is irresistible that under the circumstances reasonable rental value was properly allowed as a prior claim to the mortgage indebtedness."

And where mortgagees, in their bill seeking foreclosure of railroad property, asserted the necessity of an operation of the railroads by a receiver, to prevent dismemberment and sacrifice, until a sale could be made, and for two years did not urge a sale, it was held in Birmingham Trust & Sav. Co. v. Atlanta, B. & A. R. Co. (1924; D. C.) 300 Fed. 173, that coal bills and other expenses incurred, after the mortgagees' bills were filed, in an effort to operate and preserve the property, should be paid before anything could be paid to the mortgagees.

So, Mercantile Trust & D. Co. v. Southern Iron Car Line (1896) 113 Ala. 543, 21 So. 373, is to the effect that where, on the application of a trustee of a railroad mortgage, a receiver is appointed, who takes possession of the road and its rolling stock, a part of which is being operated under a lease, and the receiver continues to operate the same, rentals, if not

paid from the earnings, may be made a charge on the proceeds of sale on mortgage foreclosure, prior to the mortgage debt. The complainant, the trustee in the mortgage, in the foreclosure suit, prayed that the receivers when appointed should have full power to manage and operate the railway company, and to carry out and renew any and all contracts made by the company connected with the conduct of the business; and the decree appointing the receivers gave them broad powers in respect to operation of the road, in conformity to the prayer of the bill.

And where, in a proceeding to foreclose a mortgage on railway property, the order appointing the receiver directed him in effect to maintain, keep in repair, and operate the railroad, and to pay the necessary expenses of so doing, and was made on the plaintiff's request, the court in Metropolitan Trust Co. v. Tonawanda Valley & C. R. Co. (1886) 103 N. Y. 245, 8 N. E. 488, said that the plaintiff must abide by the order; and the court intimated that if the appeal were by this mortgagee alone, the order appealed from, which authorized the receiver to pay a certain sum for deficiencies for supplies, and made the certificates a first lien on the property, should be allowed to stand. However, as to another mortgagee, who was not a party to the application for a receiver, it was held that the order should not stand, as it was not shown that the obligations. were necessarily incurred.

Where, by proceeding with a sale under its foreclosure decree, the mortgagee could have dismembered a through railroad line and have secured satisfaction on the part covered by the mortgage, but refrained from this step in accordance with its associated interests, and by tacit acquiescence permitted the continued maintenance of the through service, which was kept going by receivers' certificates declaring that they were a first lien prior to mortgages on the property, it was held in Weaver V. Pacific Improv. Co. (1921) 198 App. Div. 825, 191 N. Y. Supp. 3, 541, 542, affirmed in (1923) 234 N. Y. 418, 138 N. E. 42, reargu

ment denied in (1923) 236 N. Y. 506, 142 N. E. 261, that the lien of the mortgagee was subject to a priority for a proportionate part, based upon mileage, of the outstanding receivers' certificates.

And since it seems that a fortiori the rule would apply in case of a railroad receivership, attention is called to People's Nat. Bank v. Virginia Textile Co. (1905) 104 Va. 34, 51 S. E. 155, 7 Ann. Cas. 583 (involving receivership of a textile company), in which it was said that the rule was conceded that the appointment of a receiver does not affect vested rights or interests of third persons in property which is the subject of the receivership, or disarrange the order of priority of existing liens; but that this principle is subject to an exception as firmly established as the rule itself, namely, that where the receiver is appointed at the instance and for the benefit of lien creditors, and charged with the duty of operating the property for their advantage, all proper charges, expenses, and liabilities incurred incident to the receivership are held to be a first charge not only upon the current earnings, but also upon the corpus of the estate.

But while one of the grounds for according operating expenses of a railroad in the hands of a receiver priority over existing liens may, under particular circumstances, be that the prior lienors sought, or acquiesced in, the receiver's appointment and the operation of the road by him, it seems clear that the right to make expenses paramount to existing liens does not depend on the doctrine of assent or acquiescence; in other words, as above indicated, the right may rest on other grounds. See, as supporting this view, the following cases:

United States. Kneeland v. Bass Foundry & Mach. Works (1891) 140 U. S. 592, 35 L. ed. 543, 11 Sup. Ct. Rep. 157; Ames v. Union P. R. Co. (1896; C. C.) 74 Fed. 335; 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. 624, 57 L. ed. 1356, 33 Sup. Ct. Rep. 1051.

California.

Illinois Trust & Sav.

Bank v. Pacific R. Co. (1896) 115 Cal. 298, 47 Pac. 60. Connecticut.

Flint v. Danbury & B. Street R. Co. (1924) 101 Conn. 13, 40 A.L.R. 1, 125 Atl. 194.

Illinois. Equitable Trust Co. v. Chicago, P. & St. L. R. Co. (1921) 223 Ill. App. 445.

New York. Central Trust Co. v. Pittsburg, S. & N. R. Co. (1918) 223 N. Y. 347, 119 N. E. 565, later appeal in (1920) 229 N. Y. 68, 128 N. E. 114; Townsend v. Oneonta, C. & R. S. R. Co. (1903) 88 App. Div. 208, 84 N. Y. Supp. 427, supra.

The position was taken in Central Trust Co. v. Pittsburg, S. & N. R. Co. (N. Y.) supra, as regards the power of a court to authorize the issuance of receivers' certificates for operating expenses of a railroad, and to make the same a prior lien on the property, that the power of the court did not depend upon consent of the parties interested, where the expenditures were necessary to maintain the property in its integrity as a railroad, and appeared of sufficient importance to the public and persons directly interested in the property. And to the same effect is Townsend v. Oneonta, C. & R. S. R. Co. (N. Y.) supra.

The power of a court, in administering railroad property through a receiver, to authorize the issuance of receivers' certificates for the purpose of conserving the property and continuing its operation, which certificates shall be a prior lien on the property, is not limited to mortgage-foreclosure cases, but may be exercised in suits by creditors of the railway company; and it is not essential that the security holders whose liens are postponed should be made parties, although they should be given opportunity to be heard before the order becomes practically effective. (See as to notice and hearing, VI., infra.) American Brake Shoe & Foundry Co. v. Pere Marquette R. Co. (Fed.) supra.

IV. Limitations on and caution in exercise of power.

a. In general.

While the power of a court of

equity in administering railroad property through a receiver, in a proper case, to displace existing liens on the property by allowing priority to necessary expenses for operation and upkeep, seems to be well settled, in various cases the courts have pointed out that this power is one which should be exercised with caution, and never extended beyond the necessities of the case. There is no general authority to displace prior liens when a railroad passes into a receivership, and the position has been taken that the exercise of this authority represents the exception, and not the rule. Suggesting the caution with which the power indicated above should be exercised, see the following cases: CONTINENTAL & C. TRUST & SAV. BANK V. MUSCATINE, B. & S. R. Co. (reported herewith) ante, 139; Wallace v. Loomis (1878) 97 U. S. 146, 24 L. ed. 895; Miltenberger v. Logansport, C. & S. W. R. Co. (1882) 106 U. S. 286, 27 L. ed. 117, 1 Sup. Ct. Rep. 140; Credit Co. v. Arkansas C. R. Co. (1882) 5 McCrary, 23, 15 Fed. 46, appeal dismissed in (1888) 128 U. S. 258, 32 L. ed. 448, 9 Sup. Ct. Rep. 107; Third Street & Suburban R. Co. v. Lewis (1897) 24 C. C. A. 482, 48 U. S. App. 373, 79 Fed. 196, appeal dismissed in (1899) 173 U. S. 457, 43 L. ed. 766, 19 Sup. Ct. Rep. 451; 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. 624, 57 L. ed. 1356, 33 Sup. Ct. Rep. 1051; Mercantile Trust Co. v. Tennessee C. R. Co. (1921; D. C.) 291 Fed. 462; Von Boston v. United R. Co. (1926; C. C. A. 8th) 8 F. (2d) 826, writ of certiorari denied in (1926) 271 U. S. 665, 70 L. ed. 1140, 46 Sup. Ct. Rep. 475; Meyer v. Johnston (1875) 53 Ala. 237; Makeel v. Hotchkiss (1901) 190 III. 311, 83 Am. St. Rep. 131, 60 N. E. 524 (hotel property); Equitable Trust Co. v. Chicago, P. & St. L. R. Co. (1921) 223 Ill. App. 445; Rochester Trust & S. D. Co. v. Rochester & I. R. Co. (1899) 29 Misc. 222, 60 N. Y. Supp. 409; Traction Materials Co. v. Pittsburgh, McK. & W. R. Co. (1918) 261 Pa. 153, 104 Atl. 552.

After pointing out that it could not

be seriously disputed that a court of equity has power, in appointing receivers of a railroad company, to authorize them to raise money necessary for the preservation and management of the property, and to make the same chargeable as a first lien thereon, the court in Wallace v. Loomis (1878) 97 U. S. 146, 24 L. ed. 895, said that this undoubtedly was a power to be exercised with great caution, and if possible with the consent or acquiescence of the parties interested in the funds. To the same effect is Rochester Trust & S. D. Co. v. Rochester & I. R. Co. (1899) 29 Misc. 222, 60 N. Y. Supp. 409.

In Kneeland v. American Loan & T. Co. (1890) 136 U. S. 89, 34 L. ed. 379, 10 Sup. Ct. Rep. 950, the court (Brewer, J.) observed that the appointment of a receiver vests in the court no absolute control over the property, and no general authority to displace vested contract liens; that no one is bound to sell to a railroad company or to work for it; and that whoever has dealings with a company whose property is mortgaged must be assumed to deal with it on the faith of its personal responsibility, and not in the expectation of subsequently displacing the priority of mortgage liens; that it is the exception, and not the rule, that such priority of liens can be displaced.

And suit involving a railroad receivership, where the receiver had been appointed in foreclosure proceedings instituted by the trustee for the bondholders, the court in Credit Co. v. Arkansas C. R. Co. (1882) 5 McCrary, 23, 15 Fed. 46, appeal dismissed in (1888) 128 U. S. 258, 32 L. ed. 448, 9 Sup. Ct. Rep. 107, said that it seemed to be settled that a court of equity has the power in this class of cases to authorize its receiver to issue certificates of indebtedness and to make them a first lien on the road, for the purpose of raising funds to make necessary repairs and improvements; that, however, this was a power to be sparingly exercised; that it was liable to great abuse, being usually resorted to under the pretext that it would enhance the security of the bondholders,

while not infrequently resulting in taking from them the security which they already had and appropriating it to pay debts contracted by the court. It was said, further, that that court had uniformly refused to arm its receivers with such a dangerous power; that when the road could not be kept running without its exercise, except to a very limited extent, the safe and sound practice was to discharge the receiver or stop operating the road, and to speed the foreclosure.

Where a railroad is in the hands of a receiver, the power to issue receivers' certificates paramount to the liens of strangers to the suit is of a strictly limited nature; there is no general power in a court of equity to adjudicate the rights of persons not parties to the action, or to displace or subordinate their liens or other property interests, even upon notice. Knickerbocker Trust Co. v. Oneonta C. & R. S. R. Co. (1911) 201 N. Y. 379, 94 N. E. 871. It was held that the power did not extend so as to authorize the receiver, appointed in a suit by a judgment creditor of the railroad company, to procure an order from the court, on notice to the mortgagee, who was not a party to the suit, for the issuance of certificates to pay overdue interest on the mortgage bonds and the fees and expenses of the trustee incurred in a foreclosure suit, in order to prevent a default under the mortgage.

And the court should not create an indebtedness through the issuance of receivers' certificates, having priority over the claims of all other persons interested in the property, unless such issuance is necessary to conserve the property in its custody pending the litigation; and any expenditure of money which has not this primary purpose for its object is beyond the power of the court and unauthorized. Illinois Steel Co. v. Ramsey (1910) 100 C. C. A. 323, 176 Fed. 853.

The authority to issue receivers' certificates which shall be a first lien on the property should not be extended beyond the absolute necessity for the preservation of the property as a going concern pending litigation, at least without the express or constructive 50 A.L.R.-11.

consent of those having vested interests in the property; and the certificates should not be issued for ulterior purposes. Townsend v. Oneonta, C. & R. S. R. Co. (1903) 88 App. Div.. 208, 84 N. Y. Supp. 427.

And it was said in Finance Co. v. Trenton & N. B. R. Co. (1911; C. C.) 189 Fed. 282, that the general rule is that expenses incurred in the administration of the receivership are chargeable only on the income; that in some instances, however, the corpus may be so charged, but that exceptions are never to be extended beyond their necessity.

Under the doctrine that as a general rule expenses incurred in the administration of the receivership are chargeable only on the income, and that only in exceptional instances may the corpus itself be so charged, and that the exceptions should not be extended beyond their necessity, it has been held that a claim for electric current furnished a street railway company without any contract, without the knowledge of the receiver of the company, and without any necessity therefor, should be denied priority out of the proceeds of sale of the corpus of the property, as against mortgage bondholders, after the accounting and discharge of the receiver. Finance Co. v. Trenton & N. B. R. Co. (Fed.) supra. The court said that the claim was not brought within the exceptions, which were confined to cases where, in the administration of the affairs of the company, the mortgage creditors have obtained possession of that which in equity belongs to the whole or a part of the general creditors.

The power of a court to authorize the issuance of receivers' certificates, where a railroad is in charge of a receiver, extends only as a general rule to such expenditures as are necessary for the protection of the property; the purpose for which receivers' certificates, superior to mortgage liens, may be issued, is usually confined to making necessary repairs and protecting the property; and a court of equity has no power to impair the obligations of a mortgage contract by creating a prior lien without the mortgagee's con