sent, unless it be in the exercise of an equitable power to preserve and protect the property; and it has no power through its receiver to complete unfinished work or to erect new bridges or undercrossings under a pre-existing contract, beyond what is necessary for the preservation of the railway property. Rochester Trust & S. D. Co. v. Rochester & I. R. Co. (1899) 29 Misc. 222, 60 N. Y. Supp. 409.

And under the rule that the authority of a court, in discharging its duties in conserving and operating railroad property, to make receivers' certificates a lien, when necessary, on the corpus of the property prior to existing liens, extends no further than is actually necessary to obtain the desired result, the court is not authorized, after certificates have been issued and acquired on the faith of a specific security, thereafter to enlarge the security of the certificates, even upon notice to prior lien holders, and confer upon the certificates gratuitously a priority of lien upon which they were neither originally authorized nor acquired, especially when they were originally issued and acquired upon an order expressly reciting that they should be subordinated to the lien thereafter sought, for the first time, to be displaced. Mercantile Trust Co. v. Tennessee C. R. Co. (1921; D. C.) 291 Fed. 462. In this instance, receivers were appointed in a suit brought to foreclose a second mortgage on railroad property, the first mortgagees not being parties, and, in the order authorizing the issuance of the receivers' certificates, as well as in the certificates themselves, it was provided that they should be secured by a lien on the corpus of the property prior to the lien of the second mortgage, but subordinate, as to the corpus of the property, to the first mortgage. On account of unexpected conditions resulting from the World War, and inability to sell the property subject to the first mortgage at a price which would discharge the obligations of the receivers. and the court costs and expenses, the holders of the receivers' certificates brought before the court the trustee and bondholders under the first mort

gage, in an effort to have the receivers' certificates given additional security by way of priority over the first mortgage, in direct contravention, the court said, of the recitals in the order of the court and in the face of the certificates themselves. It was held that this petition for priority should be denied.

Before receivers' certificates are issued for operating expenses of a railroad in the hands of a receiver, which certificates are made a first lien on the property, a detailed statement should be made out, specifying the sums needed, and for what they are needed, and clear proof should be given of the correctness of the statement and of the necessity that the money be raised; the issuance of negotiable certificates of indebtedness in such a case is a matter of scarcely less importance than the appointment of receivers. Meyer v. Johnston (1875) 53 Ala. 237.

And in an action to foreclose a mortgage on railroad property, where the order appointing a receiver directed him to pay the necessary expenses of maintaining, keeping in repair, and operating the railroad, it was held in Metropolitan Trust Co. v. Tonawanda Valley & C. R. Co. (1886) 103 N. Y. 245, 8 N. E. 488, that an order which authorized the receiver to issue certificates of indebtedness in a certain amount for "deficiencies for supplies," and to make the certificates when issued a lien on the railroad property prior to the mortgages thereon, was not justified, at least as to a mortgagee who was not a party to the application for a receiver, and was not found to have acquiesced therein, in the absence of any statement of the consideration or cause of the indebtedness, or anything to show that the obligations were necessarily incurred.

Although the claims in question appear in general to have arisen prior to the appointment of the receiver, attention is called to Farmers' & M. Nat. Bank v. Waco Electric R. & Light Co. (1896) - Tex. Civ. App. —, 36 S. W. 131, which discusses generally the question of the power of the court to appropriate the corpus of railway property to the payment of claims in

preference to prior mortgage debts. It was said that after a court has assumed, through its receiver, control of the property, in certain instances it is within its power to appropriate the corpus of the property to paying the costs and expenses resulting from litigation during the time of its administration by the court, but that beyond this the court has no power to go, in the absence of some provision of law in existence when the mortgages were executed, giving the claims a prior lien upon the corpus of the property. It was said, further, that the court had no inherent right, simply by virtue of its judicial authority, to displace valid mortgage liens on the property, and require that such liens should be postponed to claims which were not in existence at the time the liens were created, or which were not based upon some contract or provision of law giving them a prior right.

b. Necessity of order of court.

It has been held that a receiver of railroad property cannot, of his own motion, contract debts chargeable upon the fund in litigation; that the court must authorize expenditures on account of the property before they can be charged thereon; and that while it may, and does in its discretion, allow expenses incurred by a receiver strictly for preservation to be charged upon the fund, although incurred without the prior sanction of the court, it is nevertheless the order of the court, and not the act of the receiver which creates the charge, and upon which its validity depends. Vilas v. Page (1887) 106 N. Y. 439, 10 N. E. 743.

And in one of the earlier cases on the present question, arising in South Carolina, the position was taken that, where the order appointing a receiver of railroad property does not give him the right to contract debts, and to charge them upon the corpus of the property in preference to mortgages thereon, and there is no subsequent order of the court to this effect, parties who contract debts with the receiver in the operation of the road, other than claims for wages, are not

entitled to be paid from the corpus of the property on a sale thereof, prior to the mortgage bondholders. Hand v. Savannah & C. R. Co. (1882) 17 S. C. 219. The court said: "It was the duty of the receiver to keep his current expenditures within the current income, and if he could not do so he should have reported to the court, and asked leave to contract debts on the faith of the property. This would have given the parties in interest an opportunity to be heard upon the question whether a receivership should be continued which was not clearing expenses. . . . A mortgagee has a lien upon the property itself, but, without special provision, no lien upon the income. The mortgagor is entitled to the use and rents and profits until an order of foreclosure. He may use this income in working the property, paying current expenses, or in any other way; but he has not the power to give any liens upon the corpus for any purpose whatever, even that of cultivating or operating the property itself, which will postpone liens already fixed upon it. Any debts he may contract must take their place behind liens already resting upon the property. There may be cases where the court will declare an equity on account of additions made to the value of the property; but such are exceptional cases, and proceed upon different principles. . . . As the mortgagor himself could not contract debts to displace liens upon the corpus, it is not clearly perceived how the court can give that effect to debts contracted by the receiver, who has nothing whatever to do with the finances of the company except the money which arises from the 'income.' Possibly the court might do so in an extraordinary case, where it clearly appeared that the debt was contracted at the instance of the mortgagees and for their benefit, but not in an ordinary case of excess of expenditures over income, without express authority to contract debts upon the faith of the property."

The right of creditors of a receiver of a railway company on account of claims for operating expenses, to a preference in payment over lien hold

ers out of the proceeds of sale of the corpus, flows from an equitable situation, and arises from the order of the court so to be preferred and paid, and does not arise by operation of law independently of the order of the court. St. Louis Union Trust Co. v. Texas Southern R. Co. (1910) 59 Tex. Civ. App. 157, 126 S. W. 296.

And to the effect that the power of a court to make proper receivership expenditures an equitable charge upon the property does not arise from or depend upon the contract relation of the parties, but arises solely from its own act, the possession and authorized acts of the receiver being the possession and acts of the court, is Westinghouse Electric Mfg. Co. v. Barre & M. Traction & Power Co. (1924) 98 Vt. 130, 126 Atl. 594, holding that a claim by a municipality for street paving, which by the terms of the railway franchise was made a charge against the property, was not a receivership expense entitled to priority.

c. Property not used by railway.

a

It has been said that, in making the expense of operating a railroad charge upon it in preference to the mortgage liens, courts of equity have exercised this extraordinary power only upon the theory that the holder of such a mortgage lien takes the same subject to the implied condition that, in case of the insolvency of the railroad company, it may become necessary, under a receivership, to borrow money for the purpose of preserving its value and of protecting its franchises for the benefit of all interested therein; and accordingly it has been held that a mortgagee of a city lot which is subsequently sold to a street railway company subject to the lien of the mortgage, and is by the company used as the site for a power house, does not stand in the attitude of the ordinary lender of money on railroad security, under the above rule, and that his mortgage takes priority over certificates issued by a receiver of the railway company for operating expenses, where he was not a party to the suit in which the receivers' certificates were issued, even though he had

actual knowledge thereof and raised no objection thereto. 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. The court pointed out that the loan was made upon real estate only, and not in contemplation of its subsequent application to railroad uses, and said: "Upon what principle of equity can it be said that his mortgage has become subordinated to the uses for which the property was thereafter devoted, so that it has lost its character of a mortgage upon real estate, and has now, by virtue of the insolvency of the railway company, become extinguished by a lien created by a receiver for the purpose of maintaining other property of the company? At the time when the mortgage loan was made, the security presumably was, and still is, of sufficient value to satisfy the complainant's lien. For the protection of that lien, he has not, so far as the facts are disclosed in the pleadings, required the intervention of a court of equity, nor is it shown that any expense has been incurred by the receiver which was necessary or advantageous to the protection of his security."

It was held, further, in Third Street & Suburban R. Co. v. Lewis (Fed.) supra, that the mortgagee was not estopped to enforce his lien as an ordinary mortgage on real estate superior to the receivers' certificates, by reason of the fact that he failed to foreclose his mortgage immediately on transfer of the property to the street railway company, or that he received from the railway company or from the receiver interest which came due upon his mortgage.

But where by statute railway companies were given prior liens for traffic balances on the property and franchises of connecting railways from which such balances were due, and after a railway company, which was indebted to the claimant for a traffic balance, became insolvent and a receiver was appointed, receivers' certificates were issued for operating expenses and repairs, it was held in In

ternational & G. N. R. Co. v. Coolidge (1901) 26 Tex. Civ. App. 595, 62 S. W. 1097, writ of error dismissed in (1901) 95 Tex. 92, 65 S. W. 181, that such certificates were presumably issued for the benefit of all of the railway property, including town lots which were not used for railway purposes, but were held by the railway company for sale; and that the certificates were a charge on the lots superior to the lien for traffic balances, as well as on the other property of the company. The court said that the receiver had the administration of the whole railway property, which became a trust fund to be managed for the benefit of all the creditors; that it was his duty so to manage and protect all of the property as to prevent, if possible, any deterioration in its value; that the expenses of the receivership must be shared by all the lien holders, for the establishment and foreclosure of whose liens the receivership proceedings were instituted, and that no property in the hands of the receiver could be exempted from its share of the proper and necessary expenses of the receivership unless it were affirmatively shown that no part of such expenses was incurred for the benefit of such property; that in this instance no such affirmative showing had been made.

d. Right-of-way claims. Persons holding right-of-way claims against a railway company, being compelled to surrender their land to it in obedience to public duty, under the exercise of the right of eminent domain, cannot be placed upon the footing of those who voluntarily deal with the corporation, and therefore as to them the principle is inapplicable (under which operating expenses of a receiver of a railroad have sometimes been accorded a preference over prior liens) viz., that persons who deal with a public-service corporation as creditors do so in view of the power of a court of equity, in case the company becomes insolvent, to make repairs in order to keep the road in safe condition to serve the public. Crosby v. Morristown, & C. G. R. Co. (1897) Tenn. 42 S. W. 507.

V. Illustrations.

a. Federal courts.

In Miltenberger v. Logansport, C. & S. W. R. Co. (1882) 106 U. S. 286, 27 L. ed. 117, 1 Sup. Ct. Rep. 140, where a receiver for a railroad was appointed in a suit by a second mortgagee, 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 was held that the expenses of the first receiver incurred under order of court, in putting the road in repair, and receivers' certificates issued therefor, were a first lien; also that rentals due for the operation of a branch line, and for operating supplies and material while the road was so run by the receiver, should have priority. It may be observed that the court held, further, that certain expenses, part of which had been incurred prior to the receivership, should be given priority over the mortgages. It would seem that a fortiori this doctrine would support the right of priority of operating expenses incurred by the receiver. Thus, the court upheld provisions of the decree allowing the receiver to pay arrears due for operating expenses for a period in the past not exceeding ninety days, and to pay indebtedness not exceeding a certain amount, to other connecting lines, for materials and supplies and for ticket and freight balances, a part of which was incurred more than ninety days before the order appointing the receiver was made, and to purchase rolling stock, and to build 6 miles of road and a bridge, which was part of the main line of the road, the order making such expenditures a lien prior to the lien of the mortgages.

It was held in Union Trust Co. v. Illinois Midland R. Co. (1886) 117 U. S. 434, 29 L. ed. 963, 6 Sup. Ct. Rep. 809, that certificates issued by a receiver for necessary repairs of the railroad were entitled to priority over the lien of bondholders.

In Kneeland v. American Loan & T. Co. (1890) 136 U. S. 89, 34 L. ed. 379, 10 Sup. Ct. Rep. 950, it is held

that rental value of rolling stock of a railroad company, while it is in the hands of a receiver appointed at the instance of the mortgagee, in a suit to foreclose the mortgage, and used by the receiver in operating the road, should be allowed as a claim prior to the mortgage indebtedness; the court, however, making a distinction as to rentals which accrued prior to the appointment of this receiver, during the operation of the road by a receiver appointed in a suit by a judgment creditor. The trustees in the several mortgages were made parties to the suits brought by the judgment creditors in which the receiver was appointed; they entered an appearance and neither objected nor consented to the receiver's appointment. It was held that rentals of rolling stock, while in the hands of the receiver appointed in a suit by a judgment creditor, were not entitled to priority in payment over debts secured by first mortgage, out of the proceeds of a foreclosure sale of the property. The case has been cited on both sides of the proposition as to the right of a court of equity to allow priority to claims for operating expenses during the receivership over the lien of mortgages on the road, where the receiver is appointed in a suit by a judgment creditor, and is not sought by the mortgagees. The case has been distinguished by the same court from one involving ordinary operating expenses or claims for supplies furnished to the receiver. Thus, in Kneeland v. Bass Foundry & Mach. Works (1891) 140 U. S. 592, 35 L. ed. 543, 11 Sup. Ct. Rep. 157, the court, in holding that supplies furnished to a receiver of a railroad appointed in a suit by a judgment creditor might be ordered paid out of the fund arising from the sale of the property, where that was the only fund available, said, regarding the case of Kneeland v. American Loan & T. Co. supra: "The claim in that case was for rental of rolling stock used by the road during the period of the receivership, under a contract of purchase made by the company with the owner thereof prior to the receivership. The rental was not paid, and the lessor took posses

sion of his rolling stock. As respects the claim for rental during the period of the receivership at the suit of a judgment creditor, it was held that it was not entitled to priority of lien over the mortgage creditors, on the foreclosure and sale of the road. In other words, it was held that the bondholders, represented by the appellant, the beneficial owners of the property, could not be held liable for rental value during the time the receivership was at the instance of a judgment creditor. The theory of that ruling was that, as the earnings of the road did not pay the operating expenses, and as the lessor of the rolling stock had a lien on only that personal property of the road, and was not chargeable with a pro rata share of such deficiency, he should be content with the return of his property."

It thus appears that the decision of the Federal Supreme Court in the American Loan & T. Co. Case, supra, denying the right to priority over mortgage debts where the receiver was appointed in a suit by a judgment creditor and was not sought by the mortgagee, is based, partly at least, on the special nature of the claim for rentals, and cannot be regarded as an authority for the view that it is only where the prior lienor seeks the receiver's appointment that priority can be accorded to operating expenses incurred by the receiver.

In Thomas v. Western Car Co. (1893) 149 U. S. 95, 37 L. ed. 663, 13 Sup. Ct. Rep. 824, where a receiver for a railway company was appointed in a foreclosure suit brought by bondholders, and a sale of the property was ordered, it was held that claims for rental of cars which accrued during the receivership, and for ordinary repairs of such rented cars, rendered necessary by the receiver's use of the same, where he had agreed to keep the cars in repair, should be allowed priority to the mortgage bonds.

Attention is called, also, to Mercantile Trust Co. v. Farmers' Loan & T. Co. (1897) 26 C. C. A. 383, 49 U. S. App. 462, 81 Fed. 254, writ of certiorari denied (1897) 168 U. S. 710, 42 L. ed. 1213, 18 Sup. Ct. Rep. 944, on the