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question whether rentals of leased railroad property were a part of the operating expenses which should be given priority over the mortgage indebtedness, where the receivers were appointed in a foreclosure suit brought by the trustee of the mortgage. The court said that, if the leases should have been renounced, no part of the deficiency arising from the operation of the leased lines could be charged against or paid out of the income, or out of the proceeds of the corpus of the trust estate, but the deficiencies must all be paid by the railroads which respectively caused them; but that if, on the other hand, the leases were properly accepted and adopted, the rents reserved under them became an integral part of the operating expenses of the trust estate in the hands of the receivers, as much as the wages of employees, the rent of leased equipment, traffic balances due connecting railroads, or any other ordinary expense of operation, and that in this way the claims for rent would have a preference in payment out of the proceeds of the property as well as out of the earnings during the receivership. It was held that the evidence did not show that the lower court was in error in holding that it was to the advantage of the trust estate that the leases should be assumed by the receivers.

To a similar effect is Central Trust Co. v. Continental Trust Co. (1898) 30 C. C. A. 235, 58 U. S. App. 604, 86 Fed. 517, holding that, if a lease is properly accepted and adopted in receivership proceedings of the lessee, the rentals accruing during the operation of the railroad by the receiver constitute operating expenses which may be allowed as a preference over the mortgage indebtedness. In this instance, also, the receivers were appointed in foreclosure proceedings brought by a trustee under a mortgage of the railway property.

It was held, also, in Ames v. Union P. R. Co. (1896; C. C.) 74 Fed. 335, that claims of receivers of a railroad appointed under an administrative bill filed by stockholders, for reimbursement for expenses incurred in the operation of the railroad for a limited

time before suit was brought to foreclose a mortgage on the railroad property, were superior in equity to that of the mortgage, and should be paid first out of the income subsequently derived from the property, and, if that were insufficient, out of the proceeds obtained from the sale of the property in the foreclosure suit. It was unsuccessfully contended that these claims. for operating expenses should not be preferred to the claim of the bondholders secured by the mortgage, because the receivers were not appointed at the request or with the consent of the holders of the bonds. It was further contended unsuccessfully that the claim for a deficiency should be enforced as a preferential claim, if at all, only against the property of another railroad company which owned the stock of the company in question and was operating it as a part of its system, the stockholders of the operating company having applied for the receivership, and the same parties being appointed receivers for the principal corporation and its constituent companies. The court held that the properties of the several railroad corporations constituting the system was held under a trust, separate and distinct from the trust under which the property of each of the other corporations was held, and that the expenditures must be charged against the property the administration and operation of which caused them.

Claims for terminal facilities furnished to a receiver of a railway company, appointed in a suit to foreclose a mortgage on the property, were apparently regarded in Savannah, F. & W. R. Co. v. Jacksonville, T. & K. W. R. Co. (1897) 24 C. C. A. 437, 52 U. S. App. 51, 79 Fed. 35, as entitled to a preference over the rights of bondholders under a pre-existing mortgage of the railroad property. The claimant insisted that his claim was superior to that of the bondholders and entitled to priority of payment, and the court, in holding that the petition stated a cause of action, at least as to the period subsequent to the receiver's appointment, said that the facilities furnished were indispensable to the

successful operation of the railway, that they added to the income and enhanced its value in the receiver's hands, and that it was, therefore, only right and proper that he should pay for the use of the property, at least for the period of its occupancy by him, not necessarily at the contract rate, but the reasonable rental value of its use.

In Royal Trust Co. v. Washburn, B. & I. River R. Co. (1902) 57 C. C. A. 31, 120 Fed. 11, it was held that receivers' certificates issued for operating expenses should constitute a first lien on the railroad property, prior to the bonds and prior to the lien of a vendor for the purchase price of rails sold to the railroad company. It was said that all claims against the railroad as debtor, whatever their priority as between creditors, became subordinated to the power of the court to operate the railroad property; and that, as expenses of legitimate administration, the receivers' certificates must be met before the question of priority among creditors was reached. And the court quoted the doctrine that all persons dealing with such a corporation as creditors or holders of its obligation must necessarily be regarded as doing so with the view that, if it falls into insolvency and its affairs come into the hands of a court of equity for adjustment, the court has the power to make such repairs as are necessary to keep the road in a safe and proper condition to serve the public.

But in Nowell v. International Trust Co. (1909) 94 C. C. A. 589, 169 Fed. 497, it was held that there was no ground in equity for charging the expenses of the receivership to the mortgagees or making them paramount to the mortgage lien, where no proper case for the appointment of receiver in an action by a simple contract creditor against mining companies, or for his continuance, was made out, and the receiver had sufficient money to pay the debts of the corporations, except the mortgage debt, but by a collusive arrangement the money was diverted from this purpose, for which it was furnished, and was devoted to the exploitation of the mines, and during a

period of nearly eight years, before the trustee in the mortgage was made a party to the suit, the operations by the receiver were continued and were financially unsuccessful.

Although not strictly in point, attention is called to Queen Anne's Ferry & Equipment Co. v. Queen Anne's R. Co. (1906; C. C.) 148 Fed. 41, affirmed in (1908) 89 C. C. A. 536, 162 Fed. 828, writ of certiorari denied in (1908) 212 U. S. 574, 53 L. ed. 657, 29 Sup. Ct. Rep. 683, in which it was held that debts contracted in the operation of a railroad by a committee appointed by the stockholders and bondholders thereof, to operate it, were in equity entitled to priority over the bonds.

In Central Trust Co. v. Wabash, St. L. & P. R. Co. (1891; C. C.) 46 Fed. 26, in which it was held that a claim for compensation for the use of a leased railroad and equipment by receivers of the lessee should not be made a charge upon the interest of the mortgagees of the latter, or, in other words, not made prior to the mortgage lien, there were special circumstances, the court saying that the lease was for a long term, the practical result of which was an incorporation of the leased line into the body and ownership of the principal line, and that in no just sense was the value of the use of one, more than the other, an operating expense of the combination.

b. State courts.

Where a railroad is in the hands of a receiver for the purpose of preserving and operating it, the court having charge thereof must possess the power, after notice to and hearing of the parties interested, to allow the issuance even of negotiable certificates of indebtedness creating a first lien, when this is necessary to raise money for the economical management and conservation of the property until it is disposed of. Meyer v. Johnston (1875) 53 Ala.

237.

The rule that expenses of a receivership, including those incurred in the due administration by the receiver of the estate in his hands, may often with propriety be recognized as having a first lien on the assets, extending even

to those derived from a sale of the corpus, was applied in Lane v. Mason & A. R. Co. (1895) 96 Ga. 630, 24 S. E. 157, to a case in which the rental value of cars used by the receiver for the purpose of raising income for the railway company, of which he was receiver, was held to be an expense of the receivership of superior dignity to the lien of the bondholders' mortgage. This conclusion was reached on the assumption that the bondholders were not represented in the litigation by their trustee, and did not resist restoration of the cars to the lessor, or participate in the order of the court by which restoration was refused; although the court took the further position that, under the circumstances shown, the trustee for the bondholders was before the court in such capacity, and as trustee participated in procuring the order of refusal to restore the cars, and that, therefore, both the trustee and bondholders represented by him were estopped from denying that the rental of the cars was an expense of the receivership superior to the lien of the mortgage.

In a proper case, where a receiver has been appointed for railroad property and has incurred an indebtedness in the operation of the road, the court may, without the consent of the holders of prior liens, authorize the issuance of receivers' certificates for payment of such indebtedness, which certificates will be a first lien on the property of the company, if it is made to appear that this course is apparently necessary in order to preserve the corporate property or franchises. Equitable Trust Co. v. Chicago, P. & St. L. R. Co. (1921) 223 Ill. App. 445. The receivership was sought in this instance in foreclosure proceedings brought by trustees of the railroad mortgages. It was said that the receivers were the officers and agents of the court, and not of the parties, and that it was the right of the court, essential to its own efficiency, to subject the property to the payment of the necessary expenses of the receivership. And, as the evidence did not show whether the conditions which caused the deficit were temporary or

permanent, the court, in the absence of evidence to the contrary, indulged the presumption that it was still for the best interests of all concerned that the operation of the railroad should continue, and overruled the contention that, when it was shown that the expense of operation exceeded receipts, an order should have been made for abandonment of operation, and that the receivers' certificates should not have been issued.

In the reported case (CONTINENTAL & C. TRUST & SAV. BANK v. MUSCATINE, B. & S. R. Co. ante, 139) the court, while placing its decision partly on the ground that there had not been proper notice given to the holders of the prior liens, also held that no equity was shown entitling the claims for operating expenses to priority over the prior judgment liens, and no basis for estoppel, where the claimants for priority for operating expenses were other railroad companies which had allowed the receiver to collect interline freight balances and to use the proceeds in defraying operating costs, and the prior lien holders were not parties to the suit in which the receiver was appointed, and were not brought into court until after the claims in question had fully accrued, and there was no ground for concluding that the credit extended by the claimants to the receiver had benefited the corpus of the estate. It will be observed that in this case the mortgagees did not appeal, and that the question was as to the right of the holders of judgment liens. Therefore, one of the grounds was absent on which the courts have sometimes granted priority to operating expenses of a railroad in the hands of a receiver over the holders of prior liens, viz., that persons extending credit to a railroad company do so with an implied understanding that, if the company subsequently goes into the hands of a receiver, and expenses which are necessarily incurred to keep the road in operation cannot be paid out of income, the same may be made a prior lien on the corpus of the property. It will be observed, also, that the other ground frequently relied on in giving priority in such cases to

operating expenses, viz., the consent of the holders of the prior liens to the operation of the road by the receiver, was also lacking in this instance. The case is, therefore, an exceptional one, of importance in more clearly defining the general rule under which courts of equity have frequently allowed priority to operating expenses of a railroad in the hands of a receiver over prior liens on the property. A case of possible interest in this connection, in which the claim was for traffic balances on interline freight, claimed to have a right of priority in payment from the property of a railway company, is Illinois C. Trust Co. v. Chicago, A. & N. R. Co. (1916; D. C.) 232 Fed. 936, in which, however, the traffic balances had been expended by a bondholders' committee in the operation of the road, for upkeep and improvements, prior to the receiver's appointment. The court held that the claimant was entitled to an order directing the receiver to pay from the proceeds of the railroad property in his custody, the claim accruing from the time that this committee took possession of the property to the appointment of the receiver, in preference to the claims of the bondholders. See also Miltenberger v. Logansport, C. & S. W. R. Co. (U. S.) under V. a, supra, allowing priority to traffic balances arising before the receivership. It was said that the outcome of indispensable business relations, where a stoppage of the continuance of such relations would be a probable result in case of nonpayment, might well place payments of this kind in the category of payments made to preserve the mortgaged property, in a large sense, and entitle them to be made a first lien. And in this connection, although the claims arose prior to the receivership, attention is called to Van Frank v. St. Louis, C. G. & Ft. S. R. Co. (1901) 89 Mo. App. 460, in which the court held that claims of a railroad company to recover traffic balances which had accrued within the year prior to the receivership of the debtor railroad had an equitable right to preference over mortgage liens, such debts being necessary to keep the railroad company

in operation, and therefore within the principle on which a preference is given. And see International & G. N. R. Co. v. Coolidge (Tex.) under IV. c, supra, on the question whether a statutory lien for traffic balances was displaced by receivers' certificates issued for operating expenses, as regards town lots held by the railway company for sale, and not used for railway purposes.

On petition of a receiver of a railroad for authority to issue certificates of indebtedness to raise money for necessary repairs to the road, the court in Hoover v. Montclair & G. L. R. Co. (1878) 29 N. J. Eq. 4, in holding that the certificates should be issued and would be declared a first lien on the property, said there was no doubt as to the duty of the court under the circumstances; that the road was in such a state of repair that it could not be operated with safety to the traveling public unless the repairs were made; that the value of the trust estate depended in a large measure upon them, and the injury to the estate which would be occasioned if they were not made would obviously be great, to say nothing of the inconvenience to the public; that it was incumbent on the court to see that the receiver kept up the property by making any necessary repairs, and to that end the means might be provided by pledge of the property if necessary; and that especially was it the duty of the court to make the repairs in this instance, where the legislature had imposed upon it the obligation to operate the road for the public convenience.

It was said in Vilas v. Page (1887) 106 N. Y. 439, 13 N. E. 743, that the jurisdiction of a court of equity having possession in a foreclosure suit, through its receiver, of the property of a railroad company, to authorize the creation of debts for rolling stock and other purposes, when in its opinion it is necessary so to do to secure the continued and successful operation of the road, and to charge the debts so created as a first lien on the mortgaged property, is now firmly established; that, therefore, an order which authorized the receiver to ex

pend not exceeding a certain sum in the purchase of necessary rolling stock on credit, provided the purchase were approved by the plaintiffs in the foreclosure suit (in which a receiver had been appointed) was a valid exercise of the power vested in the court, and was binding upon the parties to the action; and that, even if it were made without their consent, the order having been procured on the application of the receiver, who represented the railway company and of the plaintiffs, the trustees in the mortgages sought to be foreclosed, who represented the bondholders, neither the company nor the bondholders could assail its validity.

Where a receiver of railroad property was appointed in an action to which all of the mortgagees and lien holders were parties defendant, by orders in which they acquiesced, the court in Woodruff v. Erie R. Co. (1883) 93 N. Y. 609, said that it was not only within the power of the receiver to assume the obligations of the several leases in question, so far as the payment of rent, either due or to become due thereon, was concerned, and to discharge the same with any funds in his hands, but that he was further authorized to bind even the corpus of the estate, without regard to the rights of the several mortgagees therein, in exercising the authority conferred upon him; also, that the receiver was not only thus authorized to assume the obligation of the lease, and to bind the estate in his hands to the payment of rent accruing thereon, but that, by entering into possession of and occupying the leased property, he manifested by an unequivocal act his election to regard the continuance of such lease as beneficial for all of the parties interested, and his intention to continue the interest acquired by the lessee thereunder.

Equity may require that the lien of a judgment of foreclosure and sale, like that of a mortgage on the property, be subordinated to that of receivers' certificates issued to raise money for the maintenance and preservation of railroad property. 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.

Where, at the time a receiver came into possession of railroad property, the company had no money in the treasury, and there was no working capital to pay current expenses, and it was without credit, and had no rolling stock except a locomotive upon which there was a vendor's lien, and one car for which a high rental was being paid, it was held in Central Trust Co. v. Tappan (1889) 25 N. Y. S. R. 635, 6 N. Y. Supp. 918, that the court properly authorized the issuance of receivers' certificates to raise money for preservation and operation of the railroad, and that such certificates might be made a paramount lien as against objection of a judgment creditor of the company.

VI. Parties, notice, and hearing. The weight of authority supports the view that prior notice to the parties interested is not essential to the validity of an order of the court authorizing the issuance of receivers' certificates for operating expenses of a railroad, which shall be a first lien on the property, but that the prior lien holders are entitled to their day in court before such an order becomes practically effective.

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 the power of a court of equity, in charge of railroad property through a receiver, to make necessary repairs and to authorize the issuance of receivers' certificates therefor, which should have priority over the lien of bondholders of the road, did not depend upon the consent of those interested, nor upon prior notice to them; but that a subsequent opportunity to be heard, on evidence, as to the propriety of expenditures and of making them a first lien was judicially equivalent to prior notice, the receiver, and those lending money to it on certificates issued on orders made without prior notice, taking the risk of the final action of the court. The court said that consent was desirable, but was seldom practicable,

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