where the debts exceeded the value of the property; and that, although prior notice to persons interested, by notifying them as parties, first requiring them to be made parties if they were not, was generally the better way, many circumstances might be judicially equivalent to prior notice; that a full opportunity, as in this instance, to be heard on evidence as to the propriety of the expenditures and of making them a first lien, was judicially equivalent.

So, it is said in Ames v. Union P. R. Co. (1896; C. C.) 74 Fed. 335, that the court might have authorized receivers for a railway company to issue certificates for the money required to pay for supplies and materials, and have made the certificates a lien on the property of the company superior to that of the mortgage, without notice to the trustee under the mortgage, provided the trustee had a subsequent opportunity to be heard as to the merits of the order and as to the application of the funds derived from the certificates. And it was held accordingly that receivers of a railroad, appointed in an administrative suit brought by stockholders, who advanced money for operating expenses, were equitably entitled to the same superiority of lien for their reimbursement that the holders of interest-bearing certificates would have had if the receivers had borrowed the money upon certificates for that purpose, where the property was subsequently turned over to a receiver appointed in a suit to foreclose the mortgage on the property, and the trustee under the mortgage then had an opportunity to question and litigate the claims of the first receivers.

That, where creditors holding liens on railroad property are made parties to a suit brought by a railroad company for appointment of a receiver, in which a receiver is appointed, operating expenses and refunding costs will not be allowed as a preference, unless notice is given to all of the parties, such lienors being entitled to be heard on the question, is held in Clarke v. Central R. & Bkg. Co. (1893; C. C.) 54 Fed. 556.

And it was held in 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, that it was not necessary that holders of liens on railroad property whose liens were subordinated to receivers' certificates issued for the purpose of conserving the property and continuing its operation should be heard before the order was passed, it being sufficient that they were given opportunity to be heard before the order became practically effective. The court said it was not necessary to the exercise of the court's power in this regard that the security holders whose liens were postponed should be by the bill made defendants or otherwise brought in as parties to the creditors' suit, although, of course, no order finally affecting liens should be made without giving to the holders of the affected liens adequate opportunity to be heard.

In Mercantile Trust Co. v. Tennessee C. R. Co. (1921; D. C.) 291 Fed. 462, the court, speaking with reference to the authority of a court of equity, in administering railroad property, to disturb existing liens for the purpose of securing receivers' certificates for necessary repairs and operating expenses, said that this authority does not depend upon consent or prior notice, where the circumstances are judicially equivalent to prior notice; that, in the absence of prior notice, it is sufficient if the prior lien holder be given full opportunity to be heard, on evidence, before the order becomes effective, as to the priority of the expenditures, and of making them a first lien; that while a court may, under some circumstances, charge the property with receivers' certificates, in advance of the prior lien holders being made parties, it cannot deprive them of their priority of lien without giving them their day in court, and that, when they are brought before the court, they are entitled to contest the necessity, validity, and effect of the certificates, as fully as if such questions were then

for the first time presented for determination; that if it then appears that the certificates ought not to have been made a charge upon the property superior to the prior lien, the contract rights of the prior lien holders must be protected; while, on the other hand, if it then appears that the court originally did what ought to have been done if the prior lien holders had been before it when the issuance of the certificates was authorized, the property should not be relieved from the charge made against it in good faith for its protection and preservation. In other words, the court took the view that, if the certificates were, without notice to the prior lien holders, originally given a prior lien and acquired on the faith thereof, the prior holders whose liens were thus displaced might, upon being brought before the court, contest the provision giving them such priority, which would be set aside if it then appeared that such priority ought not to have been originally given, but which would be confirmed if it then appeared that priority ought to have been given originally. This doctrine, the court further observed, applied only to cases in which the priority of lien was originally given when the certificates were authorized, and they were purchased on the faith of such purported. priority, and when subsequently, after notice to the prior holder, it became a question as to whether the court should adhere to or set aside the action originally taken.

Also, in Central Trust Co. v. Pittsburg, S. & N. R. Co. (1918) 223 N. Y. 347, 119 N. E. 565, the position was taken that notice was not required in order for the court to exercise its power to authorize the issuance of receivers' certificates which should be a first lien on the railroad property, if necessary for the maintenance of the property, although it was said that the authority so granted was subject to review when the parties interested and opposed to the exercise of the authority were properly before the court. And although the mortgagee was not a party to the action in which the order in question was made, it was

held that, as it had actual notice of the motion and was represented in court by counsel, it thus had a full opportunity to be heard, and such notice and opportunity to be heard were the judicial equivalent of a formal notice to a party appearing in the action. A later appeal is reported in (1920) 229 N. Y. 68, 128 N. E. 114. The question of notice arose in this instance in connection with the question of renewal of the receivers' certificates.

On the question whether it is necessary to issue receivers' certificates in order to manage and preserve the mortgaged property, where a railroad is in the hands of a receiver, which certificates should be a lien prior to the mortgage, the mortgage bondholders are entitled to be heard and to have their day in court; and where the bondholders are not parties to the action in which the receiver is appointed, or to the receivers' application for leave to issue the certificates, and the trustee under the mortgage is not a party to the proceeding in its capacity as trustee, the rights of the mortgage bondholders cannot be affected by an order nunc pro tunc, made after the certificates are issued, simply amending the petition of the receiver for leave to issue the certificates and making the trustee a party defendant. Central Trust Co. V. Pittsburgh, S. & N. R. Co. (1916) 174 App. Div. 800, 161 N. Y. Supp. 694, affirmed without opinion in (1917) 220 N. Y. 690, 116 N. E. 1040.

A court which is in possession of a railroad through a receiver, by virtue of such possession, has jurisdiction to authorize its receiver to borrow money and issue certificates therefor; and, as to the parties before it, it may decree that such certificates shall constitute a first and prior lien on the property; but, as to mortgagees or creditors not before the court, it cannot make any valid order adjudging the rank or priority of such certificates; and, as it has no jurisdiction over such mortgagees or creditors, any order or decree in this regard as to them would be a nullity. Metropolitan Trust Co.

v. Lake Cities Electric Co. (1900; C. C.) 100 Fed. 897.

And in Third Street & Suburban R. Co. v. Lewis (1897) 24 C. C. A. 482, 48 U. S. App. 273, 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, in making the expense of operating a railroad a charge upon it in preference to the mortgage liens, courts of equity have generally exercised the power only after notice to all parties to the litigation; and that if, without such notice, or if before the time when the prior lien holders become parties to the suit, receivers' certificates are issued by authority of the court, such prior lien holders, when they are subsequently brought before the court, will always be given the opportunity to contest the priority of the receivers' certificates over their liens. It was held that receivers' certificates issued for operating expenses of a railroad should not be given priority over the lien of a mortgage on the road, where the mortgagee was not a party to the receivership proceedings, even though he had actual knowledge of all the steps taken in the suit in which the receivers' certificates were issued, and made no appearance therein and no opposition to the proceedings; such notice and failure not precluding him from proceeding to foreclose his mortgage on default of payment of interest.

In Meyer v. Johnston (1875) 53 Ala. 237, the court said that the issue of negotiable certificates of indebtedness should not be authorized by the court except after full notice to the parties interested, "when this can be given," and ample opportunity for them to be heard. And it was held that, where the order authorizing the issuance of the certificates was made without notice to some of the parties, the proper mode of objecting to it was by appliIcation to the court to vacate and set it aside because of such irregularity. See the reported case (CONTINEN

TAL &C. TRUST & SAV. BANK V. MUSCATINE, B. & S. R. Co. ante, 139) holding that notice and an opportunity to be heard must be given to holders of prior liens on railroad property before the displacement of those liens, for money expended for operating expenses of the road in the hands of a receiver; and that hearing on an application to charge to the corpus the loss in operation of a railroad in the hands of a receiver after the loss had been fully sustained does not serve the purpose of opportunity to the prior lien holders to resist in advance the incurring of the loss, so as to afford them due process of law.

VII. Miscellaneous.

That third parties into whose hands receivers' certificates payable to bearer have passed for a valuable consideration have a right to rely on the promise of the court as to their priority, see, for example, Kneeland v. Luce (1891) 141 U. S. 491, 35 L. ed. 830, 12 Sup. Ct. Rep. 32. And it was held that a purchaser of the railroad on mortgage-foreclosure sale, under decree providing for payment of the certificates prior to the mortgage bonds, was estopped to deny the priority of the certificates.

It is held, also, in Central Trust Co. v. Sheffield & B. Coal, Iron & R. Co. (1890; C. C.) 44 Fed. 526, that purchasers of railroad property on foreclosure sale are estopped to deny the authority of the court to issue receivers' certificates which should constitute a lien on the property prior to the mortgages thereon, where the certificates were issued by consent of the parties, were made a prior lien, and moneys obtained therefrom were used for the preservation and improvement of the property; and it was sold and purchased with the understanding that the valid outstanding receivers' certificates constituted a prior lien, which the purchasers assumed and agreed to pay.

R. E. H.

general warranty

Covenants, § 52 - when action accrues for breach. 2. A vendee has no recourse against his vendor on a covenant of general warranty in his deed, until there has been an eviction by paramount title, or unless the vendor is insolvent or a nonresident.

falsity and with a design and intention to deceive.

[See 27 R. C. L. 357.]

Pleading, § 405 - petition for rescission of sale of land

sufficiency.

5. A petition to rescind a sale of real estate for fraud, which does not aver facts showing that the vendor had

sentation, and which does not charge him with such knowledge and thus impute to him the essential and definite elements of actual fraud, is fatally defective.

Messrs. Bradley & Bradley and J. W. Cammack, for appellants:

Plaintiffs have stated facts sufficient to show that they have been defrauded by defendants' statements and representations concerning the title to this land.

Hughes v. Collins, 197 Ky. 590, 247 S. W. 737; Goatley v. Harmon, 197 Ky. 670, 248 S. W. 212; Indian Nat. L. Ins. Co. v. Maines, 191 Ky. 309, 230 S. W. 54; Sellards v. Adams, 190 Ky. 723, 228 S. W. 424; Perkins v. Rice, Litt. Sel. Cas. (Ky.) 218, 12 Am. Dec. 298, 13 Mor. Min. Rep. 8; 7 R. C. L. 1132, 1166; 27 R. C. L. 379; Hunt v. Barker,

22 R. I. 18, 84 Am. St. Rep. 812, 46 Atl. 46; Mead v. Bunn, 32 N. Y. 280; Culver v. Avery, 7 Wend. 380, 22 Am. Dec. 586; Bryant v. Boothe, 30 Ala. 311, 68 Am. Dec. 117; Phillips v. Reichert, 17 Ind. 120, 79 Am. Dec. 463; Shackelford v. Handley, 1 A. K. Marsh. 496, 10 Am. Dec. 753; Young v. Hopkins, 6 T. B. Mon. 19; Breckinridge v. Moore, 3 B. Mon. 629; Fristoe v. Laytham, 18 Ky. L. Rep. 157, 36 S. W. 920; Meeks v. Garner, 93 Ala. 17, 11 L.R.A. 196, 8 So. 378; Fitzhugh v. Davis, 46 Ark. 337; Anderson v. Buck, 66 Iowa, 490, 24 N. W. 10; Short v. Cure, 100 Mich. 418, 59 N. W. 173;

Riley v. Bell, 120 Iowa, 618, 95 N. W. 170; 12 R. C. L. 411; David v. Park, 103 Mass. 501; Dodge v. Pole, 93 Ind. 481; Tyner v. Cotter, 67 Wis. 482, 30 N. W. 782; Campbell v. Whittingham, 5 J. J. Marsh. 96, 20 Am. Dec. 241.

Messrs. Ford & Ford, for appellees: The vendee of land by a conveyance containing a covenant of general warranty has no recourse against the vendor until there has been an eviction by paramount title, or unless the vendor is insolvent or a nonresident.

Hunter v. Keightley, 184 Ky. 835, 213 S. W. 201; Walker v. Robinson, 163 Ky. 618, 174 S. W. 503; Wilson v. McGowand, 192 Ky. 565, 234 S. W. 17.

In the absence of actual fraud, a vendee in peaceable possession of the granted premises under a deed containing a covenant of general warranty is not entitled to a rescission of the contract.

Simpson v. Hawkins, 1 Dana, 303; Hughes v. Collins, 197 Ky. 589, 247 S. W. 737.

In order for a statement or representation to be actually fraudulent, it must be made with knowledge of its falsity, and with design and intention to deceive.

Livermore v. Middlesborough Town Lands Co. 106 Ky. 163, 50 S. W. 6; Chicago Bldg. & Mfg. Co. v. Beaven, 149 Ky. 267, 148 S. W. 37; Taylor v. Mullins, 151 Ky. 597, 152 S. W. 774; Bewley v. Moreman, 162 Ky. 32, 171 S. W. 996; Anheuser-Busch Brewing Asso. v. Daviess County Distilling Co. 20 Ky. L. Rep. 1522, 49 S. W. 541; Shipp v. Com. 101 Ky. 530, 41 S. W. 856.

Representation as to title made by a vendor to a vendee at the time of the sale, which vendor believed to be true, but which in fact is untrue, does not constitute actual fraud, and will not authorize a rescission.

English v. Thomasson, 82 Ky. 280; Goatley v. Harmon, 197 Ky. 669, 248 S. W. 212; Ison v. Sanders, 163 Ky. 605, 174 S. W. 505; Hughes v. Collins, 197 Ky. 591, 247 S. W. 737; Sellards v. Adams, 190 Ky. 723, 228 S. W. 424.

The situation of the vendee by reason of the defective title furnishes no ground for a rescission of the contract. Buford v. Guthrie, 14 Bush, 697. Sampson, Ch. J., delivered the opinion of the court:

In 1918, appellant Towels bought of appellee Campbell a tract of 190

Не

acres of land at the price of $12,000, of which sum $8,500 was paid in cash and the balance was represented by a lien note. Soon thereafter Towels took possession of the land and occupied it as a home. made valuable improvements thereon and continued to use and occupy the place until May, 1922, when he commenced this action against Campbell for a cancellation of the deed and of the outstanding purchase-money note for $3,500, on the ground that the title was defective, and praying that appellee Campbell be ordered to repay to the appellants several different sums of

money paid as a part of the purchase price of land, with interest thereon, and the further sum of $5,000 damages.

Appellant was not evicted from the land and is now, so far as the record shows, in possession thereof holding and enjoying the same. Neither does the petition aver that appellee Campbell is insolvent or a nonresident of the state of Kentucky, or any of the grounds which justify a rescission of such contract, unless the following averment amounts to that:

"He says that in addition to the 'general warranty' of title contained in said deed, before and at the time of the execution and delivery of same, and for the purpose of inducing this plaintiff to accept said deed and pay the consideration therefor, the defendant represented to the plaintiff and assured plaintiff that the title to the said tract of land and all of same was a good feesimple title, and that he, the defendant, owned a good fee-simple title therein, and represented and assured this plaintiff that he knew personally that the title which he had in said land was a good feesimple title, and relying on said representation and assurance on the part of said defendant, and believing same to be true, the plaintiff did accept said deed, and pay the consideration therefor, when in truth and in fact said title was not good, was not a fee simple, but was defective as hereinafter set out, and