74 N. W. 763; Gulf Pipe Line Co. v. Lasater, Tex. Civ. App. 193 S. W. 774; Craver v. Greer, 107 Tex. 356, 179 S. W. 862; 8 Fletcher, Corp. p. 8987, 1924 Supp. §§ 5396, 5397; First Nat. Bank v. Ewing, 43 C. C. A. 150, 103 Fed. 168; McLane v. Placerville & S. Valley R. Co. 66 Cal.. 606, 6 Pac. 748; Savannah, F. & W. R. Co. v. Jacksonville, T. & K. W. R. Co. 24 C. C. A. 439, 52 U. S. App. 51, 79 Fed. 35; Traction Materials Co. v. Pittsburgh, McK. & W. R. Co. 261 Pa. 153, 104 Atl. 552; New York Trust Co. v. Detroit T. & I. R. Co. 163 C. C. A. 508, 251 Fed. 514.

Messrs. Thompson & Thompson for appellant Kelly.

Messrs. H. O. Weaver, Clapp, Richardson, Elmquist, Briggs, & Macartney, and Nichols, Tipton, & Tipton, for appellees Guthrie and Johnson:

The allowance of priority to claims against the receiver of a railroad as such out of the corpus, over the rights of vested lien holders, is a matter of sound equitable principles, applied to each case as it arises.

Kneeland v. American Loan & T. Co. 136 U. S. 89, 34 L. ed. 379, 10 Sup. Ct. Rep. 950; Wallace v. Loomis, 97 U. S. 146, 24 L. ed. 895; Union Trust Co. v. Illinois Midland R. Co. 117 U. S. 434, 29 L. ed. 963, 6 Sup. Ct. Rep. 809; Miltenberger v. Logansport, C. & S. W. R. Co. 106 U. S. 286, 27 L. ed. 117, 1 Sup. Ct. Rep. 140; Van Valkenburgh v. Ford, Tex. Civ. App. 207 S. W. 405; Farmers' Loan & T. Co. v. Burbank Power & Water Co. (D. C.) 196 Fed. 539; Merchants' Loan & T. Co. v. Chicago R. Co. 86 C. C. A. 87, 158 Fed. 923; Von Boston v. United R. Co. (C. C. A. 8th) 8 F. (2d) 826; Traction Materials Co. v. Pittsburgh, McK. & W. R. Co. 261 Pa. 153, 104 Atl. 552.

The law imposed no obligation upon. the appellants as connecting carriers to extend credit to a bankrupt carrier. Chicago & A. R. Co. v. United States & M. Trust Co. 141 C. C. A. 64, 225 Fed. 940; Vital v. Kerr (C. C. A. 2d) 297 Fed. 959.

The judgment of appellee for personal injuries was a prior lien upon the aliquot part of the property of the road lying in Louisa county, where Mrs. Guthrie's action was tried.

Southern R. Co. v. Bouknight, 30 L.R.A. 823, 17 C. C. A. 181, 25 U. S. App. 415, 70 Fed. 442; North American Co. v. St. Louis & S. F. R. Co. (D. C.) 246 Fed. 260.

Messrs. Lane & Waterman and J. F. Devitt for other appellees.

Morling, J., delivered the opinion. of the court:

On July 1, 1916, defendant railroad company mortgaged its property to the defendant American Trust Company. On July 1, 1919, a mortgage was made to the plaintiff, which by arrangement between the parties interested was given priority over the former mortgage. On November 20, 1920, Nellie Guthrie recovered in Louisa county a judgment against the railroad company for personal injuries. On November 27, 1920, Howard Kelly recovered in Louisa county a judgment against the railroad company for personal injuries, and later transcribed it to Muscatine and Des Moines counties. On October 6, 1921, Cornelius B. Johnson recovered in Muscatine county a judgment against the railroad company for workmen's compensation. On November 30, 1921, P. W. Keefover recovered in Muscatine county a judgment against the railroad company for personal injuries.

On May 20, 1921, in an action brought by J. F. Cullen against the railroad company, a receiver was appointed and directed to take possession of all of the railroad company's property and operate the railroad. On October 13, 1921, the present suit was brought to foreclose the 1919 mortgage. The receiver appointed in the Cullen suit, Cullen, the American Trust Company, and the judgment lien crediThe tors were made defendants. American Trust Company filed a cross-bill for foreclosure of its mortgage. On May 8, 1923, decree of foreclosure of both mortgages was entered by which the proceeds of the foreclosure sale were ordered. to be applied, first, to payment of unpaid taxes; second, to costs; third, to a fund to make good diversion of current earnings; fourth, to the judgment liens; fifth, and subsequently to payment of the mortgage indebtedness. Modifications of the decree on petition of various parties.

were made, but that is immaterial to this discussion. On January 8, 1924, a number of railroad companies filed petitions of intervention in the foreclosure suit, claiming of the receivers balances for interline freight collections, per diem car charges, and freight claims, and asked that the same be established as operating liabilities and as such given priority of payment out of the proceeds of the sale of the corpus of the estate superior to the judgment and mortgage liens. The railroad property was located in the three counties named, Muscatine, Louisa, and Des Moines. As a basis for determining the amount applicable to the payment of liens recorded in the respective counties the court apportioned the funds among the three counties on a basis which is not complained of, and ordered the Johnson and Keefover judgments paid out of the amount apportioned to Muscatine county and the balance of that amount to be paid to the receiver. The court ordered the amount apportioned to Louisa county to be used in payment, first, of the Guthrie judgment and the balance, as far as it would go, on the Kelly judgment. He ordered the balance of the fund, namely, that apportioned to Des Moines county, to be paid to the receiver. The court thus denied to Kelly a lien on account of his transcripts of judgment on the funds in the counties in which the transcripts were filed. This denial is evidently based on § 11,606, Code 1924, which provides: "A judgment against any railway,

for an injury to any person or property, and any claim for compensation under the Workmen's Compensation Act for personal injuries

shall be a lien upon the property of such corporation or copartnership within the county where the judgment was recovered or in which occurred the injury for which compensation is due."

Priority of lien of judgment for personal injuries and workmen's compensation over prior mortgages

His appeal, therefore, cannot be further considered.

On interveners' appeal it is to be noted that the only parties to the suit in which the receiver was appointed were the plaintiff therein, Cullen, and the defendant railroad company. None of the proceedings in that suit are before us except the order appointing receiver. The order recites that the cause came on for hearing on the petition of the plaintiff and the answer of the defendant upon application for appointment of receiver. The record does not show that the plaintiff or cross-petitioner or any other party asked for the appointment of a receiver in the present foreclosure suit or the continuance of the existing receivership. The judgment lienholders set up their judgments and asked that they be given priority. They did not ask for a receiver. The railroad company answered by a general admission. The receivership was not referred to in any of the pleadings until the petitions of intervention were filed. The petitions of intervention prayed for the establishment of interveners' claims and for priority as has been noted. It will be borne in mind that the intervention was not in the receivership suit but in the subsequent foreclosure suit. The interveners' resistance to one of the applications for modification of decree asserted that the judgment lienholders were parties to the Cullen Case, but this

(-- Iowa, statement is not sustained by the record. It does not appear that any of the lien claimants participated in any wise in the receivership proceedings or that they had any knowledge of how the receivership was being conducted, or that there was any expectation of a deficiency of operating income or of making any charge for operating expenses against the corpus of the property. The railroad company could not

Judgment-displacement of liens.

Receivers-con

of railroad.

by its own act displace the statutory liens held by the judgment creditors. A railroad company while it retains its franchise owes to the state and the public the duty of operating its road. This duty should be taken into account by the court tinued operation on an application for a receivership, and consequently operation of a railroad may be ordered under circumstances in which operation of a purely private enterprise by a receiver would not be ordered. Nevertheless railroad property is private property, cannot be tion of railroad subjected to unreasonable requireNorthern

Constitutional which

law-confisca

property.

Carriers-right

ments or to confiscation. P. R. Co. v. North Dakota, 236 U. S. 585, 59 L. ed. 735, L.R.A.1917F, 1148, P.U.R.1915C, 277, 35 Sup. Ct. Rep. 429, Ann. Cas. 1916A, 1. A railroad company cannot be compelled to retain its franchise and to continue to operto compel opera- ate at a loss when tion of railroad. there is no reasonable prospect of future profitable operation. State ex rel. Brown v. Beaton, 190 Iowa, 216, 178 N. W. 1, 180 N. W. 166; Bullock v. Florida, 254 U. S. 513, 65 L. ed. 380, P.U.R.1921B, 507, 41 Sup. Ct. Rep. 193, and cases cited; Erie R. Co. v. Public Utility Comrs. 254 U. S. 394, 65 L. ed. 322, P.U.R.1921C, 143, 41 Sup. Ct. Rep. 169; Brooks-Scanlon Co. v. Railroad Commission, 251 U. S. 396, 64 L. ed. 323, P.U.R. 1920C, 579, 40 Sup. Ct. Rep. 183; Colorado v. United States, 271 U.

en it is shown to be a losing venture such operation should be discontinued unless the expenses are guaranteed. Atlantic Trust Co. v. Chapman, 208 U. S. 360, 52 L. ed. 528, 28 Sup. Ct. Rep. 406, 13 Ann. Cas. 1155; Farmers' Loan & T. Co. v. Oregon P. R. Co. 31 Or. 237, 38 L.R.A. 424, 65 Am. St. Rep. 822, 48 Pac. 706; Illinois Steel Co. v..Ramsey, 100 C. C. A. 323, 176 Fed. 853. Lienholders by asking for a receivership and opera- -charging proption of the property erty with operfor their benefit, or for the preservation and benefit of the property, may thereby bind the corpus of the property as against themselves for the payment of opKneeland erating expenses. American Loan & T. Co. 136 U. S. 89, 34 L. ed. 379, 10 Sup. Ct. Rep. 950, and cases below cited.

ating expenses.

V.

As said in Kneeland v. American Loan & T. Co. 136 U. S. 89, 97, 34 L. ed. 379, 383, 10 Sup. Ct. Rep. 950, 953: "The appointment of a receiver vests in the court no absolute control over the property, and no general authority to displace vested contract liens."

It is said in Fosdick v. Schall, 99 U. S. 235, 251, 25 L. ed. 339, 342:

"The possession taken by the receiver is only that of the court, whose officer he is, and adds nothing to the previously existing title of the mortgagees. He holds, pending the litigation, for the benefit of whomsoever in the end it shall be found to concern, and in the meantime the court proceeds to determine the rights of the parties upon the same principles it would if no change of possession had taken place. The mortgagee has

his strict rights which he may enforce in the ordinary way. If he asks no favors, he need grant none. But if he calls upon a court of chancery to put forth its extraordinary powers and grant him purely equitable relief, he may with propriety be required to submit to the operation of a rule which always applies in such cases, and do equity in order to get equity. The appointment of a receiver is not a matter of strict right. Such an application always calls for the exercise of judicial discretion; and the chancellor should so mould his order that while favoring one, injustice is not done to another. If this cannot be accomplished, the application should ordinarily be denied. There

is nothing to show that the current income of the receivership or of the company has been in any manner employed so as to deprive this creditor of any of his equitable rights. In short as the case stands, no equitable claim whatever has been established upon the fund in court. Prima facie that fund belongs to the mortgage creditors, and the presumption which thus arises has not been overcome."

It is said by Judge (now Mr. Justice) Sanford in Mercantile Trust Co. v. Tennessee C. R. Co. (D. C.) 291 Fed. 462, 467:

"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 make the certificates issued for money borrowed by the receivers for such purposes lien upon the corpus of the property, and, so far as necessary, prior to existing liens.

The authority to disturb existing liens for the purpose of securing

receivers' certificates should, however, be exercised with great caution and 'carried no further than actually necessary to attain the desired result.' American Brake Shoe & Foundry Co. v. Pere Marquette R. Co. 123 C. C. A. 322, 327, 205 Fed. at page 19. It does not, it is true, depend upon consent or prior notice, where the circumstances are judicially equivalent to prior notice. Union Trust Co. v. Illinois Midland R. Co. 117 U. S. at page 456, 29 L. ed. 970, 6 Sup. Ct. Rep. 809. And in the absence of prior notice, it is sufficient if the prior lienholder be given full opportunity to be heard, on evidence, before the order becomes effective, as to the propriety of the expenditures and of making them a first lien. Union Trust Co. v. Illinois Midland R. Co. supra; American Brake Shoe & Foundry Co. v. Pere Marquette R. Co. 123 C. C. A. 322, 205 Fed. at page 19, supra. While the court may, under some circumstances, charge the property with receivers' certificates in advance of the prior lienholders being made parties, it cannot deprive them of their priority of lien without giving them their day in court; and when they are brought before the court they become 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. 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 lienholders must be protected; while, on the other hand, if it then appears that the court originally did what ought to have been done, even if the prior lienholders had been before it when the issuance of the certificates was authorized, the property should not be relieved from the charge made upon it, in good faith, for its protection and preservation. Union Trust Co. v. Illinois Midland R. Co. 117 U. S. at page 460, 29 L. ed. 972, 6 Sup. Ct. Rep.

809, supra. And see Wallace v. Loomis, 97 U. S. 146, 24 L. ed. 895. It is clear that the prior lienholder, when brought before the court upon notice of an application for the enlarged security, is entitled to contest, upon evidence, the necessity and validity of the lien then sought to be given the certificates; and that, by analogy to the rule of the Illinois Midland R. Co. Case, if it then appear that the court would not have been authorized originally, even upon notice, to have made the certificates a charge upon the property superior to the prior lien, the contract rights of the prior lienholders should be protected and such additional security denied the certificate holders. As already stated, the authority of the court, in discharging its duty in conserving and operating the railroad property, to make receiver's certificates a lien, when necessary,' upon the corpus of the property prior to existing liens, extends no further than is actually necessary to attain the desired result."

The power of the court to authorize receivers to raise money necessary for the preservation and management of the

charged with property and charge

penses.

-when property operating ex- it as a lien on the corpus in preference to prior liens "is, undoubtedly, a power to be exercised with great caution; and, if possible, with the consent or acquiescence of the parties interested in the fund." Wallace v. Loomis, 97 U. S. 163, 24 L. ed. 901; Illinois Steel Co. v. Ramsey, 100 C. C. A. 323, 176 Fed. 853; Birmingham Trust & Sav. Co. v. Atlanta, B. & A. R. Co. (D. C.) 300 Fed. 173. While a court of equity taking possession of and operating railroad property through a receiver in a sense undertakes that operating debts shall be paid, this implied undertaking is not without its limitations. The court should in the first place, as has been shown, make the determination only after hearing those whose prior rights may be prejudiced by its action.

50 A.L.R.-10.

It

should be careful to ascertain wheth

er operation will -conditions for pay expenses and continuing will be in the inter- operation. est of conservation rather than conducive to dissipation of the property.

The end in view in appointing a receiver is the conservation of the property and the rights of the persons interested therein and in the income therefrom,

expenditures.

and expenditures power to allow for any other purpose or end is, as to owners or lienholders not parties to the suit, or not estopped, beyond the power of the court. Persons dealing with the receiver must at their peril take notice of his author

dealing with.

ity and the jurisdic-duty of persons tion of the court. Knickerbocker Trust Co. v. Oneonta, C. & R. S. R. Co. 201 N. Y. 379, 94 N. E. 871. In this case the interveners allowed the receiver to collect interline freight balances apparently to considerable amounts and to use the proceeds in defraying In effect the reoperating costs. ceiver without any authority from the court, unless it was the implied authority to conduct the business

according to the custom of the company, appropriated interline freight balances to paying operating expenses, or, to state it otherwise, by that means raised funds to conduct operations. The only evidence as to the nature of the claims is the testimony of the receiver that it was "interline freight balances and per diem and freight claims," including items paid for damages to freight chargeable to receiver.

It is not shown that the interveners made any inquiry into the authority of the receiver, or relied upon any action of the court or upon any action or nonaction of prior lienholders, or made any investigation as to whether operating income was equal to operating expenses. There is no evidence that the lienholders had any knowledge even of the receivership, but if it may be assumed that they knew of it as a matter of public information, still