Security Trust Co. v. Goble Railroad

Mr. Justice Wolverton, after stating the facts in the foregoing terms, delivered the opinion of the court. 1. There is no evidence accompanying the record, and we are to inquire whether the conclusion of law noted is — 373 — (leducible from the findings of fact, the paramount question being whether these labor and supply claimants are entitled to a preference in payment over the mortgage creditor. The claimants base their right to such preference upon the major premise, namely, that the defendant company is a railroad' corporation in the ordinary acceptation of the term, in the discharge of quasi public functions, such as a common carrier of freight and passengers for hire, which they urge is established by the findings of fact; and that, having performed labor and services and furnished supplies to such a corporation operating in that capacity within the last 90 days preceding the appointment of a receiver, they are entitled to a priority over the Security Company’s lien upon the proceeds of the sale or the corpus of the property, and hence to a preference in payment. The primary and essential resource for the reimbursement and payment of the interest charges of the mortgagee of the properties of such a railroad is the net income of the road, obtained by deducting from the gross earnings what is required for necessary and managing expenses, proper equipment, and useful improvements. The mortgagee, therefore, in accepting the security, tacitly and impliedly agrees that the current debts and liabilities arising in the ordinary course of business in operating the road shall be paid from the current receipts before he has any right to such income, the underlying idea or controlling feature in this relation being that, from considerations of both public and private interest, the railroad should be kept and maintained a going concern. The security of the mortgagee is essentially and best subserved when these conditions are sustained, as it conduces to the preservation of the mortgaged property ; hence it is that labor performed, services rendered, and supplies contributed and furnished, that conduce to the maintenance and continuance of the enterprise, and therefore to the con — 374 — servation and preservation of the mortgaged security, are in equity and good conscience entitled to precedence when it comes to an adjustment of the earnings, and .in many instances the marshaling of the assets or proceeds arising from the corpus of the property. For the purpose of doing justice between the parties thus concerned, equity will take note of the gross earnings, the current operating charges, and the debts and liabilities arising on that account, and, if anything has been taken from what is styled by Mr. Chief Justice Waite, in Fosdick v. Schall, 99 U. S. 235, as the “current debt fund,” and put into that which belongs to the mortgage creditors, it will, when the property has gone into the hands of a receiver, and especially at the instance of the mortgagee, either for management and keeping the road in operation, or for winding up the'business and disposing of the corpus of the property, restore that which has been misplaced, and, if necessary to a full adjustment, declare a preference upon the proceeds arising from the sale of the property; the rule governing all such cases being “ that, if current earnings are used for the benefit of mortgage creditors before current expenses are paid, the mortgaged security is chargeable in equity with the restoration of the fund which has been thus improperly applied to their use”: Burnham v. Bowen, 111 U. S. 776 (4 Sup. Ct. 675). The rule has since been several times reaffirmed by the same court. These observations as to the law upon the subject are fully sustained both upon principle and authority. See Fosdick v. Schall, 99 U. S. 235 ; Burnham v. Bowen, 111 U. S. 776 (4 Sup. Ct. 675); McCornack v. Salem Ry. Co. 34 Or. 543 (56 Pac. 518, 1022); Miltenberger v. Logansport Ry. Co. 106 U. S. 286 (1 Sup. Ct. 140); St. Louis, A. & T. H. R. Co. v. Cleveland G. G. & L. Ry. Co. 125 U. S. 658 (8 Sup. Ct. 1011); Thomas v. Western Car Co. 149 U. S. 95 (13 Sup. Ct. 824); Virginia & A. Coal Co. v. Central R. & — 375 — B. Co. 170 U. S. 355 (18 Sup.Ct. 657); Southern Ry. v. Carnegie Steel Co. 176 U. S. 257 (20 Sup. Ct. 347.) The right thus established, giving labor and supply claimants contributing to the maintenance and operation of a railroad whose demands fall within the current expense account a priority over a mortgage incumbrance, is, however, notably an exception to the general rule. As was said by Mr. Justice Bean in Merriam v. Victory Min. Co. 37 Or. 321, 332 (60 Pac. 999): “The right of a court appointing a receiver to give priority of payment to unsecured debts over the lien of a mortgage is restricted to creditors of railroads, which are public concerns, and is only exercised as to them under special circumstances, and in favor of a particular class of claims.” See, also, United States Invest. Corp. v. Portland Hospital, 40 Or. 523 (64 Pac. 644, 67 Pac. 194, 56 L. R. A. 627). So, it is said by Mr. Justice Brewer in Kneeland v. American Loan Co. 136 U. S. 89 (10 Sup. Ct. 950): “It has been assumed that a court appointing a receiver could rightfully burden the mortgaged property for the payment of any unsecured indebtedness. Indeed, we are advised that some courts have made the appointment of a receiver conditional upon the payment of all unsecured indebtedness in preference to the mortgage liens sought to be enforced. Can anything be conceived which more thoroughly destroys the sacredness of contract obligations? One holding a mortgage debt upon a railroad has the same right to demand and expect of the court respect for his vested and contracted priority as the holder of a mortgage on a farm or lot. So, when a court appoints a receiver of railroad property, it has no right to make that receivership conditional on the payment of other than those few unsecured claims which, by the rulings of this court, have been declared to have an equitable priority (being such as we have hereinbefore indicated and treated of). No one is bound to sell to a rail — 376 — road company, or to work for it; and whoever has dealings with a company whose property is mortgaged must be assumed to have dealt with it on the faith of its personal responsibility, and not in expectation of subsequently displacing the priority of the mortgage liens. It is the exception, and not the rule, that such priority of liens can be displaced. We emphasize this fact of the sacredness of contract liens for the reason that there seems to be growing an idea that the chancellor, in the exercise of his equitable powers, has unlimited discretion in this mattér of the displacement of vested liens.” See, also, St. Louis, A. & T. H. R. Co. v. Cleveland, C. C. & I. Ry. Co. 125 U. S. 658 (8 Sup. Ct. 1011). The doctrine has been especially adhered to and reaffirmed in Thomas v. Western Car Co. 149 U. S. 95 (13 Sup. Ct. 824); Virginia & A. Coal Co. v. Central R. & B. Co. 170 U. S. 355 (18 Sup. Ct. 657); Southern Railway v. Carnegie Steel Co. 176 U. S. 257 (20 Sup. Ct. 347). The sacredness of contract rights and obligations cannot, therefore, be impinged upon or ruthlessly broken over, and he who would displace such rights must do so through contractual relations also arising by express or implied assent thereto, either by direct affirmance of the articles of contract or in the light of the conditions, laws, and usages prevailing, and, unless he is able to establish such relations, the courts are powerless to aid him, however deserving and meritorious may be his demands. 2. Coming now to the facts as indicated by the findings of the court, we may ascertain whether the claimants are within the exception and entitled to its benefits. The objects of the railroad company in its organization were, among other things, to construct, build, acquire, own, operate, and maintain railroads ; to engage in the business of carrying and transporting, for hire, passengers, logs, freight, and goods, wares, and merchandise. The company had constructed its road a portion of the way designated — 377 — by its articles of incorporation (to what distance it does not appear), and the court finds that at the time of the commencement of this suit, and for about five months prior thereto, the company “ was engaged in the operation of said railroad, and in getting out logs for transportation by its railroad, and its principal business was in getting out logs and transporting them over said railroad and selling the same.” It appears, therefore, that this company was engaged in the operation of its railroad, and it would seem to be a reasonable inference therefrom that it ivas carrying on the business for which it was organized—that is, the transportation of passengers and freight for hire— in which respect its functions were quasi public, so as to entitle persons performing labor for it and furnishing supplies necessary to its operation to a preference over the mortgage creditor in payment out of the earnings, if any such were misapplied to the payment of the Security Company’s mortgages and improvements of the road as found. But the railroad company was engaged also in getting out logs, which, together with transporting them over its road and selling them, constituted its principal business. Such is manifestly not the business of the ordinary railroad, and does not partake in any manner of a public service. The road, therefore, although being operated for the purpose for which it was organized—that of the carriage of passengers and freight—thus giving it the semblance of a quasi public concern, was principally engaged in a business that was exclusively of private concern, namely, getting out logs, transporting and selling them, presumably upon its own account and for its own benefit. Now, we must assume, as the facts exclude any other reasonable hypothesis, that the labor and services rendered and supplies furnished were rendered and furnished the company for the carrying on and prosecution by it of the principal business in rvhich it was then en — 378 — gaged, and not in the ordinary operations of its railroad, which being so, the claimants have not brought themselves within the exception herein ascertained and defined, and the general rule must apply. To hold otherwise would be to put laborers in logging camps and persons furnishing supplies thereto upon a like footing with railroad employés contributing their labor and substance to the maintenance of the road, and this the law will not warrant or permit us to do. The interveners are therefore not entitled to a preference over the mortgages of the Security Company in the proceeds of the sale of the property. 3. The finding that the earnings of the railroad company were more than -sufficient to pay all its operating expenses, including the claims of the petitioners, cannot help them, as the earnings must necessarily have arisen from the operations of the private business in which the company was engaged, and the labor performed and supplies furnished were not necessary for keeping the road a going concern, and thereby conserving the security of the mortgagee. It appears from the'findings, however, that the receiver has realized from the sale of other personal property belonging to the defendant railroad company not covered by the mortgages the sum of $670, and that, while he has paid said sum out upon the expenses of the suit and receivership, he has not as yet had any settlement with the court. As the primary purpose of the suit culminating in the appointment of the receiver was to foreclose the mortgages, the costs of the proceeding incident to the foreclosure should be borne and paid out of the corpus of the mortgaged property, and the $670, or such portion thereof as has not been disbursed in defraying the expenses of the receivership other than those incident to the foreclosure, should be shared among the general creditors of the company, the mortgagee becoming a general creditor as to the — 379 — balance due after application of the proceeds of the sale of the mortgaged property. In pursuance of these considerations the decree of the circuit court will be modified, and one here entered accordingly, neither party to the appeal being entitled to costs or disbursements. Modified.