Barnum v. Southern Oregon Traction Co.

HARRIS, J. The evidence shows that the earnings of the traction company were deposited in the Jack — 658 — son County Bank. Barnum contends that there is evidence showing that the Bullis Company advanced and loaned moneys to the traction company, thus enabling the traction company to operate its railroad, and that the moneys so loaned were also deposited in the Jackson County Bank and commingled with the current earnings, so that it is now impossible to determine whether the interest payment of $1,710 made on February 27, 1918, was made with current earnings or with borrowed moneys. We do not find it necessary to determine what the fact may be, but for the purpose of this discussion we shall assume, without deciding, that the whole sum of $1,710, paid on the interest on February 27, 1918, was made with current earnings. Although there may be some room for arguing otherwise, nevertheless, we shall assume, without deciding, that all the current earnings were earnings from the operation of the railroad as a public utility: See Security Trust Co. v. Goble R. R. Co., 44 Or. 370, 377 (74 Pac. 919, 75 Pac. 697). 1. The general rule, of course, is that a secured debt has priority over a subsequent unsecured debt; but a notable exception to this general rule is found in the doctrine which gives in cases of railroad receiverships priority to unsecured claims for labor or supplies contributing to the maintenance and operation of the railroad. A person taking a mortgage on railroad property is held impliedly to agree that the current debts and liabilities incurred in the ordinary course of the operation of the railroad shall be paid from the current receipts before he has any right to such income. This doctrine is based upon the theory that it is to the interest of the mortgagee that the railroad shall be kept a going concern and thus prevent the impairment of the security of his — 659 — claim, and that it is to the interest of the public that the trains which serve the public shall not cease to run. 2. Whenever a labor or supply claimant asserts that the rule which gives his claim priority has been violated, a court of equity will ascertain the amount of the gross earnings and then figure the amount of the current expenses; and if it is found that moneys have been taken from the current earnings and used to pay interest on a mortgage covering the railroad property, and if it is further found that there are not sufficient moneys in the current earnings fund with which to pay such labor or supply claimant, the court will compel the mortgagee to make restoration of so much of the moneys paid on the interest as may be necessary to satisfy the labor or supply claim. Restoration may be accomplished by making the labor or supply claim a lien on the corpus of the property, and if the railroad property is sold, such part of the proceeds of the sale as is necessary can be applied in payment of the claim. We understand from the record that the railroad property was sold at a foreclosure sale and that Barnum was the purchaser, and that the sale price did not exceed the amount due on the note and mortgage. We also understand that the power company is attempting to impose a lien on the railroad property so as to compel Barnum to pay the amount of the power company’s claim. 3. However, there is a limitation upon this rule under which courts of equity will, when necessary, compel restoration of moneys diverted from the current earnings fund. Since the right of priority arises out of equitable considerations, the right must be accepted and exercised subject to equitable considerations. It is equitable that there shall be a time limit upon the — 660 — right of priority, and hence it is said that only those claims which have accrued within a reasonable time before the appointment of the receiver will be given preference over claims for interest due on a mortgage debt; and although there is no arbitrary time fixed, the period of six months is generally prescribed as the time limitation. Of course, for sufficient reasons courts may and will extend the time limitation beyond six months, or fix it at a less period than six months. We shall treat the claim of the power company as one which is clearly entitled to preference, but we are unable to assign any good reason for the extension of the time limitation beyond six months, usually fixed for labor and supply claims: Blair v. St. Louis H. & K. R. Co. (C. C.), 22 Fed. 471; Thomas v. Peoria R. I. Ry. Co. (C. C.), 36 Fed. 808, 819; Central Trust Co. v. Clark, 81 Fed. 269, 271 (26 C. C. A. 397); International Trust Co. v. Townsend Brick & Contracting Co., 95 Fed. 850, 857 (37 C. C. A. 696); Burnham v. Bowen, 111 U. S. 776 (28 L. Ed. 596, 4 Sup. Ct. Rep. 675, see, also, Rose’s U. S. Notes); Southern Ry. Co. v. Carnegie Steel Co., 176 U. S. 257 (44 L. Ed. 458, 20 Sup. Ct. Rep. 347). 4. The diversion must have occurred within whatever period is adopted as the one during which labor and supply claims must have accrued to be preferred. Restoration will be compelled if the diversion was made within whatever period is adopted as the time limit; but, if the diversion was made before the beginning of such period, restoration will not be compelled: John A. Roebling’s Sons Co. v. Idaho Ry. L. & P. Co., 243 Fed. 527 (156 C. C. A. 225); 1 Tardy’s Smith on Receivers, § 423, p. 1177. 5. There are three statements or bills, exhibits “A,” £ÍB,” and ££C,” showing the amount of electric current furnished by the power company. Exhibit — 661 — “A” covers light and heat used by the traction company in its office at Medford.’ Exhibit “B” embraces the light and power used by the traction company at its substation in Medford and also a few supplies furnished; and exhibit “C” includes only the electric current used for lights in Jacksonville. Each of these three statements gives the account from and including the month of May, 1917, to and including the month of October, 1918. Turning to exhibit “A,” we find that the charges for light and heat aggregated $71; that the credits aggregated $68; thus leaving a balance of $3. Exhibit “A” shows that on August 1, 1918, the account balanced, so that it can be said that the unpaid indebtedness of $3 accrued after August 1, 1918. Upon examination of exhibit “B,” we find that from May 1, 1917, to November 1, 1918, the traction company used electric current as follows: For power, $1,976; for supplies, $11.95; for lights, $23.90. The light account ran from 90 cents a month, the lowest, to $2.90, the highest. The power account varied from $92 for the month of March, 1918, to $142 for the month of December, 1917. Supplies were furnished in four several months only. Exhibit “B” shows credits totaling $448.35, leaving a balance of $1,563.50 due and unpaid. However, upon further inspection we find that if we include only the six months immediately preceding November, 1918, there was furnished at the substation during that period electric current as follows: For power, $670; for light, $5.80; and supplies were furnished of the value of $2; and the aggregate value of the electric current and supplies was $677.80. Although the credits for the same period totaled $9.95, we shall assume that these credits should be applied on the unpaid debits which accrued prior to May, 1918. — 662 — Exhibit “0” shows debits amounting to $19.80, and credits aggregating $16.80, leaving a balance of $3. This account shows that the traction company was charged $1 per month from and including the month of May, 1917, to and including the month of October, 1918. The last credit was for $6.20 paid July 22, 1918, and the next to the last payment was made February 25, 1918. If we leave out of our calculations the credits amounting to $9.95 shown in exhibit “B,” the total unpaid indebtedness which accrued during the six months period amounts to $683.80. If we now look into . the expenses and earnings of the traction company we shall find that the total operating expenses from and including September, 1917, to and including October, 1918, were $22,874.12; and this includes $1,710 paid on February 27, 1918, on the interest, as well as the sum of $452.14 paid in satisfaction of taxes; and the earnings for the same period beginning with September, 1917, and ending with October, 1918, were $21,807.39. But if we calculate the earnings for the six months period beginning with May, 1918, and ending with the following October, we find that they aggregated $10,276.48, and the operating expenses for the same six months period amounted to $6,447.84, thus leaving a net balance in the current earnings fund of $3,828.64, or considerably more than not only the indebtedness accruing for electric current during the six months period but the unpaid indebtedness accruing after May 1, 1917. 6. If we make our calculations so as to cover the period beginning with February, 1918, and ending with the following October, we shall find that the total earnings were $13,923.57, and the total operating expenses were $12,512.78, including $1,710 paid to Barnum on interest; thus leaving nearly enough in — 663 — the current earnings fund to pay the total balance due the power company. The record does not show, nor is it claimed, that the power company took any steps or attempted in anywise to compel payment of its claim until it filed its petition in intervention. The attending circumstances, as we view them, argue against rather than for any extension of the usual six months’ time limitation. We are told that the receiver was appointed on November 19, 1918; and, hence, the alleged diversion, which resulted from taking $1,710 out of the current earnings fund on February 27, 1918, and applying it on the interest due on the mortgage, occurred nearly three months prior to the beginning of the six months period, and for that reason the power company can now compel a restoration of the moneys so diverted. The decree is affirmed. Aeeirmed. Decree oe Lower Court Modieied on Motion and Remanded. Burnett, C. J., and McBride and Benson, JJ., concur. Decree of lower court modified on motion April 19, 1921. On Motion to Modify. (197 Pac. 269.) Department 1. Claiming that it is entitled to a modification of the decree which was entered in the trial court and affirmed by this court (Barnum v. Southern Oregon Traction Co., ante, p. 652 (195 Pac. 580), the power company has petitioned that the decree be so modified as expressly to declare that a portion of the power company’s claim shall be a preferred charge against — 664 — the surplus income arising under the receivership. In the original opinion we ruled that the mortgagee cannot be compelled to restore to the current income fund the interest payment made on February 27, 1918, for the reason that the payment was made more than six months prior to the date of the appointment of the receiver. The power company now says that it accepts, without further objection, the ruling expressed by us in the original opinion; but the power company also says that under the terms of the decree the mortgage debt is treated as a prior charge not only against the corpus of the railroad property, but also against the “surplus” or “net income” arising under the receivership. Barnum urges that the decree merely declares that the power company’s claim cannot be made a preferred charge against the mortgaged property, and that the decree adjudicates no other question. Decree oe the Lower Court Modified on Motion. Mr. Porter J. Neff, Messrs. Morrison, Dunne & Bro-beck and Mr. James T. Chinnock, for the motion. Mr. Ous Newbury and Mr. A. C. Emmons, contra. HARRIS, J. 7. The language found in the decree can be better understood if we first direct attention to the pleadings. It will be recalled that at some time in October or November, 1918, Barnum began this suit in foreclosure. In one of the briefs it is said that a receiver was appointed on November 19, 1918. The power company filed a petition in intervention on November 21, 1918, and in its petition the power company alleged, in paragraphs 3, 4 and 5 that between the first day of August, 1917, and the first day of November, 1918, the petitioner delivered — 665 — to the traction company electric current for the purpose of light and power in connection with the operation of the railroad; that the electric current so furnished was reasonably worth a stated sum, and that a certain sum was due and unpaid; that “during all said time” the traction company operated the railroad with the electric power and “said electric current was actually furnished and delivered to the defendant and by it actually used in the operation of said railroad and in lighting its station and office.” That “during said period the current earnings of said railroad company were sufficient to pay the operating expenses thereof, including the amount due to the plaintiff as aforesaid, but that said current earnings, instead of being applied to the payment of operating expenses of said railroad, including the amount due plaintiff, were diverted to the defendant company to the payment of interest on the indebtedness due plaintiff to the making of permanent improvements in and additions to said railroad, which were designed to and did increase the value of said property, and consequently the security of plaintiff under its mortgage on the indebtedness due it as alleged in its complaint.” The petition concluded with a prayer that the court appoint a receiver in accordance with the prayer of the plaintiff’s complaint “only on condition that said receiver be directed to pay the claim of this petitioner in full from the earnings of said property while operated by such receiver, and, if such earnings be insufficient, then from the corpus of the said property. And further, that said receiver be ordered and directed to so pay said claim of this petitioner as a preferred claim before any payment is made to plaintiff upon its said mortgage, and for such other and further relief as the court may deem just and equitable.” — 666 — The evidence showed that the electric power was used by the traction company in the operation of its railroad and in lighting its station and office as alleged by the intervener. It is contended in behalf of Barnum that the petition in intervention is insufficient to show that the claim of the power company is a preferential claim; but we are unable to concur in this contention. The petition recites every ultimate fact necessary for the establishment of a preferential claim against not only the corpus of the mortgaged property, but also against the “net income.” In other words, if the evidence had supported the petition, Barnum would have been obliged to restore to the current income fund moneys paid on the mortgage debt; but he succeeded in avoiding any obligation to restore when it appeared that the interest payment had been made more than six months before the appointment of a receiver. If the interest payment had been made within six months before the receivership, restoration could have been compelled for the purpose of paying the portion of the power company’s claim which had accrued within six months before the appointment of the receiver. In the original opinion we ruled that the power company’s claim belonged to that class of claims which are entitled to preference. In other words, the claim of the power company constituted “a debt of the income” and as such was an equitable charge upon the “current income” of the mortgaged railroad. Whenever such an “equitable charge” upon the “current income” is incurred within a reasonable time before the appointment of a receiver and “remains unpaid when the railroad passes into the possession of the court of equity, this ‘equitable charge’ — 667 — is continued, and attached to the ‘surplus income’ arising under the receivership”: International Trust Co. v. T. B. Townsend Brick & Contracting Co., 95 Fed. 850, 860 (37 C. C. A. 396). See, also, Burnham v. Bowen, 111 U. S. 776, 782 (28 L. Ed. 596, 4 Sup. Ct. Rep. 675, see, also, Rose’s U. S. Notes). If the interest payment had been taken out of the “current income” fund at any time within six months prior to the appointment of the receiver, the mortgagee would have been obliged to restore to the “current income” fund the moneys received in payment of interest if the “net income” in the hands of the receiver was insufficient to pay the power company’s claim. A part of the power company’s claim accrued more than six months prior to the appointment of a receiver; and a portion of the claim, aggregating more than $600, accrued within six months before the appointment of a receiver. All that part of the power company’s claim which accrued more than six months before the receivership must be treated as general indebtedness without any rights of preference; but the remaining portion which accrued within six months before the receivership must be treated as a preferential claim. The power company contends that, so far as its claim against the traction company is concerned, the decree of the trial court presents itself in two phases upon this appeal: (1) The relative rights of the power company and Barnum considered with reference to the corpus of the mortgaged property; and (2) the relative rights of the power company and Barnum considered with reference to the “net income” arising under the receivership. Barnum con — 668 — tends that the appeal presents only the first phase. In onr original opinion we decided the first phase and decided it against the power company; and with that decision the power company now says it is satisfied. The issues arising out of the amended complaint filed by Barnum in the foreclosure suit as well as those arising out of the power company’s petition in intervention were all tried and determined in the foreclosure suit. Besides adjudicating the amount due Barnum on the note and decreeing a foreclosure of the mortgage, the decree also adjudicated the claim advanced by the power company in its petition in intervention. The power company appealed from that part of the decree which adjudicated its claim against the traction company. When the receiver was appointed on December 19, 1918, there were no moneys on hand, and apparently there were no assets except the mortgaged property. Evidently there were no moneys in the hands of the receiver even as late as March 10, 1919, the date when the decree was entered, and consequently the main effort of the power company was to fasten its claim upon the corpus of the mortgaged property, while the main effort of Barnum was to prevent the power company’s claim from attaching to the corpus of the railroad; and the natural result was that but little attention was given by the litigants to the question of paying the power company’s claim out of any “net income” which might subsequently arise from the receivership. The appeal was argued on January 20, 1921; and on that day the power company filed a certified copy of the supplemental report of the receiver. From — 669 — this supplemental report it appears that on May 27, 1919, the receiver filed “a final report.” The supplemental report was filed on October 16, 1919. In his supplemental report the receiver stated that he had on hand, after paying all expenses of operation, a net balance of $396.16. Under date of January 22, 1921, Barnum caused to be forwarded to our clerk a certified copy of an order made by the Circuit Court together with a copy of a notice mailed to the attorney for the power company and to other interested attorneys. From these copies it appears that on October 31, 1919, the attorney for Barnum notified the attorney for the power company, as well as other interested attorneys, that he would appear in the Circuit Court on November 12, 1919, and ask for an order directing the receiver to pay to Barnum this sum of $396.16, which remained in the hands of the receiver after the settlement of receivership and operation expenses; and accordingly on November 15th, apparently the earliest date when the matter could be heard, the court, upon motion of Barnum, directed the receiver to pay to Barnum the sum of $396.16 “for the purpose of applying the same upon the plaintiff’s unsatisfied judgment.” We understand that the power company did not appear in the Circuit Court on November 15, 1919; and, as we understand it, the company declined to appear in response to Barnum’s notice for the reason that it took the position that the decree of March 10, 1919, was a final adjudication of the power company’s rights. At any rate the power company at this time insists that the decree of March 10, 1919, was an adjudication of all its rights, and that the order of November 15, 1919, was merely in execution — 670 — of the decree. Barnum contends, however, that the decree only decided that the claim of the power company could not be fastened upon the corpus of the property, and that the order of November 15th adjudicated the rights of all parties with reference to the sum of $396.16, and that, therefore, not having appealed from the order, the power company is precluded from complaining about the disposition made of the $396.16. The material finding of fact and the important conclusion of law found by the trial court as well as that portion of the decree which the power company appealed from are exemplified in full in the original opinion and need not be repeated here. In its petition in intervention the power company states enough facts to entitle a portion of its claim to a preference of the “net income,” and in its prayer the power company asks “that said receiver be directed to pay the claim of this petitioner in full from the earnings of said property while operated by such receiver * * The finding of fact asserts that the intervener’s claim is not a claim “which can attach as superior to that of the plaintiff by virtue of his mortgage.” The conclusion of law declares: “That no judgment or lien should be entered” in favor of the intervener “as a preferred claim, and the intervener’s complaint in intervention should be dismissed.” In the decree the court ruled that the intervener’s claim was “subordinate and inferior to plaintiff’s claim.” In our view the language employed in the finding of fact, conclusion of law, and decree mean that, as between the mortgage debt, on the one hand, and the intervener’s claim on the other hand, the intervener’s claim is not entitled to any preference rights against either the corpus of the — 671 — railroad property or the “net income.” However, as we have already shown, under the established rule the intervener has a preferential claim upon the “net income” for electric current furnished within six months before the appointment of the receiver. In our view the decree of March 10, 1919, was a final adjudication of the relative rights of the power company and the mortgagee, and the order of November 15, 1919, was simply in execution of the decree: See 3 C. J. 518. Among other assignments of error the power company assigned the following error: “The court erred in not finding and decreeing that intervener was entitled to have applied on the payment of its claim the net earnings of the railroad while in the hands of the receiver.” As previously explained, the attack made by the power company was directed almost entirely against the corpus of the railroad, and the defense made by Barnum was confined to an attempt to protect the mortgaged property against this attack made by the power company; and yet because of the comprehensiveness of the decree the intervener is entitled to a modification of it. The power company is therefore entitled to a modification of the decree so as to give to the power company a preferential right to the “net income” arising from the receivership. Because of the condition of the record, we do not attempt to decide what rights, if any, the power company has against Barnum on account of the payment of $396.16 to him by the receivership. We merely rule that the decree from which the power company appealed is an adjudication of the relative rights of Barnum and the power company; but we do not attempt to determine whether any subsequent steps were taken properly or improperly. — 672 — The decree is modified and the cause is remanded to the Circuit Court for such further proceedings as may be necessary and proper. Affirmed. Decree of Lower Court Modified on Motion and Remanded. Burnett, C. J., and McBride and Benson, JJ., concur. Disallowed June 8, 1921. On Objections to Cost Bill. (198 Pac. 520.) HARRIS, J. 8. Barnum, the respondent, filed a cost bill, claiming that he was entitled to $75, as costs and disbursements. The power company, the intervener and appellant, also filed a cost bill, claiming that it is entitled to $85.06 as costs and disbursements. The power company asserts that it is entitled to costs and disbursements for the reason that on appeal it secured a modification of the decree rendered by the Circuit Court. Barnum insists that he should have his costs and disbursements for the reason that the decree was affirmed as to its principal features and the modification related only to a matter which was collateral and secondary to the main question litigated in the trial court and presented to the appellate court. The facts connected with the litigation and the steps taken or refused to be taken by the respective litigants are set forth in our opinions heretofore rendered: Barnum v. Southern Oregon Traction Co., ante, p. 652 (195 Pac. 580, 197 Pac. 269); and we think that the circumstances attending this suit are such as to make it proper to refuse to allow costs and dis — 673 — bursements to either party. "We direct that the decree shall be without costs or disbursements to either litigant. Both cost bills are disallowed. Disallowed. Burnett, C. J., and McBride and Benson, JJ., concur.