Gulf, M. & N. R. Co. v. Hill Mfg. Co.

Ethridge, J., delivered the opinion of the court. The appellant filed a bill in the chancery court of Chickasaw county, alleging that on the 27th day of January, 1912, it delivered to the New Orleans, Mobile & Chicago Eailroad Company (which at that time owned the line of railroad now owned and operated by the appellant) a shipment of cotton being destined to Lewiston, Me., the freight amounting to two hundred twenty-six dollars and one cent, to be transported to said point, but that the said railroad company failed to deliver the forty-seven bales of said cotton to the value of two thousand, four hundred eleven dollars and sixey-seven cents; that said railroad company having failed and refused to pay for said cotton, that suit was filed in the circuit court of the state, and having lost its cause in said court, appealed to this court, where such judgment was reversed and judgment entered for the plaintiff for said amount, with six per cent, interest thereon; that the said New Orleans, Mobile & Chicago Eailroad Company was a corporation of the state of Mississippi, and its railroad lines traverses numerous counties of Mississippi, including .Chickasaw county; that on the 20th day of December, 1909, said New Orleans, Mobile & Chicago Eail-road Company, in violation of the rights of the public and of the complainant, contracted certain debts, giving a mortgage upon its property; that under section 4067, Code of — 657 — 1906 (section 6696, Hemingway’s Code), said mortgage was invalid as to the rolling stock, franchise, and future income against thé claim of the complainant] that thereafter, under the terms of said deed of trust or mortgage, the Metropolitan Trust Company filed a hill in the district court of the United States for the Southern district of Mississippi, Eastern division, in connection with a similar bill filed by the same party in the Southern district, Southern division, of the state of Alabama, praying for a foreclosure of said pretended deed of trust and mortgage in Mississippi and Alabama, and charges that said bill was filed by collusion with the New Orleans, Mobile & Chicago Railroad Company for the purpose of defeating its incurred obligations, debts, and liabilties of its regular business of a common carrier of passengers and freight, among which was that of the complainant, and in said bill asked for the appointment of a receiver to take charge of said property and operate same pending foreclosure; that in accordance Avith the prayer of said bill a receivér was appointed and entered upon his duties as such; that a decree was entered ordering a foreclosure and that said property was sold on the 11th. day of December, 1916, to one Chauncey H. Murphy, who in turn sold it to the present defendant, the Gulf, Mobile & Northern Railroad Company; thereafter defendant took entire possession of all of said property, including the rolling stock, franchise, future rights, etc., in violation of the statute of the state of Mississippi above mentioned; that the full record of said proceedings of foreclosure appear in file No. 12 in the equity files of the United States District Court at Mobile, Ala., and file No.-in equity in the Eastern division of the Southern district of Mississippi, which said bill states that said file is made Exhibit E to the bill, but which said exhibit is not fully copied into the record before us, but the record in the case of Rospigliosi et al. v. N. O., M. & C. Railroad Co., et al., on appeal from the district court of the Southern district of Alabama to the circuikcourt of appeals challeng — 658 — ing said decree is made an exhibit by agreement to the present record. The bill further alleges that the sales to the appellant, who was defendant below, are void and of no effect against the claim of the complainant, and that said property conveyed to the defendant is a trust in the hands of the defendant for the purpose of paying the debts contracted in carrying on the business, the liabilities incurred as a common carrier, and damages to persons and property inflicted by the New Orleans, Mobile & Chicago Kailroad Company; that the appellant has received large profits and income, which it has converted to its own use and all of which it holds in trust as a trust fund for the payment of the debts, liabilities, and damages of said railroad company, and is subject to full payment of same, but that the amount of the profits and income is unknown to complainants and peculiarly within the knowledge of the defendant, and that an accounting and discovery thereof is necessary on the part of the defendant to determine the same. The bill prays that a decree be entered declaring the deed of trust and mortgage given by the New Orleans, Mobile & Chicago Kailroad Company above mentioned to be void in so far as the rights of tli’e complainant are concerned, and to subject the same to the payment of its said judgment and costs, and that a lien be declared against said property, and it be further ordered to pay the said judgment and costs, and, if necessary, that defendant be required to make a full discovery of all the profits, income and earnings of said property since it came into its possession; that the same be declared a trust fund in the hands of the defendant for the purpose of paying complainant’s judgment; and if mistaken in the relief prayed, for other, further and general relief. Answer under oath was specially waived in the bill. There was a demurrer to the bill, which was overruled, and the defendant answered, admitting that it owns and operates the line of railroad set forth in the bill; admits that the New Orleans, Mobile & Chicago Railroad Com — 659 — pany only owned and operated a part, but not all, of tbe railroad now owned by the defendant; admits that the complainant recovered judgment against the New Orleans, Mobile & Chicago Railroad Company as alleged in the bill, and that the said New Orleans, Mobile & Chicago Railroad Company was a corporation of Mississippi, and that it possessed a franchise and then possessed future income, rolling stock, tracks, rights of way, depots, and equipment necessary for business of a common carrier of freight and passengers; admits that said railroad company executed the deed of trust mentioned in the bill, including the rolling stock, franchise, and future earnings, but denies that said mortgage was in violation of the rights of the public and of the complainant and denied that it was void as against complainant or in contraven- , tion of any statute of the state of Mississippi, but avers, that said mortgage debt was valid at the time it was executed and was a bona-fide indebtedness due by the New Orleans, Mobile & Chicago Railroad Company; admits the allegation with reference to the filing of suit in the United States district court, but denies that the bill of complaint was filed by collusion; admits that the receiver was appointed and that until' January, 1917, such receiver had possession and control of said property and operated it as a common carrier; admits that an order for the sale of said property, including the rolling stock and future earnings and all other property of the New Orleans, Mobile & Chicago Railroad Company, was entered in order to effect the payment of the indebtedness for which the deed of trust was given, and for the payment of such other claims as were entitled to priority, and that under such'orders of said court the property ivas sold to Murphy and was confirmed by the court, but that there was an appeal to the circuit court of appeals, where the decree of the district court of Mobile was affirmed in the latter part of 3916; admits that Murphy convened said property to this defendant and that it is now the owner thereof; admits that it took possession of said property, including — 660 — the rolling stock, but denies that it took possession of the future earnings of the New Orleans, Mobile & Chicago Eailroad Company, and denies that its possession has been in violation of any right of the state of Mississippi; denies that the conveyance from Murphy to it ivas void as against the public or claims of the complainant; denies that the purchase of rolling stock, income, and future earnings is void or a pretended conveyance, but affirms that it is valid and binding and it was a 'bona-fide purchaser at said sale; denies that it received large profits and income from the property it acquired from Murphy and that it converted such property and income to its own use, and avers that its entire profit and income has been devoted to the payment of its employees and the many obligations incurred in the operation of the railroad; denies that it ever came into the possession of any income or future earnings of the New Orleans, Mobile & Chicago Railroad Company; denies that it holds the property in trust for the payment of the debts and liabilities of the New Orleans, Mobile & Chicago Railroad Company; and avers that the complainant has no right of any character in the property now owned by it. It avers that the property ivas operated by the receiver under the orders of the court, and that for a long period, more than three years, the claim in question ivas not presented to the receiver, nor were any steps taken by complainant to protect its alleged rights to any funds or property in the possession of the receiver, or funds that came into court as the proceeds of sale of any rolling stock or franchise, and that complainant was advised of the pendency of the receivership and knew the situation of the said New Orleans, Mobile & Chicago Railroad Company. It then avers that, if any rights were possessed by complainant, complainant failed to take advantage thereof; that the rolling stock now possessed by appellant was purchased subject to liens for the purchase money which are now outstanding and unpaid; that a portion has been paid by the defendant, but out of the in — 661 — come and earnings of the defendant, and no.t of the New Orleans, Mobile & Chicago Railroad Company. It appears from the record of the proceedings of foreclosure in the United States district courts of Alabama and of Mississippi that the court in appointing the receiver forbade any persoh levying on or talcing «such property under execution, and reserved to itself in said proceedings the right to pass upon all questions of priority of claims against the New Orleans, Mobile & Chicago Railroad Company. In the administration of the receivership during that period of time the court adjudged certain claims as having priority over the mortgage and allowed their payment by the receiver. There is no allegation in the bill of complaint as to how many claims of the kind involved in this suit were outstanding and unpaid, nor is there any averment as to what specific property was owned by the Mississippi corporation in the state of Mississippi at the time of the accrual of complainant’s claim, or at any time thereafter, and while the bill states facts upon which a discovery could have been predicated, it waived that right to a discovery by waiving answer under oath, so no feature of discovery is involved in this litigation. The section relied upon by the appellee to impose a trust upon the property so as to give it a superior right is section 4067, Code of 1905 (section 6696, Hemingway’s Code), Avhich reads as follows: “A mortgage or deed of trust, conveying the income of future earnings or the rolling stock of a railroad company shall not be valid against liabilities incurred by such company as a carrier of freight and passengers, or for damages sustained by persons or property.” Does this section create any lien or impress any trust upon the property of a railroad company prior to its reduction to judgment? And, if so, did the failure of the appellee to propound its claim for priority in the federal district court defeat its rights? — 662 — We do not think that the statute was intended to go to the extent contended for by the appellee here. The primary purpose of the statute was to prevent the mortgagees of the railroad company from securing the total earnings of the railroad company under its contract and thus postpone all other claimants against the railroad company until it was satisfied. It was intended primarily to have the operating expenses of the railroad company and claims for damages growing out of its torts or breeches of contract paid before the mortgagee could take pos- . session of the earnings of the railroad company while it was. being operated as a going institution. It may be that the statute could be construed so as to protect the owners of claims of the character here involved and others named in the statute, if the proceeding was nothing more than a sale under the mortgage, provided, of course, that the buyers at the mortgage; sale had knowledge of the existence of such claim. The statute is in derogation of the common right in making contracts, and its terms will not be unduly extended. The court will seek to give the statute a reasonable and fair construction, neither abridging the terms of the statute beyond its purpose nor extending them beyond their evident purport. The public is vitally interested in having railroads operated; and where one company operating a line of railroad becomes insolvent and unable to pay its obligations and continue its operations, it is necessary that some other person or corporation may be able to purchase and operate the railroad. If such person or' corporation must buy at its peril as to all existing claims, regardless of whether they are evidenced by any record affecting' the title or by any knowledge of the buyer, then it is manifest that no person or corporation would buy and operate an insolvent railroad. There is nothing in the record to show that the purchaser had any knowledge of the claim in suit, nor that any lis pendens notice or other notice was filed of record, so as to charge buyers with notice of the claim. It is manifest also that, if the complainant had a superior right to the buyer of — 663 — the property, claims of its class, that is, claims favored by the statute, could not go beyond or exceed in value the property excepted from the mortgage by the statute; that is, when the full value of the property was taken up in paying claims of the class named in the statute, in good faith, under the statute the buyer could not be further harassed by executions. We are of the opinion that no lien attaches to such property as a result of such claims until the claim is reduced to judgment and enrolled as required by laAV to impress judgment liens upon other property. B. T. & G. Co. v. Hofstetter, 85 Fed. 75, 29 C. C. A. 35; Frazier v. Railroad, 88 Tenn. 138, 12 S. W. 537; Chattanooga, etc., Railroad Co. v. Evans, 66 Fed. 809, 14 C. C. A. 116; King v. Thompson; 110 Fed. 319, 49 C. C. A. 59; B. C. R. & N. R. Co. v. Terry, 48 Iowa, 458; 33 Cyc. 540; 14 C. J. 1026. This being true, the judgments would be payable in their order of priority, and before a suit of this kind could be sustained it would have to be reasonably evident that the complainant’s claim was not subordinate to other enrolled judgments or liens created bv law or contract. The statute does not have the effect contended for by the appellee. His right to resort to the property exists only when he has secured a lien by judgment or by contract as to such claims. The bill fails to state a case, under our view of the statute. The decree was a personal judgment against the railroad company. Under no state of facts shown by this record could that decree be upheld. The federal court had jurisdiction of the subject-matter and of the parties, and was empowered to appoint the receiver and to dispose of the Avhole matter, subject only to such limitations as are found in the statutes of the states or of the United States. The federal statutes permit a receiver of railroads to be sued in a court of laAV; in other words, it may reduce its claim to judgment without going into the federal court, but before it can secure priority of its claim over other claims, where the federal court has provided that it itself aa ill determine all questions of priorities, it must go into — 664 — the federal court and establish its right to priority. Within their sphere the federal courts are supreme. It is not competent for a state court to set aside and modify the federal court’s judgments where it has jurisdiction of the subject-matter and power to adjudicate the questions covered by its decrees. See authorities cited in L. C. P. edition, Digest of Decisions of the United States supreme court, title “Courts,” division VI — d. In the foreclosure proceedings the federal court reserved jurisdiction to deal with all-claims and other matters on the application to it by the the proper parties; and in our opinion the complainant must resort to that court if he has any right now to establish a claim of priority as to the.property here involved. The judgment of the court below will be reversed and decree entered here for the appellant, without prejudice to the right of the complainant, the appellee, to propound his claim in the proper federal court. Reversed and dismissed.