Pennsylvania Steel Co. v. New York City Ry. Co.

LACOMBE, Circuit Judge. This cause comes here upon exceptions to a report of the special master. Under previous proceedings a considerable sum of money came into the hands of the receiver of the City Company, which was divided into two shares, one to be delivered to the Metropolitan estate, the other to be retained by the city estate. A prior decree provided that out of the share going to the Metropolitan the receiver of the City Company should be reimbursed for certain expenditures made and obligations incurred by the City Company prior to appointment of receivers on September 24, 1907. A more specific statement of the questions presented will be found at the oqtset of the special master’s opinion. “Obligations incurred” cover the claims of a great number of persons from whom the City Company bought materials of various sorts (or obtained services) for which, at the date of receivership, it had not paid. When the process of reimbursement puts in the hands of the city receiver money to pay any of these claims, the holder of such claim, under the Hugh Thomas decision (206 Fed. ■663, 124 C. C. A. 463) may assert that such money is a trust fund which should be applied to the payment of his claim. Therefore the present report deals with a multitude of claims presented by various counsel. A perusal of the opinion will show what an extremely laborious task has been accomplished, practically the trial of very many separate actions. It is desirable that the opinion of this court upon the questions involved should be presented in some way which will not add to the complications already existing, and will submit to the court of review a few concrete propositions; when the opinion of that tribunal — 122 — ás to those propositions is obtained, final disposition of all the claims may easily be had. On most of the propositions advanced in the report this court is fully in accord. In those cases where there is no such accord no attempt will be made ten indicate the result upon individual claims by modifying the report as to such claims, because should the Court of Appeals accept the special master’s conclusion, final disposition will be accomplished by a simple confirmation of the report as to such claims. Should that tribunal accept the conclusion of this court as to any such proposition, the effect thereof upon individual claims can be then determined. [1] The questions presented involve the construction of certain articles of the Metropolitan-City lease. Since these are not set forth in full in the opinion of the special master, it may be convenient to quote them here. Article XII provides: “The lessee shall furnish to the lessor the sum of twenty-three million dollars ($23,000,000) for .the purpose of paying the unfunded debt of the lessor, and providing for expenditures for improving, extending and equipping the lines of railroad and other property of the lessor and its subsidiary companies.” This sum of $23,000,000 was in due course furnished and spent; the article under which the present claims are advanced is article XV, which provides: “The intention of this agreement is that the lessee shall pay not only the fixed charges of the lessor and the rental herein provided to be paid, but also all sums of money properly chargeable to current maintenance and operation, but if after the expenditure of such part of said sum of $23,000,000 as shall be available for additional, equipment, improvements and extensions, it shall be deemed expedient by the lessee to extend limes of railroad hereby demised or the lines of railroad of any subsidiary company, or to construct any branches of any such lines, or to provide any additional and increased equipment for or mahje any change of motive power upon, or amy radical change in the construction, location or character of any such Unes, then such expenditures shall be provided as follows: “(A) The lessee shall deliver to the lessor a written statement of the proposed expenditures, stating the approximate amount thereof and the purposes for which they are to be made. “(B) If the parties hereto shall not within twenty days thereafter agree that such expenditures are advisable and are properly chargeable to capital account and shall not further agree upon the nature and amount of the securities to be issued by the lessor to provide for such expenditures, then the question upon which the parties shall have failed to agree shall be submitted to arbitration in the manner hereafter provided. “(C) When such questions have been agreed upon by the parties or'determined by arbitration, then the lessee shall provide the moneys réquired for the capital expenditures so agreed upon or determined, and the lessor shall issue to the lessee therefore such securities, whether stock, bonds or other obligations, as shall have been fixed by such agreement or arbitration and at the price and upon the terms so fixed. “(D) * * * Any such obligations shall be subject to the provisions hereof relative to the funded debt of the lessor, and the lessee shall in no event be relieved from its obligation to pay 7%l per annum upon the capital stock of the lessor. “Nothing herein' contained shall prevent the lessee from arranging for the extension, consolidation or refunding of any funded debt of the lessor * * * or from advancing money to the lessor * * * for any expenditure chargeable as herein provided to capital account, or for any purpose not herein other — 123 — wise provided lor * * *; provided, however, that the lessee shall in no event be relieved from paying the guaranteed dividend of 7%l upon the amount of the capital stock of the lessor and the other fixed charges of the lessor as heroin provided.” The prior decree, above referred to, directed reimbursement for expenditures made and obligations incurred “for the purposes described in article XV of the lease.” No one of the claims now advanced, therefore, can he a basis for such reimbursement unless it represents supplies or labor “for the purposes described in article XV of the lease.” The special master holds that supplies furnished by a claimant come within this category if, at the time they were ordered and received, it was the intention of the City Company to use them for the purposes described, although in fact they never were so used and were found among the unexpended supplies when receivers took possession. The opinion sets forth the reasoning by which this conclusion is reached, and the proposition is vigorously contended for in the briefs of the various parties, but the arguments are not found persuasive. The word used in the lease is “expenditures”; it says nothing about “obligations”; the latter word makes its first appearance in the opinion and decree in the Apportionment Proceeding. 198 Fed. 778, 117 C. C. A. 560. Net us take the simplest of the specified purposes—constructing a branch line, which lessor and lessee have agreed shall be built'— and see what were the expenditures which the lessor was ultimately to pay. They must be expenditures actually made for the purpose of the particular extension; that is materials used in that extension must be. bought and paid for by the lessee, for clause C provides “the lessee shall provide the moneys required for the * * * expenditures * * * agreed upon.” Having done that, certain securities will be delivered by the lessor to lessee to reimburse the latter. In other words there is- to be a purpose, a use for such purpose and a disbursement—then we have an actual expenditure for the purpose. Buying on credit, the lessee might, at any given time (such as date of receivership), be found in the situation where it had bought and used materials for the purpose of building the branch, hut had not yet paid for them. In one sense this might not technically be an “expenditure,” since money had not yet been actually paid out; hence we find that the decree above referred to, provides for reimbursement, not only for “expenditures made,” but also for “obligations incurred.” But that circumstance does not, as it seems to me, in any way modify the meaning which the word “expenditure” has in the lease. If the City Company has not in fact expended its money for the special purposes—say for building the branch line—it must at least have expended its supplies for that purpose. Until it has expended something there is no “such expenditure” which, as the lease provides, the lessor will issue securities for. Overmuch seems to be made in argument of “intent” at the date of purchase of supplies. To take a converse proposition as an illustration: Suppose the City Company had bought 500 steel yokes for renewal and repair work, and had charged them up to its supply account, but had not paid for them before receivership. Suppose, moreover, that it — 124 — had actually used 100 of these very yokes in the new work on First avenue expressly referred to in article XV. Could it not demand reimbursement for them, and could not the man who sold 100 yokes, upon proving they were used for such purpose, maintain a claim against this fund—although neither he nor the City Company, nor any one else, at the time of sale and delivery intended that they should be so used? Having been used in that work they would be an “expenditure” of the City Company, and, not having been paid for, they would be an “obligation” for which reimbursement was to be made out of the fund. It is suggested, in argument, that the Metropolitan might have issued the securities in advance, and the City Company have raised money on them for the purpose we are considering, viz., building a branch line, that-if this had been done such money would be a trust fund not to be diverted to other purposes, and that supplies bought with such money could not be used for other purposes. The illustration is unpersuasive because nothing of the sort happened, nor so- far as the lease shows was it contemplated. The course of business was for the lessee to go on and build the.branch, using for the purpose supplies which it had purchased, itself providing the money to pay for supplies so' used, and receiving securities from the lessor to make it whole for such expenditures. All the supplies which form the basis of the claims here presented were bought by the City Company on its own credit; the sellers knew nothing of the contract between the two companies, nor of any trust fund out of which they were to be paid. Pursuing the concrete example we have taken—a branch line which both lessor and lessee approved of: The City Company buys 10,000 steel rails, intending and expecting to expend them in building such branch. Subsequently, and before the branch is built, urgent repairs are needed somewhere, and 2,000 of the rails are used for that purpose. Certainly the use to which those 2,000 rails are put is not within the terms of article XV, and the concern which sold them to the City Company would have no claim against this fund for their price, although when they were bought the purchaser expected to use them for purposes within the terms of the article. It is understood that the special master and all counsel substantially agree to this. But if, after purchase, the purchaser was thus free to select to what use it would put the supplies purchased, it certainly remained free to make that selection, until their destination was finally detérmined by their being expended on some particular object. If it be granted that original intent alone does not absolutely determine the use to which purchased material must be put, and no one •seems to' argue to the contrary, then it seems quite clear to me that as to all supplies which were bought with intent to use them for one or other of the designated purposes, but which had not actually been used or expended and still remained on hand when receivership came, they were in the same situation as any other supplies bought also on City Company’s credit, without any special intent and not actually used. The special' master has, in my opinion, attached too much weight to the entries in the books. Inasmuch as they were all made with the approval of. the auditor of the Metropolitan, no doubt they evidence a willingness on the part of that company to pay the charges so made. — 125 — The Metropolitan might agree to pay any claim the City Company might make upon it, which was not forbidden by law, or obnoxious to good morals or to public policy; but it does not follow'that all these entries of charge were made and audited with any intention to expand or modify this clause XV of the contract by “practical construction.” A significant entry is referred to in respondent’s brief. For the year ending June 30, 1507, the Metropolitan Company was. charged with $24,185.57, representing 5 per cent, of the expenditures on account of injuries and damages for that year. “The theory upon which this was done was that there would be more injuries on a given street after electric lines had been established than there were during the preceding period.” If the lessor company chose, it might pay some proportion of the lessee’s losses from operating the road, but it would seem to extend the doctrine of practical construction beyond all reasonable limits to hold that an entry of that sort operated thus to modify the plain language of the written lease. The special master has been extremely liberal in allowing items claimed as expenditures under clause XV, such allowances as those for 1 rack connections required by the removal of the old tracks on Amsterdam avenue, and the placing of vestibules on cars are on the very border line. Nevertheless his decision on this branch of the case will not be disturbed except in the following instances : [2] Allowance has been made for the full amount of various items of expenditures made necessary by a partial or entire loss of buildings by fire. Article V of the lease expressly provided that: “The lessee will replace any oi: the demised premises or any addition thereto, which may he destroyed by lire or other causes.” This clause, which deals with, a single subject is more specific than clause XV, which deals with several subjects and should control if there he any conflict between the clauses. But there is no such conflict, the clauses are entirely harmonious; the lessee is to keep the plant in fit condition at its own cost, hut for betterments of the sort mentioned in clause XV it is to be provided with funds by the lessor. I do not see how any system of bookkeeping can operate to nullify the explicit provisions of clause V; there was a fixed obligation on the part of the lessee to restore what was destroyed. It may be that in the process of restoration improvements and betterments were made which might fairly be considered “additional and increased equipment.” The correct rale would he to ascertain as to each building what would have been the cost of mere restoration and what was the cost of a larger and better building, the percentage of total cost representing betterments could thus be ascertained anti applied to any individual item, allowance being made only for such improvement. A similar situation arises in the case of certain cars. The City Company ordered 155 cars, substantially standard. Subsequently it directed that ihese should be new type, i. e., pay-as-you-enter cars, a more expensive type of car. It also ordered 40 other standard cars. If nothing had happened subsequent to these orders, these cars would have been “additional and increased equipment,” and the City Company could have called upon the Metropolitan to provide the securities neces — 126 — ■sary to raise the money to pay for them. It presumably was the original intent to place these cars on the road as an addition or increase; but long before their completion 280 cars were destroyed by fire. The City Company was bound by the lease to replace these at its own expense. It did not order 280 new standard cars to take their place; the -cars under order would, therefore, as completed, become replacements until the_ loss was made good. The obligation of the City Company might fairly be limited to the replacement of standard cars. If some new and more expensive type were provided, the extra cost may be considered as coming within the classification of article XV. An application of the percentage rule above indicated would be the correct method ■of disposing of such P. A. Y. E. items as may be left after eliminating all such as fail by reason of the circumstance that they were not actually used before receivership. It is thought that the findings in the action at law against the Securities Company are not controlling here—and that an item should not necessarily be allowed here as a charge under article XV because it was held to be such a charge in that action. In addition to the other reasons advanced—e. g., an action between different parties, etc., this circumstance may bq noted. The action at law and the suit in equity ■against directors were both settled together in a single transaction upon ■payment of a lump sum of money. That sum was less than the aggregate amount of the judgment (with interest) in the one cause, plus the amount claimed in the other cause. Something -claimed was waived manifestly, and it cannot be said, as to any single item now under discussion, that it is represented by cash to its full value in the fund with which we are concerned because it figured in the total for which judgment was entered against the Securities Company. . In all respects not covered by what has been above written the spe-cial master’s findings and conclusions are confirmed.