John A. Roebling's Sons Co. of California v. Idaho Ry., Light & Power Co.

HUNT, Circuit Judge (after stating the facts as above). [1,2] The appellant’s principal contention is that there was a wrongful diversion of income, and that, in view of the extensive system of properties owned and operated by the Railway Company, the work done constituted merely ordinary service extensions and improvement and repairs, and was properly chargeable to maintenance and operation. As set forth in the statement of the case, the Roebling’s Sons Company claim is in much the larger part for new wire for the transmission of electric power over newly constructed transmission lines, running from a central station to an irrigation transmission line and to a certain pumping station. When completed, these lines constituted substantial additions to the lines owned and operated by the Railway Company, or owned by the Idaho-Oregon Company, a separate corporation, the stock and bonds of which were principally owned by the Railway Company. The minor part of the claim, an item of $1,121.15, was for materials used “in connection with general service extensions of the Railway Company and its distributing systems” about and in the village of Eagle, Idaho. We are not advised just what “service extensions” included, and, in the absence of record evidence to make clear what the precise items were for, we will adopt the finding of the District Court, that ‘under the facts shown it cannot be held to have been an operating expense. The stipulation of fact that the material furnished by the Roebling’s Sons Company “is and was necessary to the continued maintenance and operation of the respective parts of said property for which the same was supplied and in which it is used” is to be construed with other portions of the stipulation, which show that the material went to making additions or enlargements of the system which had existed and for the maintenance and operation of such newly constructed lines adding to the system. This, however, takes us no further than to the point that, inasmuch as the supply was for new construction and use in connection therewith, it is not to be regarded as necessary for such repair or replacement as was required to keep the power plant and system a going concern as it had theretofore been conducted and kept up. The case is not altered by the stipulation that the Roebling’s Sons Company sold the materials in the belief and intention on its part that the bills therefor should be paid out of current operating income. It is probably true in many instances that merchants who sell their products to public service corporations expect payment of their bills out of current income; but if there is an outstanding mortgage contract between the corporation and a mortgage creditor, such as there-was here, preference will not be awarded over the mortgage creditors, unless it is proven that all parties agreed that the claim of the merchant shall be first paid out of current earnings of the buying company. [3, 4] The claim of the Morris Company is for material furnished under a contract dated October 31, 1912, wherein the Morris Company was to design, construct, 'deliver, and install certain machinery necessary to enlarge and reconstruct what is called the Swan Falls plant of the Railway Company. The power part of the machinery was to be delivered in installments prior to April 1, 1913, and certain other materials were to be delivered within a year from the date of [531] the contract. The enlargement and improvement made at the Swan Falls plant w~as to put the .Railway Company “in a condition to better serve its customers and to supply the increasing demand for electric current.” The machinery to be furnished was for the purpose of generating the increased power to be transmitted over the new transmission lines heretofore referred to in connection with the claim of the Roebling Company. It also appears that the machinery included in the claim of the Morris Company would generate approximately 60 per cent, of the entire power of the Swan Falls plant, which is the only power plant owned and operated directly by the Railway Company. The stipulation of facts that the machinery is necessary to the continued operation of the Railway Company’s system, and that, without it, it could not perform its duties to the public, is not an agreement that tlie machinery prior to its installation was necessary to the continued operation of the system, or that the Railway Company could not, prior to such installation, perform its duties to the public. The machinery being for work of new construction, we think that the conclusion of the District Court that the machinery furnished was for the enlargement, and not for the repair or the maintenance, of the Railway Company’s plant, is the only correct one that could be reached with respect to this claim. It is to be specially noted, too, that the contract pertaining to this machinery was made 14 months before the appointment of the receiver; that the work was not finally completed until September, 1913, and was not finally accepted until December 9, 1913, upon which latter date $21,200.66 was paid, and two promissory notes, each for the sum of $13,246.58, were given. The comment of the District Court upon this phase of the claim was that it was “quite incredible” that the Morris Company, having knowledge of the plans of the Railway Company, could have expected that the entire expenses to arise under the contract would he taken care of from current receipts. [5] In arguing for the claims above mentioned, appellants say that there was diversion of income by reason of the fact that the railway company paid on June 1, 1913, interest on the bonds held by the Guarantee Trust Company amounting to $165,750, interest on the bonds of the Boise & Interurban Railway Company amounting to $26,825, and interest on the bonds of the Boise Railroad Company amounting to $9,725, or a total of interest paid, $202,300. But of this amount, $56,750 came from the proceeds of the sale of the bonds of the Railway Company, and $30,000 was borrowed on the note of the company. If we deduct the amount of these two items from the total sum of $202,-300 paid out, we have a balance of $115,550. In this amount was $9,725 interest on the bonds of the Boise Railroad Company, but this amount did not inure to the benefit of the bondholders of the railway company, and in the decree made by the District Court it was specially provided that the Guarantee Trust Company, or bondholders represented by it, should not be held on account of the construction payments made on account of the Boise Railroad Company, as the properties of that company had been decreed not subject to the mortgage of the Guarantee Trust Company, and were ordered segregated from the receivership estate. [532] [8] With respect to the Morris claim, it is to be noted that the alleged diversion of June 1, 1913, was nearly seven months before the receiver was appointed. Or if, as counsel for Morris Company have urged in their brief, the material and labor involved in the claim were furnished within six months before the appointment of the receiver (December 23, 1913), then the claim did not accrue until after June Í, 1913, when the interest on the bonds was paid, and preference cannot be claimed, for clearly it is not a diversion of earnings for a corporation to pay interest due on its bonds when nothing is due at the time of the payment. The legal principles and the more important authorities which bear upon the several views of the questions presented having recently been carefully considered and announced in Crane Co. v. Fidelity Trust Co. et al., 238 Fed. 693, - C. C. A. -, any extended discussion of the law would, be but a repetition of what was there said. [7] In accordance, therefore, with the rule of that case, we conclude that Roebling’s Sons Company furnished material which went for new construction and extraordinary improvements in the plant of the Railway Company or the plant of the Idaho-Oregon Company, and the claim is not properly páyable as a current operating expense in ordinary course of business, and that there was no diversion of any income earned after the accrual of the Roebling’s Sons Company claim; that the Morris Company claim, being for generating machinery by way of new construction and extraordinary improvement to the mortgaged property, is not to be recognized as a current operating expense incurred in the ordinary business of the railway company, and that, the claim having accrued within six months prior to the appointment of the receiver, there was no diversion of income by payment of interest on June 1, 1913. It may be added, however, that, if we should assume that the materials involved in the Morris claim were furnished more than six months before the receiver was named, no special circumstances appear for departing from that period as the usual and reasonable limit. The decree is affirmed.