Downs v. Farmers' Loan & Trust Co.

MAXEY, District Judge, after stating the case, delivered the opinion of the court. The appellant was made a party defendant to the suit in the court below December 3, 1889. On March 15, 1892, it appears that the circuit court overruled a motion made by him to vacate the receivership, from which no appeal was taken; nor did he appeal from the final decree of the court, passed March 8, 1895. His petition, in which he claimed the right to the net earnings of the railway as purchaser of the property, was filed October 22, 1895, and it was to the order made thereon January 6,1896, that he objected, and from which he appealed. It is clear, therefore, that he is not in a position to assail here the action of the court in the appointment of a receiver, and it is deemed altogether useless to cite authorities in justification of the order made by the court. The bill filed by the appellee the Farmers’ Loan & Trust Company made out a plain case of equitable cognizance, and one in which the court was authorized to take possession of the property for the security of the creditors of the railway company and the protection of its stockholders. The only question, then, which properly arises upon the specifications of error is whether the appellant, by virtue of his purchase of the Waco & Northwestern Division of the Houston & Texas Central Railway, September 8, 1888, is entitled to the net earnings resulting from the operation of the railway by the receiver from the date of his purchase to the final sale of the property, September 3, 1895. As to the period embraced between the date of appellant’s purchase and the filing of the bill in this suit, April 6, 1889, the report of the master, which was not excepted to, shows that no net earnings accrued from the operation of the Waco & Northwestern Division. Hence the claim to net earnings for that period has been properly abandoned. The master further reports that a considerable amount of net earnings was derived from the operation of said division between April 6, 1889, and September 3, 1895, and, at the date of the report there remained of net income in the hands of the receiver, or in the registry of the court, the sum of $362,855.37. To the income thus accruing between April 6, 1889, and September 3, 1895, the appellant asserts a right superior to that claimed by the appellees, who are in part the owners, and partly the representatives of the owners, of the first mortgage bonds, secured by the mortgage which was foreclosed in this suit. It is conceded that the net earnings, superadded to the proceeds of the sale of the Waco & Northwestern Division, are not sufficient [219] to 'discharge the principal of the bonds and accrued interest. The record discloses that for several years prior to the filing o£ the bill in this suit the properly was in the hands of a receiver duly appointed by the court in other causes then pending, which embraced the entire property of the Houston & Texas Central Railway Company. Upon the day that the bill was filed, an order was made, pursuant to its prayer, appointing a receiver in the suit, who continued in possession as receiver of the Waco & Northwestern Division, and such receivership went on until the property was finally sold. It is thus seen that the Waco & Northwestern Division of the Houston & Texas Central Railway was in the sole and exclusive possession of receivers, duly appointed by the court in foreclosure; proceedings, throughout the entire period for which net earnings ¿are claimed by the appellant. Neither the appellant nor the railway company was in possession of the property a single day during the period mentioned. nor did either have aught to do with the management am! operation of the railway. Therefore the Texas cases cited by counsel for the appellant as to the rights of a mortgagor in possession under an ordinary trust deed, or his right under such a deed to demand the premises from a mortgagee who has unlawfully acquired possession (Silliman v. Gammage, 55 Tex. 369, Loving v. Milliken, 59 Tex. 427, Edrington v. Newland, 57 Tex. 633, a,ud others of similar type), are without application to the facts of this case. The mortgage which was executed by the Houston & Texas Central Railway Company to the appellee the Farmers’ Loan & Trust Company, as trustee, expressly authorized the trustee, upon the failure of the railway company to pay any part of the interest or principal of the bonds when the same should become due and payable, and for 60 days after having been demanded, to take possession of the railway, operate and manage the same, and receive the revenue and income thereof, and apply the surplus to the payment of the interest and principal of all the matured outstanding bonds. And the trustee was further empowered, upon the request of the holders of one-fifth in amount of the outstanding bonds, in case of default in the payment of any part of the interest due on the bonds, “to enter upon and take actual possession, with or without entry or foreclosure, of said railway and property herein described, and all and singular each and every part and parcel thereof, and assume its management, until the arrears of both principal and interest be paid, or the property sold as herein prescribed, receiving the rents, revenues, and income thereof, itnd applying them in the same manner as above stated.” And by the following clause of the mortgage the discretionary right of the railway company to appropriate the income of the property was restricted to the time when default should be made in the payment of the interest or principal of the bonds: “It is, however, expressly agreed that the said party of the first part [referring to the railway company] may dispose of the current net revenues and income of all (he said property and railway hereby conveyed, in such manner as it shall deem best, until default shall be made in the payment of the interest or principal of said bonds, or of any one or more of them.’" The railway company having defaulted in the payment of the in [220] terest, the trustee resorted to the courts for the more effectual protection of the rights of the beneficiaries under the mortgage, and upon its application the property was withdrawn from the possestion of the railway company, and placed under the control of the court. In view of the provisions of the mortgage and the uninterrupted possession of the railway by the receiver from the filing of the bill to its final sale, we confess our inability to understand how the appellant can justly assert a claim to the net income accruing during the receiver’s control and management of the property. Surely, the railway company itself could not have preferred such claim, because, having made default in the payment of interest, it was debarred by the very terms of its contract. The appellant, in that respect, has no right superior to that of the railway company. He purchased the property subject “in all things'’ to the lien of appellees’ mortgage, which secured to the bondholders, as we have seen, the net income of the property, upon default by the railway company in the payment of interest. We have, then, before us a case where the contingency contemplated by the parties has occurred which authorized the trustee of the bondholders to act. A receivership was the result of such action, and we are clearly of opinion that the net income derived from the operation of the railway by the receiver should be appropriated to the payment of the debt, principal and interest, for the security of which the mortgage was executed. The rule announced is consistent with reason, and finds support in judicial decisions. It must be borne in mind that we are here treating of net income; the question of preferential claims arising out of expenses incurred, equipment supplied, betterments made, and other kindred demands, not being involved. The issue is solely between the bondholders and one who purchased the property under a junior mortgage, subject to their rights. The circumstances which determine the respective rights of the .mortgagor and mortgagee to the earnings of the property mortgaged are stated by the supreme court in several cases. Thus, in Dow v. Railroad Co., 124 U. S. 654, 8 Sup. Ct. 674, says the court: “It is well settled that the mortgagor of a railroad, even though the mortgage covers income, cannot be required to account to the mortgagee for earnings, while the property remains in his possession, until a demand has been made on him therefor, or for a surrender of the possession under the provisions of the mortgage.” In concluding the opinion, at page 656, 124 U. S., and at page 675,. 8 Sup. Ct., it is further said: “Under these circumstances, as there are no current expense creditors claiming the fund, we are satisfied that the money is to be. treated as income covered by the mortgages, and should be paid to the trustees, to be held as part of that security.” See Sage v. Railroad Co., 125 U. S. 361, 8 Sup. Ct. 887, and authorities there cited. It is said by Mr. Justice Woods, speaking for the court in Teal v. Walker, that: [221] “The American eases sustain the rule that so long as the mortgagor is allowed to remain in possession, be is entitled to receive and apply to his own use the income and profits of the mortgaged estate; and, although the mortgagee may have the right to take possession upon condition broken, if lie does not exercise the right, he cannot, claim the rents; if he wishes to receive the rents, he must take means to obtain the possession.” 111 U. S. 249, 250, 4 Sup. Ct. 424. And at pages 250, 251, 111 U. S., and at page 425, 4 Sup. Ct., it is further said: ‘•Chancellor Kent siates the modem doctrine in the following language: ‘The mortgagor has a right to lease, sell, and in every respect to deal with the mortgaged premises as owner so long as he is permitted to remain in possession, and so long as it is understood and held that every person taking under him takes subject, to all the rights of the mortgagee, unimpaired and unaffected. Nolis lie liable for rents, and the mortgagee must recover the possession by regular entry by suit before he can treat the mortgagor, or the person holding under him, as a trespasser.’ 4 Kent, Comm. 157. Bee, also, Bridge Co. v. Heidelbach, 94 U. S. 798; Clarke v. Curtís, 1 Grat. 289; Bank v. Arnold, 5 Paige, 38; Hunter v. Hays, 7 Biss. 362, Fed. Cas. No. 6,906; Souter v. Railroad, Woolw. 80. 85, Fed. Cas. No. 13,180; Foster v. Rhodes, 30 N. B. R. 523, Fed. Cas. No. 4,981. The authorities cited show that, as the defendant in error took no effective steps to gain possession of the mortgaged premises, he is not entitled to the rents and profits while they were occupied by the owner of the equity of redemption.” The same rule obtains in the jurisprudence of Texas, as the following extract from Giles v. Stanton, will disclose: “The mortgagees under this mortgage,” says the court, “had no lien upon the earnings o<‘ the road while it remained in the hands of the company. 1! * * The lien of the mortgage upon the earnings of the railway depended solely upon the terms of the mortgage, and until the trustee took some steps authorized by the mortgage to appropriate the earnings no lien attached to the earnings. * * * By the terms of the mortgage the company was to remain in possession of the road, and hail the right to operate the same, and to appropriate the earnings and income. Upon default in the payment of interest continuing for six months, the trustee was empowered to take possession of the railway, and operate it, applying the net earnings to the satisfaction of the interest, or he might sue to foreclose the mortgage; and if such default continued for twelve months, the trustee was authorized to sue to foreclose the mortgage. The trustee did not demand nor take possession of the road, and took no steps towards foreclosing the mortgage until the 38th day of .June, 3891, when the plea of intervention was filed. It follows that the lien of the mortgage did not attach to llie earnings of the road in the hands of the receiver which wore earned before the date of the filing of the intervention; but from that iime the lien of the mortgage attached to such earnings, subject to the expenditures and claims which by law were given a preference over it.” 80 Tex. 627, 26 S. W. 618. The lien of the mortgage attached to the earnings certainly from the date of filing the bill aud appointing the receiver in this suit, and the net earnings subsequently acquired are properly attributable to the payment of the priucipal and interest of the mortgage debt. Such was the ruling of .the circuit court, and in it there was no error. The decree appealed from should be affirmed, and it is so ordered.