PJiiNliy.·V.AUGUST.A.: Ii K. ·R.CO.
PBINIZY et aI. v. AUGUSTA & K. R. CO.. ct aI. CENTRAL TRUST CO. OF NEW Y,ORK v. PORT ROYAL &,W. 0. RY. CO. Ex parte COMER et al. (.Circuit Court, D. South Carolina. AugustlS,1894.)
RECEIVERS-'-EXl'ENSE OF Ol'ERATING BRANCH OF CONSOLIDATED ROAD.
SAME-IMPROVF,MENTS-SUBORDINATION TO LIEN OF MORTGAGE.
SAME-INTERES'l' ONlI0R'l'GAGE BONDS.'
As the roads forming the subordinate company, on consolidation, took and held such branch subject to the mortgage, and by statute (Gen. St. S. C. § 1428) assumed li/Lbillty for tl)e debt, receiver's claim for inter. est paid on such mortgage bonds is subordinate to the lien of the mortgage,
Petition of H. M. Comer and R. Somers EIayesr,receivers of the Central Railroad & Banking Company of Georgia, for allowance of certain expenditures. Lawton & Cunningham and Mitchell & Smith, for petitioners. W. K. Miller, W. G. Charlton, Charles H. Phinizy,· N. B. Dial, and J. R. Lamar, for respondents. SIMONTON, Circuit .rudge. These cases now come up upon a petition of Comer and Hayes, receivers of the Central Railroad & Banking Company of Georgia, setting up certain claims against the Port Royal & Western Carolina Railway Company, for balances due on operating expenses while the said road was in the hands of H. M. Comer, receiver, $129,225.31, and for the value of certain steel rails laid during the same period on the Augusta & Knoxville Rail· road, a part of its system, $40,084.52 and for interest paid on the first-mortgage bonds of the Augusta & Knoxville Railroad Company, $22,277.50, and praying that receivers' certificates ma;r be issued for the total amount claimed to be thus due. The Port Royal & West· ern Carolina Railway Company is made up of several roads. Among them, and the principal part, is the Augusta & Knoxville Railroad. Upon this road is a first mortgage, securing a number of bonds. Uponthe whole system of the Port Royal & Western Carolina Rail· way is a mortgage, subordinate to this first mortgage on the Au· gusta & Knoxville Railroad, at least over the property of this last· named road. The certificates asked for would be prior in lien to both mortgages. The Central Railroad & Banking Company 01 Georgia, for which the petitioners are receivers, was a large and
powerful oombination of railroads, forming a complete system, under one controlling management, aU the component parts of which were made contribl1toity to the CentralRailroad of Georgia, having its ocean terminus at Savannah. ' This great combination had obtained and exercised complete control over the Port Royal & Western Carolina Railway, and had,made}t an integral part of its system, ...,.....one . ot, the feeders of. the stem. Tb,is control was secured, not by any lease or contrad, nor by ownership of the propertY,but by of .the votingp0'rer in .tMcbrporation, through holdings of stock voice in Its ,management. The officers and agen;ti$:ofthe Porte Royal & Western Carolina Railway Company were virtUally appointed by the Central. Its financial arrangements were made by the Central. Its traffic rates were adopted by agents jts funds were received by the Central. In of the Oentr8J. All fact, it -Was dominated, and managed as a subd$visiQn of the Central. In the courseo! railway manipulation, the Central Railroad & Banking Company of Georgia ha:d itself, with every part of its great system, come u.ri(lerthe control ,of the Richmond. & Danville Railt'oad,Co,WJ)any, by WHue of a lease; and, in its turn, it was managed asa part of the system of the lessee. In March, 1892, a bill was filedin the circuit court of the United States for the southern district of'Q'eorgia, in the name of Rowena Clark et al. against the & Banking Company'of Georgia et al.; and, as a result of tliis bill, the domination of the Richmond & Danville Railroad Company was ended. Subsequently, on 4th July, 1892, upon a bill filed by the Central Railroad & Banking Company, in the same court, against the Farmers' Loan & Trust Company et aI., the complainant r()ad was placed in the hands of receivers, and finally of one ;E£. M; COpler. The prayer and purpose of that bill were that a receiver should be appointed to take charge of and to operate the whole system of the Central Railroad & Banking Com· pany, with its auxiliary, owned and controlled, corporations and properties of every description; among them by name, the Port Royal & Western 'Carolina Railway Company. As we have seen, H. M. Comer was' appointed such receiver. The declared object of this appointment, made at the instance of the insolvent corporation (complainant), was the maintenance, preservation, and protection of the entire system, in all its parts, conducted by the Central Railroad & Banking Company, and .the prevention of its disintegration; in other words, the preservation and security of the object for which the great system was created. H. M.Comer, having thus been appointed receiver, under these circumstances and for these purposes, entered into the possession and control) as such receiver, of the whole system, or such, parts thereof as, were within the jurisdiction of the court appointing him. The Port Royal & Western Carolina Railway was a corporation both of Georgia and South Carolina, and by far the largest, part of its property was in the latter state. Auxiliary proceedings were instituted in this district under the same name and to the same effect as the Georgia suit, and under them the appointment of H. M. Comer .asreceiver, to the same intents and purposes, was recognized and confirmed in this district; and under this order
PHINIZY V. AUGUSTA &: K. B. CO.
Comer entered into possession and control of the Port Royal & Western Oarolina Railway in this district, as a part of the system. As such receiver,-that is, as receiver for the whole system of the Central Railroad & Banking Oompany,-he operated the road in question from the 20th day of July, 1892, to 4th June, 1893. On this last-named day he was removed as such receiver, and the whole of the Port Royal & Western Carolina Railway Company was placed in the hands of John B. Cleveland, appointed as receiver in proceedings instituted by Phinizy and another trustee of the first mortgage of the Augusta & Knoxville Railroad Company, praying foreclosure of this mortgage, and also in proceedings instituted by Central Trust Company of New York against the Port Royal & Western Carolina Railway Company. During the period of his receivership, H. M. Comer had operated this Port Royal road as a part of his system, and its operations were unprofitable. He had also paid interest at one time on bonds of the Augusta & Knoxville Railroad Company. He had also placed on the tract of this last·named road secondhand steel rails, under these circumstances: New steel rails were needed for the Central Railroad,-the main stem of the system,-and they were furnished. The old rails replaced by them were put down on the Augusta & Savannah Branch of the Central, and the steel rails for which these were substituted were put on the Augusta & Knoxville Railroad. The iron rails of this latter road, taken up to be replaced by the steel rails, were put on the Port Royal & Augusta Railroad, another part of the great system, under the control of. the same receiver. All the moneys needed for the operating expenses and the interest and the rails were furnished by H. M. Comer, receiver of the Central Railroad & Banking Company; that is, by himself to himself. Mr. Hayes having been appointed to assist him as coreceiver, the account now in question is presented in their joint names. This is proper. The receivership is continuous, and is analogous to a corporation sole. The claim belongs to the receivership, not to the person of the receiver. McNulta v. Lochridge, 141 U. S. 331, 12 Sup. Ct. 11. If any claim exists in behalf of the Central Railroad & Banking Company for advances or improvements Illade anterior to the appointment of any receiver, it could be presented and prosecuted by them. Oil Co. v. Wilson, 142 U. S. 325, 12 Sup. Ct. 235. No such claim has been presented, nor does it appear that any such claim exists. The question before us naturally divides itself into three heads: Amount Due for Operating Expenses. The Port Royal & Western Carolina Railway Company, as has been seen, was controlled and managed by the Central Railroad & Banking Company of Georgia, as a part of-a subdivision of-its whole system, under no contractual relation, but solely by virtue of its control of the voting power in the first-named corporation. By virtue of this power, it absorbed it into its system; and, by reason of this absorption, it was included among the corporations placed in the hands of Comer as receiver. As has been seen, this appointment was made for the purpose of preserving and protecting the
quo, 'and was made atthe<sutfb of'the CentraL: So, Comer,the receiver, occupied ,to this controlledl'oad ,precisely ,the same relations which the Central Railroad &I Banking haddoQe, controlling it through and because of: the voting power, and using it through thllit control. When, therefore, the receivers present this account for operating eXpenseliJ"they ,can rely ,for reimbursenient on no express contract, but must,s:eekitex equo etbono. on some contract which the law, orpdnciplesJof equity, would imply.; ,This subordina,te ,road was part ofa tgf'eat system,.........a system 'conceived and created bythe'Central Ra,ur.9ad & Banking Company, for its benefit solely. Every' part of the'system contributed to the good of its creator, and ·to this end the interest of the Central, and not of the feeders,was the dominatin.gidea. The advantages derived by the Central from the operation of the other parts of the system were vastly disproportionate to those derived by the contributing roads. It poured into its channel all the freight coming from or going to these subordinate roads. It gave to the Central apotentinfiuence in its contracts with rival systems, and in its negotiations with connecting lines. It furnished constant and profitable use of its plant and capital. It added, to, and sustained its credit at all financial centers; By the increase:of the volume Of business on the main line, it could make the most attractive offers to the agricultural and business community. In short, under the complete dominationof this majority vote, the subordinate road was conducted, not with a· view to the interest of its stockholders and creditors, but for the benefit of the central figure of the system. No implied contract, therefore, could arise on the part of the subordinate corporation to reimburse the controlling corporation for expenses incurred in operating it. The profit of the adventure inured to the Central. This profit could not be:rp.easured bya money balance. The benefits sought· were wholly for, the Central. "Qui sentitcommodum sentiredebet et onus," is the maxim of equity and good morals. As the Central Railroad & Banking Company could not have looked to or demanded from its controlled subordinate reimbursement for moneys advanced in operations conducted for the benefit of the Central, so the receiver appointed to take the place of the Central. to maintain the integrity. of its system, to preserve, protect, and secure the status of this system, conceived and created for its benefit solely, is in the same plight as the Centrlll, and must bear the loss of these operating expenses, whatever they may be. Rails Placed on Augusta & Knoxville Railroad. Thisexvenditure is on a different footing. The first duty of a railroad' corporation enjoying its franchise is to the public. The roadbed 'must always be kept so that safety is' secured, and expenditures for this purpose are looked upon with' favor. The receiver is authorized, in his own discretion, to make expenditures. not of an extravagant character, to this end; and even in cases where perhaps he should have applied to the court in the first instance, but, in his own discretion, he has made expenditures, the
MAYOR, ETC., OF CITY OF COLUMBUS.
court -will sanction them upon proper investigation. Cowdrey v.Railroad Co., 1 Woods, 336, Fed. Cas. No. 3,293. The present instance is a case of this character; and, as the expenditure would have been allowed if authoritv had been asked, it is now confirmed; but the charge will be upon "the entire road of the Port Royal & Western Carolina Railway, and must be subordinate to the lien of the first mortgage on the Augnsta & Knoxville Railroad, the trustees of this mortgage having no part or lot in the receiver'ship. Interest on Bonds of Augusta & Knoxville Railroad Company. This is a question of much difficulty. If the receivers, by virtue of this payment, can require its return in the shape of receivers' certificates, they would then be placed in a position superior to any bond or coupon holder of the company. The payment of the interest under these circumstances would work no advantage whatever to the first-mortgage bondholders, and there would be no equity for its reimbursement. On the other hand, the payment and of these coupons prevented the foreclosure of the thereby prevented the disintegration of the system,-the object for which the receivership was created. When the roads now forming the Port Royal & Western Carolina Rail way Company were consolidated, however, the consolidation held the part of their road formerly the Augusta & Knoxville Railroad subordinate to this first mortgage, and under the act of the legislature it assumed a liability for this debt. Gen. St. S. C. § 1428; Pub. Laws S. C. § 1539. The claim under consideration is admitted, ranking next after the snm necessary to satisfy the outstanding bonds and coupons secured by the first mortgage on the Augusta & Knoxville Railroad. 'l'he prayer for receivers' certificates is refused. In the order for sale of the property, let provision be made for the sums allowed in accordance with this opinion.
DENISON et aL v. MAYOR, ETC., OF CITY OF COLUMBUS.
(Circuit Court, N. D. :Mississippi, E. D.
September 6, 1894,)
MUNICIPAL BONDS-DONATION TO RAILROAD COMPANY -VALIDITY CATION.
Act Feb. 1, 1872 (Acts :Mlss_ 1872, p. 297), gave the city ot Columbus power to subscribe in aid of the Coo F. & D. R. Co., and to issue its bonds therefor. No provision was made fOl' an exchange of bonds for stock, ood stock Is not mentioned in the act. Acts 1\'1iss. 1882, p. 886 (ratifying the consolidation of such railroad company and others into the G. P. R. Co.), § 2. provides that the "donation of $100,000 in Its bonds" by the town ot Columbus to the C., Ii'. &, D. R. Co., but which have not yet been pald over. "be lwd are hereby declared to be payable to the" G. P. R. Co. In 1884 the city charter of Columbus was amended so as to authorize It to levy Illid collect a special tax to pay the Interest on such bonds, and provide a sinldng ftmd to pay the principal. The bonds were voted as a donation by the constitutional majority of two-tblrds of the qualified voters, and Interest was paid on the bonds for 11 yeu1's, Bela that, If a donation was