664
FEDERAL. REPORTER,
vol. 45.
of equity; and the federal courts are to adopt it only so far lIS it is consistent with the mode of procedure in equity cases established by the courts of the United States. Demurrer sustained.
FARMERS' LOAN
&:
TRUST CO. ". GREEN BAY, (FRANCK, Intervenor.)
W. & ST. P. Ry.
CO.,
(Ofn'cw£t Oaurt, E. D. W'I.8con8'£n. R.uLBOAD MOBTGAGB-FoBBOLOSUBE-PBIOBITIES.
March 28, 189L)
A claim against a railroad company for causing the death of plaintiff's intestate .is a demand arising from a failure of duty, and could not by its qreation benefit, preserve, or increase the corpuBof the estate of the company, and is not entitled to priority upon the foreolosure of a mortgage thereof.
"
In Equity. Upon the intervening petition of Emily Franck,administratrix, eW. The bill is filed to foreclose a trust-deed executed by defendant to complainant on the lst day of September, 1881, upon itsline of railway, to secure its bonds of even date, aggregating $1,600,000, maturing in 1911, or at the option of the trustee, upon default in payment ofinterest. The interest of the bonds was payable· semi-annually on the 1st days of February and August in each year. Upon default in the payment of interest, continuing 30 days, the trustee at its election might, and, upon request of the holders of one-fourth in amount of the bonds, should, take possession of the mortgaged premises, and dispose thereof at sale, as provided. Default occurred in the payment of interest due August 1, 1888, continued after default for more than 30 days, and in all subsequently maturing interest. On. the 31st of July, 1890, the trustee, after proper request of the bondholders, demanded and received possession of the mortgaged premises, electing to as matured th(:l entire principal sum of the bonds, lj>nd has siDce operated the railway. On the 14th August, 1890, the trustee filed this bill to foreClose. On the 18th of August an order of the court, entered by consent of the parties, affirmed the possession of the trustee, authorizing its continuance in possession under the protection of. the court, and conferred upon the· trustee the usual powers and duties ola receiver. No provision was made by the order with respect to the floating indebtedness of the railway company. On the 5th day of January; 1891, Emily Franck filed her intervening peti. tion, representing that Martin Franck, aconductot ill the service of the railway company, lost his life on the 15th day of April, 1890, in the discharge of his duty, without fault on his part, and solely through the neglect of duty of the railway company; that he left a dependent father; that the railway company is insolventjand that she, as administratrix of the estate of the deceased, prefers this petition to obtain for the father proper indemnity for the loss of the son, rightfully demandable under the la.ws of Wiaconsin. The complainant takes issue with the petition;
FARMERS' LOAN & TRUST CO. fl. GREEN BAY, W. & ST. P. RY. CO.
665
and alleges the superiority of the lien of its mortgage. The petitioner now moves the court to institute necessary proceedings to establish the liability for the death, and the amount recoverable therefor, claiming that such amount, when ascertained, constitutes a proper charge upon the income and COTp'UB of the property, superior to the lien of the trustdeed. G. W. Hazelton, for petitioner. Winkler, Flanders, Smith; Bottom & l'Uaa, for trustee. " JENKINS, J., (after Btating thefact8 aa above.) The objection that theapplication is premature cannot he sustained. It is not essential that the demand should be first established in a suit at law against the railway company. If the petitioner's demand be a proper charge upon the fund in the hands of the receiver growing out of the operation of the railway, it is properly cogniz!,,-ble in this court, which, as a court of equity, has through its receiver possession of the railway, and exolusive control of the fund realized from its operation. In such case it pertains to this court to adjust all demands upon the fund, and to that end may permit an action at law, or direct the trial of a feigned issue. Barton v. Barbour, 104 U. S. 126. The act of congress permitting suit against receivers appointed by a federal court, without leave of the appointing court, is limited" in respect of any act or transaction of his in carrying on the business connected with such property." 25 St. 436, § 3. It does not include a demand arising prior to' such appointment. The principle upon which equity acts in allowing, with respect to certain claims, priority of payment over precedent mortgage in the case of railways is settled by repeated adjudications of the supreme C0urt. The gross income arising from the operation of a railway should be first applied to the payment of the expenses of operation, proper equipment, and needful improvements. If the income be diverted to the payment of bonded interest, in disregard ofthe payment of such expenses, there ..hould De restoration to equitable right. Failing diversion, there can· be no restoration. Thll amount of restoration is dependent upon the amount of diversion. The power rests upon the fact ofdiversion of a fund belonging in equity to the general creditors, or some -of them. Fosdick v. SchaU, 99 U. S. 235; Burnham. v. Bowen, 111 U. S. 776, 4 Sup. Ct. Rep. 675; St. Louis, etc., R. Co.v. Oleveland, etc., Ry. Co., 125 U. S. 658, 8 Sup. Ct. Rep. 1011; Railway 00. v. Hamilton, 134 U. S. 296, 10 Sup. Ct. Rep. 546; Morgan's L. & T. R. & S. 00. v. Texas Cent. Ry. 00., 137 U. S. 171, 11 Sup. Ct. Rep. 61. The exercise of this equitable power in the court is not, however, dependent solely upon diversion of current earnings to payment of bonded interest, leaving current expenses unpaid, but is exercised as well in consideration of the fact that, in case of failure of the trustee to take possession upon default, it is indispensable to the preservation of the property, and its maintenance in integrity, that it should be operated. It must be kept a going concern. The expense of such operation and ·maintenaI!ce within a limited time prior to the recei:v:ershipis therefore
666 allowed priority.
FEDERA.L. REPORTER,
vol., 45.
Miltenberger'll. Railway Co., 106 U. S. 286, 1 Sup.
ot; Rep. 140; Trust Co. v. Souther, 107 U. S.591, 2 Sup. Ct. Rep. 295.
Theprinoiple is here sought to be extended to embrace a claim for a death ocourring in the operation of the road within the limited period. In an able and ingenious argumeqt theoounsel fQr the petitioner insists that, although the liability for the death here rests upon statute law, and is to a stranger to the contract of hiring, and aristls from failure of duty enjoined by the law of master and servant, yet that.tbe liability is impol'led by the law upon, and constitues a term of, the contract of hiring, and so mustbe regarded as a liability incurred in the operation of the road, having prfurityof payment over a precedent mortgage. This proposition findssnpport'in the case of Dow v. Railroad Co., 20 Fed. Rep. 260. There Judge in appointing a receiver of the railway, provided by his order for the payment of,allobligations incurred..for injuries to pel'sonwithin the six preceding menths. He states that failure by the trustee to take possession works an implied assent that the earnings of the roadrshouldbe applied to compell$ate those damaged in its operation, and asserts. tl'fat the rulings of the supreme oourt furnish ample authority for such order. A careful reading of-Ell! decisions of supreme tribu. nalupoU!.that:subject convinces me that Judge CALDWELL has either misconceived :tihe underlying principle of these decisions, or seeks to, extendH unduly.· The as I read the opinions, has been most careful to limit the doctrine to inured to the benefit of the ',mortgaged properth: iauch as labor and supply claims, amounts dueto:connecting roadsfor;material, repairs,ticket and freight balances, like, allowing priority to such olaims, because their non-payment would cause cessation, ;of work, supplies, and running arrangements; and result in stoppage in the operation of the road, which, in the interest, as well of the bondhQlder as of the public, is not to tolerated. The doctrine is analogoUS' ,to that of the certain supplies to a vessel precedence over a mortgage upon the vessel, and ,rests upon the S:l.me principle.:!> }1he vessel must not be allowed to rOt at the wharf. The railway must not be permitted to rust, and jt/3 franchise to be forfeited, operate. Such thiQgs, thereJore,that are done to avoid such result working destruction to the mort", ga;gesholild be compensated in priorttyto the mortgage. The protection accorded is for that dona for the benefit of the res, not that su.ffered in the-doing, not to individual right under the contract; for that'dont;! in performimce of the contract, 110t that suffered. by breach of contract;. for labor and supplies furnished, not wrong sustained. A death claim does notoome within the principle. Theloss of life occurred in the operation of the road, but arose from duty. It happened in the per·formance of the contract, but not because of. performance. Its promotingcause was the default of the company, not the labpr perform,ed. "tesulting death was a detriment.,. not an aid, to the road. It was in no ,The res was not possible sense of advantage to the',mort/.{age benefited" and· tha-t, I take it, is the test. If f/til\,ue to take . possession ,
FARMERS' LOAN &: TRUST CO. V. SREtN' BAy, W. & ST. P. RY. CO.
667
works an implied assent that the earnings should be applied in compensation of casualties in priority to the mortgage, why not as to all floating all improvements,upon the road, and irrespective of time? Why not say that, through faIlure to take possession, the bondholders assent that· earnings should be devoted· to the payment of all debts in.curred. after dafa-ult in the payment of interest, and in priority thereto? Why limit sUQhpriority to the period ofsix months prior to the l'ecbiv- ership? If priority is to be predicated upon implied assent inste;td of upon benefit to the res, it should be allowed to all claims arising during failure to take possession from which assent is implied. The priority should be co-extensive in point or time with the implied assent. .That logically re'sults fi;om the principle bottomed upon implied assent. Such doctrine is, to my thinking, a broad departure from the equitable doetrine declared by the supreme court,and would be ruinous in its consequences. If conceded, the entire floating debt of a rail way company, oc(:mrring after default in payment of interest, and during failure to take possession, would necessarily and logically be given priority. Vested rights of property would be subjected to great detriment under such holdirig. The bonds of American railways are scattered throughout Europe, and are held in many hands. It requires much time to institute concerted action by the holders after default in payment of interest. Meantime, unprincipled directors, anxious to retain possession of the road, could contract indebtedness-given priority by such ruling-working ruin to the mortgage interest. The bondholder would be "improved out of his estate," and his vested rights placed at the mercy of hostile directors. I am unwilling to assent to such doctrine. I do not understand it to be the law. The rule is that current income should be first devoted to the current expenses of operation. Liability for death is not an expense of operation in any just sense of the term. It is an unsecured debt, and, as such, cannot take precedence in payment over prior and express liens. St. Louis, etc., R. Co. v. Cleveland, etc., Ry. Co., 125 U. S. 658, 673, 8 Stip. Ct. Rep. 1011. The appliC'.ation was presented only upon the theory of priorit:>". The record presents no disclosure touching income. There is no suggestion of its diversion. There has been no sale of the road. It may happen that the income will more than suffice to discharge the operating expenses and the unpaid and accruing interest. There may arise equities sanctioning payment of the claim not possible now to forecast. The petitioner may therefore take order for an issue to determine the question of liability of the company and its amount, subject, with respect to pay ment, to the ruling herein declared.
668
FEDERAL REPORTER,
HOWE tI. BARNEY
et al.
(Otrc'IJ,it Oourt, So D. OMo, W. D. April' 24, 1891..) NATIONAL BJ.1IlX!l-INSOLVENoy:-MISCONDVOT OF DIRECTOJIS-RIGHT OF STOCKHOLDERS TO BVE.
A stcJckholder in an insolvent national bank for which a receiver has been appointed cannot sue its directors to make them personally liable for the mismanagement of the bank, as the right of action is in the receiver, and not in the individual stockholder.
At Law.
MiltonSaterand Follett KeUy, for plaintiff. Paxton It Warrington, Harmon Colston, Gold8mith Jordan &: O'Hara, and O. W. Baker, for defendants.
Hoadly, Jordan,
SAGE, J. The plaintiff sues as the owner and holder of 100 shares of 8100 each, of the capital stock of the Metropolitan National Bank, a corporation organized under and by virtue of the laws of the United States for the purpose of carrying on the banking business, which business it did carryon in the city of Cincinnati, Ohio, from the 1st day of January, 1884, to the 1st day of February, 1888, its capital stock being $500,000. The petition sots forth that the defendants constituted the board of directors of said bank, and by reason of their mismanagement, carelessness, neglect, bad faith, and unlawful conduct in the administration of their office, permitted and caused the money, property, assets, and capital of the bank to be squandered, wasted, and loaned llpon insufficient security or without security, and the capital stock to become almost worthless, to such an extent that the bank become embarrassed and insolvent, by reason whereof the comptroller of the treasury of the United States, on the 6th day of February, 1888, seized upon and took possession of the bank, displaced the defendants from the management and control thereof, and turned over its money, property, and assets to a receiver duly appointed, who proceeded to close out and wind up its affairs according to the laws of the United The petition sets forth in detail the acts of the directors complained of, and alleges that from the property and assets of the bank sufficient money was realized to pay its creditors and depositors in full; and that dividends at different times have been declared an<;l paid to the stockholders, including the plaintiff, of 49 per cent. of the face value of the stock held by them, the dividend to the plaintiff amounting to $4,900. . The petition further alleges that by reason of the acts of the defendants complained of the plaintiff h!Jj:i lost 51 per cent. of the stock so owned and held by him as aforesaid,-that is to say, the sum of $5,100, -for which he prays judgment, with interest and costs. Four of the defendants have filed answers. The cause is now before the court upon general demurrer on behalf of the defendants Charles M. Holloway and Edward N. Roth. The demurrer is upon the ground that, admitting the facts alleged in the petition, the right of action is in the receiver, and not in the individual stockholders. The precise point