'CENTRAL TRUST CO. V. CHATTANOOGA, R. & C. R. CO.
27&
"This. cause came on for hearing at.this time before the court, pursuant to the order setting the same down for hearing, plaintifl' appearing by John F. Cowan, Esq., his attorney,· and no appearance being made on behalf of defendants; and after hearihg evidence and· proofs adduced on behalf ofplaintifl', . and arguments of counsel, it is ordered * * ·." .
The record fails to show any of the evidence, except the contract or agreement under which appellant claims his equitable interest in the land, andwllich, in connection with the answer, show that he has an equitable interest therein; but there is. Ilothing whatever in the record showing upon what evidence the court below rendered a decree in fav{)r of the appellee. On appeal from a decree in equity the record must show some evidence to sustain the findings, otherwise the decree will be reversed. In the case at bar the record shows that appellant has an equity in the lands, and there is no evidence whatever showing that appellee has a better title, or any title which should prevail in a court of equity over that of the appellant under his contract. The record shows that there was oral testimony intrdduced, presumably in pursuance of the order taken on December 6th, but there is no warrant of law for oral testimony to be taken at the hearing of a cause in equity on an ex parte order made by counsel. Section 862, . Rev. St. U. S., provides that: ''The mode of proof in causes of equity and of admiralty and maritime jurisdiction shall be according to rules· now or hereafter prescribed by the BUpreme court except as herein specially provided."
The supreme court, in pursuance of this statute,bas adopted rules for the taking of testimony. The sixty-seventh equity rule provides the manner in which testimony may be taken. That rule does not permit testimony to be taken orally at the final hearing, except "upon due notice given as prescribed by previous order." When oral testimony is presented, it must be taken down and made part of the record, and upon appeal certified to this court; otherwise, it must be disregarded. Blease v. Garlington, 92 U. S. 1. In the case cited the whole subject is considered, aud the proper practice settled. There being no evidence in the record to sustain the decree, it must be reversed, and the cause remanded, with leave to the parties to amend their pleadings as they may be advised, and to take proofs. Ordered accordingly. CENTRAL TRUST CO. OF NEW YORK v. CHATTANOOGA, R. & C. R. CO. et at OWEN et al. v. JONES. (Circuit Court of Appeals, Fifth Circuit. No. 784. 1. RAILROADS-MORTGAGE ON FUTURE-AcQUIRED PROPERTY-GENERAL
May 16, 1899.)
LAWS. There being in force a general law for the incorporation of railroads which authorizes the mortgage of future-acquired property, the fact that the original or amended charter of a railroad company does not authorize a mortgage ot after.:acqulred pl'operty will not affect the right to execute
276
FEPERAL REPORTER.
,,' such mortgage, as power in that respect Is given tlle law, , and lien of such a mortgage;Vi'ill take precedencg ,of th¢ ,liens of subsequent judgments on such after-acquired property. Neither the local laws of Georgia nOf the decisions of the supreme court of that state limit the security of a mortgagee to the corpus, to the exclusion of 'the income after default. ' 3. SAME...:..RENTS, AND PROFITS-RECElVER. AFTER DEFAULT HI', MORTGAGE-LOCAl, WS AND DECISIONS.
, T!;lat,/f mortgage does ,not expressly include the income on the property l+Iortgaged is not material, as the mortgagee can only be interested in the inco¢e on default,on which event, if the maker is insolvent and the se'cUrity inadequate, he is entitled to the appointment of a receiver to prenot only the corpus, but the rents and profits, for of debt. Where a .railroad corporation Is unable to pay its currently accruing interest, it is actually, as well as 'technically, insolvent, and its property inadequate security for its mortgage debt, and it may be put in the hands of a receiver.
'"
'
4.
SAME..-INSOLVENCY-INADEQUACY OF SECURITy-RECEIVER.
5.
SAME-MoRTGAGES-RECEtVERS.
Ijailroad mortgage which expressly authorized a mortgagor to receive,the income until default bad been made for three months, whereuponl:the trustee 'cOlHd take possession of the road and operate the property until Slile, or apply,for a receiver, upon electing to ask fOr appoint· ment of a receiver the right to the rents and profits inured to the mortgagee, subject to such terms as the court might impose; at the date of entry, by the receiver.
Appeal from the Circuit Court of the United States for the Northern District of Georgia. L. A. Dean and:C. P. Goree, for appellants. Alex. C. King,' for appellee. Before PA'RDEE, and SHELBY, Circuit Judges. McCORMICK, Circuit Judge. The Chattanooga, Rome & Columbus Railroad Company, by a different ;name, was chartered by an act of the legislature of the state of Georgia approved August 30, 1881. The company was given power to issue bonds iusuch amount as it desired, and to mcJ:tgage all of its railro\td, right of way, rolling stock, and franchise for the purpose of securing its bonds. Laws Ga. 1880-81, p. 246" § 13. By an amendment approved December 22, 1886, it was provided that the company should have power and authodty to issue income bonds, and to secure the same by a mort: gage of its property and franchise, or by pledging the income of its railroad, either or both, ,as the company,should deem proper. Laws 1886, p. 137;§ 2. The company was authorized to construct a railroad from Chattanooga,Tenn., to Carrollton, Ga.,-a distance, by the route proposed, of about 140 miles. It began the construction of its road, placed a mortgage on that part Of its propeJ!ty lying between Rome and Cedartown to secure an issue of bonds amounting to $150,000, but up to September 1, 1887, had only completed 20 miles of its railroad. On September 1, 1887, it executed thedeed"oftrust foreclosed in this' proceeding. This deed conveyed to the trustee all of the and to be constructed extending, ftom Chattanooga} Tenn., to Carrollton, (ia., .with all the rights of way,
CENTRAL TRUST CO. V. CHATTANOOGA, R. & C. R. CO.
277
depot grounds, yards, terminal property and rights, and all such real and personal property as might be germane to and necessary for the construction, operation, and maintenance of its line of railroad, whether then owned and possessed by the mortgagor or thereafter to be acquired,-specifying exhaustively the materials necessary to be used in the construction, maintenance, and operation of the railroad, whether then owned and possessed by the mortgagor or thereafter to be acquired by it; also all the rights, powers, plivileges, and franchises of, or belo.J;lging to, or thereafter to be acquired by, the mortgagor. This deed of trust was subject to the former mortgage as to so much of the property as that mortgage embraced. It was given to seeure an issue of bonds amounting in the aggregate to. the sum of $2,240,000. It provided that, in case of default for three months in the payment of any interest coupon when due, the prineipal of .the bond to which the eoupon was annexed should immediately become due; and if such default should be made in the payment of interest, and in the payment of prineipal thereby or otherwise matured, upon the written request of the holder of any bond or coupon the trustee was authorized, empowered, and direetedto take and hold possession of the railroad and all its property, rights, etc., and to maintain and operate the same until the day of sale thereafter to be fixed, or, in its discretion, proceed by bilI in equity or other appropriate proceeding in any court of competent jurisdiction, whether of the United States or of the state of Georgia, to foreclose the mortgage, and enforce the rights, liens, and securities of the trustee and bondholders thereunder. On September 2, 1887, the defendant railroad company (mortgagor) issued income bonds, and, to secure their payment according to their terms, executed .and delivered to the same trustee a mortgage, covering the same property, declared to be subsequent and subordinate in all respects to the mortgage dated September 1, 1887, pledging as security for the payments stipulated to be made by the income bonds and coupons thereto attached the net earnings of the railroad, after providing for the interest on the $2,240,000 of first mortgage prior lien bond8. After the execution and delivery of these mortgages, the mortgagor company sold and conveyed all of its property, including the property covered by the mortgages, to the Savannah & Western Railroad Company, which last-named company came under the eontrol of the Central Railroad & Banking Company of Georgia, all of whose property was placed in the hands of receivers in J\lareh, 1892. On September 1, 18fl2, default was made in the payment of interest on the bonds secured by the mortgage of September 1, 1887, and on :Uareh 1, 1893, and on September 1, 1893, default was made in the payment of interest respectively maturing on those dates. On December 15, 1893, the trustee in the deed of trust exhibited its bill. with proper averments, asking for a foreclol'lure of its lien, a salt of the mortgaged property, and showing that the property was irtadequate security for the debt, that the mortgagor and its assigns were insolvent, and praying that, pending foreclosure proceedings, the mortgaged property be taken possession of by a reeeiver to be appointed by the court, with such powers and authority as may be
278 t()
94 FEDERAL 'REPORTER.
thereof,. use cit Eugene' E, J9nes, was thereupo:IJ. duly a!>pointed receiver ,by' a,n ?rder passed 1, 1894. of aU (;lftherailroad an,4operated it pending the pr,ogress of the ,Ilustomary orders in such The decree and sale was passed July 12, 1894. It ascertained am()unt due on the at that date. ft provideq that the 1?e realized from shOUld be to tbe -payment of cbsts, inexpenses and: allowances sec()nd, to the payment of, the principal and ipterest due and unpaid on the bonds secured by the mortgage of September 1, 1887; third, to the paYment of the of the inCOme bonds. secured by the ,mortgage of date Sepa,nd, fourth, should there be any surplus remaining, teml)er'.2,: after aboye directed, to be paid into the registry of the. court to abide such order and decree. as the court sh.ould:tb.ake in For reasoni3 which the record does 'fu,lly '. disclose, the'. sale was not made until sonie time in the el:\,rIypai't 9f 1897.. At the a reorganization became the purchaser. ,TheycompIied"with the terms of the sale, and the them bya dec,reepassed JUlle30, 1897. On 25, 1897, the interveners their petitl0I1" showing that t,hey judgm,ent cre,ditors Qf, the .mortgagor com¢ny, whose judgrp.entl1l.· W,ere obtained in the. several state courts. of Georgia prior of the the Central Trust Compaqy' of New York the mortgage. They claimed that, as judgment they had a lien-First, on the proceeds of the sale ;the road, .eX.Gept' ,the 20 miles that had been constructed at tb,e da.fe of. the mortgage'; and, second, on the whole amount of the net earnings in' the hands of the receiver acquired. by him from his operation of the road pending the forec1osqre proceedings. To this petition. the 'receiver (appeUee) demurred, on the .ground that the lien of" the mortgage attached to aU of the proceeds of the sale of the railroad property and to the alleged income earned by the receiver, and was superior to theaUeged lien of the petitioning creditors' judgII\ents. On September 16, 1898, the circuit court passed its decree, sustaining the demurrer of the receiver, and dismissed the petition of the interveners. 89 Fed. 388. From that decree this appeal was taken. The errors' assigned are: (1) That the circuit court erred in holding that the mortgage is a valid lien upon the property acquired by the railroad company after the execution. of the mortgage; (2) in holding that the mortgage creditors are entitled to the income earned by the receiver While operating the railroad; (3) in holding that the judgments are not liens on. the after-acquired property and the incolDes, superior to the mortgage lien. The appellants contend---,Fir'st, that the defendant railroa,d corporati.on (mortgagor) .had no authority, un,<ler its original Or ,its amended charter, or. the general laws of Georgia, to mortgage on September 1, 1887, any,part of its railroad npt then constructed, or any part of its equipment or other property which had not theretofore been
to
279
acquired and was not then held by it; and, second, that the modgagor company had no authority, under its charter or under the general laws of Georgia, to mortgage its income. By. the act of the legislature of the state of Georgia approved September 27, 1881, a general law for the incorporation of railroads, it is provided that future-acquired property may be mortgaged by railroad corporations formed under that act. Laws Ga. 1880-81, p. 1(;0, § 9. The supreme court of Georgia, by a decision rendered on August 20, 1894, held: "(1) There being in force a general law for the incorporation of railroad companies, if the subsequent special charters of the two railroad companies involved in this litigation were unconstitutional, and therefore wholly void, each of said companies was, nevertheless, :i corporation de facto, and, as such, could acquire and own property, and would be bound to its creditors by all acts which would have bound it had it been duly incorporated under the general law. Bonds issued by it, and deeds or mortgages made to secure the same, are enforceable to the same extent as they would be if no special charter had been granted, and the company had been organized as a corporation in the method prescribed by the general law, and such bonds, deeds, and mortgages had been thereafter executed; and any person making claim upon the assets of one of these corporations de facto, whether as its own creditor directly, or as a creditor of such creditor or of a stockholder, sustains the same relation to it in respect to such claim as would be sustained under like circumstances were it a corporation de jure. (2) A corporation created under the general law of this state for incorporating railroad companies can bind by mortgage or trust deed, executed to secure bonds issued by it to prOVide funds for constructing its railroad, futUre-acquired property, as well as property owned by it at the time of the execution of the instrument. This being so, a corporation de .facto can do the like." Georgia S. & F. R. Co. v. Mercantile Trust & Deposit Co., 94 Ga. 306, 21 S. E.701.
In the opinion in the case just cited we find this langnage: "If we. have succeeded in' showing that these railroad companies, supposing their special charters to be void, are de facto corporations, because of the existence of the general law, it would seem that they might make any contracts authorized by that law, and become bound by such contracts to those with whom the same were made. As a practical proposition, it is well known that most, if not all, of the railroads of any length in the United States which have been built for years past have been constructed by issuing in advance bonds upon their entire lines, including the unbuilt portions, as well as .those already constructed,with mortgages to secure the bonds covering the whole. If a de facto railroad company is a corporation for any purpose at all, Hougbt, on general principles, to have the power to mortgage 'future-acquired property'; and this seems to be the doctrine very generally recognized by the courts."
On the authority of decision of the supreme court of Georg,ia, the circuit court rightly held that the appellants' first contention is not well taken. The appellants' second contention is that the deed of trust foreclosed in these proceedings does not purport, in express terms, to cover the income of the railroad property, and that, if it did, the Ij1ortgagor company had no authority to mortgage its income. It is earnestly insisted that the questions submitted by this contention depend upon the local law as declared by the statutes of Georgia and by the decisions of the supreme court of that state. We haVe examined with care all the provisions of the statlaw which !3eem to us to bear either directly or remotely upon these questions, and, in connection therewith, the decisions of
280
" 94 FEDERAL" REPORTER.
court of Georgia to :which we" have been referred. We ha:ve considered with and the decision in Green V! Railroad 00.,24 is. E. 814, and the later decision in Railway Co. v. Barton, 28 S. E. 842. The authority of the decision first just above cited is stated thus by the court: mvoklng !rellef, such' as the appointment of a receiver and the adminlstbitlon .of the mortgaged property. by equitable means and agencies, mortgagees" submit themselves tD do equity relatively to any creditor of the mortgagor who may rightly intervene in the foreclosure proceedings in which such relief is sought. Mortgages upon a railway, and the Income from the same, the m"ortgagor being left In are, as to the .income, whether produce<! before or after the appointment of a receiver in foreclosure proceedings, to be postponed in" equity hI fa VOl' of a claim for damages resulting frQm a tort committed by the mortgagor while and by reason of operating the railway after the execution of the mortgage" The tort now in question consisting or" negligence in running a train upon the railway, damages accrued, and judgment therefor against ttte mortgagor having been, obtained before the mortgages were foreclosed or the receiver ,vas. appointed, such damages, so reduced to judgment, should be regarded as operating expenses charged by the jUdgment upon income as against the mortgages and all their incidents. So long as such a charge is unsatisfied, the mortgagees cannot justly and equitably dive.rt income from its payment, and take the benefit of such diversion, whether directly or Indirectly."
of preferential claims which have been fully recognized generally by the courts since tJ.1e decision in Fosdick v. Schall, ,,99 U. S. 235. There was manifested in the circuit courts of the United States a to extend the doctrine of Fosdick v. SCllall to a degree that has challenged the attention of the supreme court, and moved it to check this tendency, as appears from its utterances in Kneeland v. Loan Co., 10 Ct. 950, and subsequent The fact that so many railroad corporations have issued bonds and mortgarailroads, ged their property in advance of the construction of and the acquisition of the propertywortgaged, greatly beyond its market value at forced sale, had inclined courts of equity to treat the holders of railroad bonds, or the trustees in the' mortgages, as the owners of the roads, rather than simply as lienholders, and to charge th,em as sucn (jwners,after defauit, with the unpaid expenses of operating the property. It has become the settled pracmortgagees invoke equitable relief and seek the appointment of a receiver and the administration of' the mortgaged property by equitable means and agencies, to require them to permit payment of that large class of· claims generally referred to as The considerations which· inspired the glOWing argument of the distinguished jurist who wrote the opiniouin the case of Green v.Railr.Md Co., supra, have touched the consciences of other chancellors.. No· exactly definite limits can be traced to include the class of claims which ha"Ve generally been heretofore allowed as preferential. The warnings of the supreme court indicate that the bounds have been extended as far as sound judicial discretion can go, and that, if further reliefis needed,it can be granted only by the legislature. The decisions of the supreme
It extends a little further than had hitherto been done the class
This decision evidently does not purport to rest upon local law.
CENTRAL TRUST CO. V. CHATTANOOGA, R. &; C. R. CO.
281
court of Georgia on which the appellants chiefly rely have been rendered since the execution of the mortgage here involved, and since the default, which by the terms of the mortgage terminated the right of the mortgagor to receive the income, and since the appointment of the receiver, who took possession of the property at the prayer of the mortgagee, to secure the earnings of the railroad to the use of the bondholders. We do not see in these decisions anything to control or qualify the settled dodrine that has obtained in the courts of the "Cnited States in such fOl'eclosure proceedings as these. The appellants appear to regard as of the first importance the distinction between mortgages which, in express terms and with full warrant, are made to include the int'ome of the property, and those which for want of power in the mortgagor. or a failure to exercise the power, do not expressly embrace the income. As far as we have been able to discover, such a distinction cannot rest on any provisions of the statute law of Georgia that are peculiar to that state, either in the language of those provisions or in the construction that has been placed on the language by its supreme court. The Civil Code of Georgia (section 2723) declares, "A mortgage in this state is only security for a debt, and passes no title." That rule is not peculiar to Georgia. It was the rule in equity from the beginning.. In this country that rule is accepted by the courts of law. In some . states, as in Georgia, it.is expressed in a statutory provision; but, wherever thus found, it is only declaratory of the law already established by the dealings of the people and the decisions of the eourts. This rule being established, it would seem to be immatc rial whether or not the income is expressly named as included in the mortgage. When the mortgage does expressly include the income, the mortgagee can only claim his debt, principal and interest; and, while these are paid as they mature, he can have no cause of action on his mortgage for possession, or for account of rents and profits, or for any other account. He receives what is due him as it matures, and the mortgagor, or his assigns in possession, receive, and have a right to receive, the rents and profits. If default is made in the payment of interest, or of principal that has matured, the mortgagee has his right to foreclose accordiugto the terms of the mortgage. If the corpus of the mortgaged property is ample security for the whole mortgage debt, the mortgagee has no need, even after default, to look to the iucome, or to an account of rents and profits, so long as the corpus is adequate security. When the mortgaged property is not of value sufficient to secure the payment of the mortgage debt, or when its suflidency becomes substantially doubtful, and the mortgagor is insolvent. accruing interest matured and unpaid, like accruing taxes due and unpaid, takes the character of waste as clearly and distinctively as deteriorations by the cutting of timber, suffering dilapidation, etc.,-the leading illustrations from the earliest time in the adjudged cases and with text writers. In such cases courts of equity always have the power to take charge of the property boY means of a receiver, and to preserve not only the corpus, but
282
04 FEDERAL REPORTER.
profits for satisfaction 'Qf the debt.· Kountze, v. RotE:ICo., W7 U. S. 378, ,2 SIlP. Ot. ,911; Teal v. 111 U. s: 242, 420. ,,',',,' i , " " · in this casesho,ws that (b,e mortgf!,gor company and its !ire insolvent, are unable to .PllY their qebtfil" apd liabilities in that the value. of the property covered, ,l:iythe mortgage of Sepfember 1, 1887, is less in amount ,than the amount of the bon,d,S, issued under that mortgage,an, d is ina,de,qu,ate, security for their payment. The result of the sale shows 'that after nearly three' years'delay (dm:ing which the property wasjlllproved) the court, through it,S cOIllmissioner, succeeded in obta,iniIlg a bid for the W()J,'tgaged property as an entirety to an amount equal to not more than one:fifth of the ,mortgage <tebt at tb lt date of the sale. H iS,true that such salel', are not reasonable ,test of the actual value of such property. 'tt js, equally true that the conditioul;l, ,which generally affeCt ,such property have ,been found to render it-not practicable to make a, sal.e thereof, in any other manner to l\D.ygreater or .t9an': equaJadvantagetoa,ll parties concerned ,therein. Tbe praetical,resuIt,from, these,previJ"lent conditions arailroal1, corporation is Unable topaY,its currently accrui:J;ig it js a,ctually, as well as tech:p,ically, inSOlvent, and secl1rity for its debt. The larger'p:,trt /4 the value of! ,the property is depen.dent upon' its, continued-operation asa, Pllblic carrier., operation and abiiity J() earn, in mQstca,sel'! largely, dependent on its relations with other the, railroad's, carriers, and QU it while the apof a receIVer i!!l not a Illatter of strict rIght, and such the exerGise ,of judicial discretion, applications tbef;le ipuuinent conditiolll'l ,11earing suc4, pljoJ?e,rty" after default by the mortgagor in, the paYUlent of interest. oIl' the mort(!age debt, ,give to a,n application for the appointm.ent of a receiver f{reat force, an.d the practice to grant the prayer, t,llerefor in such eases has become settled. ,We thinJr it is quite equally well settled that tMe receiver' takes and operates the property, subject to preferential Claims as stated in Fosdick v., Schall, and to liens prior in point of time to the date of the mortgage, for the benefit of the. mortgagees,according to their priority. His possession is "that of the court, whose officer he is, a;nd adds nothing to the previously existing title of the mortgagees. lIe holds, pending the litigation, for the benefit ,of whomsoever in the end it shall be found to, concern, and in the meantime the court proceeds to determine the rights of the parties upon the same principles it would if no change of possession had taken place." This is precisely what. thecil'cuit .court did in, this case. It has determined that the judgments, being junior to the mortgage in the date of their rendition, if entitled to a lien at all on the corpus of the mortgaged property, such lien is not superior to that of the mortgage. And the mortgage by its terms having limited the right of the mortgagor to remain in possession and receive rents and profits, and authorized the entry of the trustee either without or by
YOU"G V. RAPIER.
283
the aid of a court of equity, the right to operate the road and receive its rents and profits, subject to such terms as the court of equity might impose, inured to the mortgagees at the date of the entry by the receiver. We have seen that the mortgage does expressly provide, that the mortgagor should receive the income until default had been made for three months in the payment of interest on the bonds, and that thereupon the trustee had the right to take possession and operate the mortgaged property until the sale to be thereafter fixed, or, at its discretion, to apply to a court of equity, as it elected to do, for the appointment of a receiver to take charge of the property, and operate the same until a sale should be made. We have seen, further, that in the issuance of its income bonds, and the mortgage given to secure the same, it provided that payment thereon should be made out of the net income of the road, after the interest on the bonds issued under the prior mortgage was duly paid. It seems clear to us that the circuit court did not err in holding that the lien of the mortgage was superior to the lien of the judgments, both as to the proceeds of the corpus of the property and as to the net income from the operation thereof while it was in the hands of the receiver. The decree of the circuit court is therefore affirmed. YOUNG v. RAPIER.
(Circuit Court of Appeals, Fifth Circuit. No. 802.
May 9, 1899.)
There can be no recovery of specific property, as part of the community, in an action by a divorced wife against the estate of her former husband, where it does not appear that the property is in the possession of, or in any wise claimed by, defendant. 2. SAME-INCREASE OF SEPAUATE BY USE OF FUNDS. '1'0 entitle a dlYorced wife to a share in the increased value of her hus-
PROPERTy-RECOVERY FROM ESTATE OF FORMER HUSBAND.
band's separate property caused by the expenditure of community funds, the amount of such expenditure must be shown. TO ACCEPT COMMUNITY.
3.
SAME-FAILURE OF DIVORCED
'Vhere the only evidence that a divorced wife had accepted the community was that of a futile suit to have the divorce annulled, and a suit to have her decreed the owner of an undivided one-half interest in property claimed to have been acquired during the community, commenced more than 20 years after the divorce, she will be presumed to have renounced the community, under Hey. Ciy. Code La. art. 2420, providing that a divorced wife who has not accepted the community within the delays fixed is supposed to have renounced the same, unless she has within the term obtained a prolongation.
In Error to the Circuit Court of the United States for the Eastern District of Louisiana. Mrs. Jennie Bronson (now the wife of Henry J. Young) was married to Alva M. Holbrook, in the city of :\'ew York, on the 25th day of June, 1864. Holbrook was domiciled in the city of New Orlenns. On the 20th day of December, 1871, upon a petition filed in :\'ovember of that year, a decree of divorce was pronounced in the Eighth district court for the parish of Orleans,