LOUISVILLE & N. R. CO. et al. v. CENTRAL TRUST CO. OF NEW YORK et al., 87 F. 500

SEVERENS, District Judge, having stated the case as above, delivered the opinion oí the court. As will be seen from the foregoing statement of the facts, the circuit court directed that compensation be made for the use of the track, in accordance with the terms of the contract, during the time when the court had possession of the property.

We have, therefore, only to determine whether or not the court was right in disallowing priority to the interveners’ claim for the track service from the latter part of March, 3890, to June 27, 1890, that being the period of the Louisville ¡Southern Railroad Company’s occupation, and also during the second period, from June 27, 3890, to June 25, 185)2, while the track was in use by the East Tennessee, Virginia & Georgia Railway Company. It wili be noticed from these dates that the use by the first-named company terminated two years prior to the time when the receivers were put in possession.

It was found and reported by the master that during this first period, the claim for which we are now considering, the current net earnings were more than sufficient to pay this claim; and it also appears that surplus earnings were paid over to the bondholders for interest, or appropriated to the purchase of equipment and for improvements of the road.

Upon such facts it is contended by the counsel for the appellants that the proceeds of the sale of the mortgaged property may be appropriated to the interveners’ claim for that period, notwithstanding the lapse of time intervening between the termination of it and the commencement of the foreclosure proceedings. Rut it would be unprecedented for the court, upon these facts merely, to concede the priority of a claim of such a character. There is no proof in the record to show that at the time in question the Louisville Southern Railroad Company was insolvent or approaching or apprehending insolvency.

The principal of the bonded debt, secured by its mortgage, was not due, the interest was being paid, and there was no ground for any action of the trustee towards foreclosure. There was, therefore, no delay which enabled the mortgagor to disappoint its creditors.

There is nothing to show that the Kentucky Central Railroad Company relied upon, or had any reasons for reiying upon, the then current earnings as the source from which these track rentals were to he paid, and there was nothing in the nature of an equity which gave it any right to have those earnings applied in satisfaction of the installments of rent as they fell due. In fact, there was no equitable circumstance which does not exist in every case where a debtor applies his current income to the payment of one creditor rather than another.

Again, in order to constitute an equitable claim upon the current income, it must appear that the creditor asserting the claim did, in fact, or presumably, rely upon an expectation of being paid out of that fund. In the present case it is shown that from the beginning there was a question pending between the Kentucky Central Railroad Company and the Louisville Southern Railroad Company in regard to the construction of the contract on wMeh the amount to be paid under the contract was to be ascertained.

The parties took no steps at that time to have the question determined, and appear by mutual consent to have let its determination remain in abeyance. This action shows clearly enough, that the Kentucky Central Railroad Company did not rely upon or expect payment for this track service at the time or out of the current earnings, but must have understood that payment was postponed until some future time. It is a-hopeless proposition to say that any equitable charge upon the current income arose upon facts like these.

None of the facts upon which equitable claims have been maintained in suits of this character existed. All of the cases, from Fosdick v. Schall, 99 U. S. 235, to the present time, in which such claims have been recognized as having priority, rest upon the fundamental ground that there were peculiar circumstances, out of the ordinary course of business, which gave rise to a special equity, which it was the duty of the court to enforce..

With respect to the claim of priority for the track rentals during the period from June 27, 1890, to June 25, 1892, while the East Tennessee, Virginia & Georgia Railway Company was operating as lessee the road of the Louisville Southern Railroad Company, many of the above and still other considerations are presented. The lessee company was using this piece of track for its own purposes and its own business.

It is true that, in a strictly legal sense, the lessor continued to be bound by the obligations of the contract; but, having, assigned its interest therein to the East Tennessee, Virginia & Georgia Railway Company, with the knowledge of the Kentucky Central Railroad Company, followed bv the recognition by the latter company of the assignment, the lessor company stood in the relation of-surety for the payment of these charges. It did not control the operation of the road and had no control of the disposition of its earn-, ings.

During the foreclosure proceedings resulting in the sale of the. property of the East Tennessee, Virginia & Georgia Railway Company and the distribution of its assets, this claim was not nresented. to the court, nor was any attempt made to collect it. It was known to all parties that the position of the Louisville Southern Railroad Company was- that of surety merely.

We do not say that the mere failure to assert this claim against the assets of the East Tennessee,Virginia & Georgia Railway Company during its winding up would, in and of itself, be a bar to the prosecution of the same claim against, the surety if inherently it were one of an equitable character, but it is one of the circumstances which a court of ¡equity may properly regard as having some bearing upon this claim as urged in the present condition of affairs.

But beyond all this, and with respect to the claim, for both of the periods we have been considering, the nature of-the. claim itself is of a kind which, upon the general current-of authority upon the subject, disentitles it to a position of priority over the mort-' gage debt.

It appears to us to stand upon no higher or better ground than claims for rentals of rolling stock, which are quite as indispensa-, ble to the daily operations of a railroad as are its tracks; and, with respect to track rentals for the period prior to the accession of the. receiver, they are not, as a general rule, recognized as entitled to priority. Thomas v. Car Co., 149 U. S. 95, 13 Sup. Ct. 824.

The facts in the present case clearly indicate that the Kentucky Central Railroad Company placed its reliance upon the general credit of the Louisville Southern Railroad Company and of the East Tennessee, Virginia & Georgia Railway Company, rather than upon the expectation of displacing the priority of the mortgage lien, to adopt the language of Mr. Justice Shiras, in delivering the opinion of the supreme court in the case of Thomas v.

Car Co.; or, as he elsewhere puts it in the same opinion,, ‘‘must be regarded as contracting upon the responsibility of the railroad company, and not in reliance upon the interposition of a court of equity.” It further remains to he observed that much the larger portion of the interveners’ claim is excluded by the operation of the rule; in respect to the length of time prior to the appointment of a receiver llie court will regard in the adjustment of equities of this sort.

But for the reason that, upon the grounds already considered, we think no part of this claim can be given preference, it is not necessary to draw a line of discrimination or to canvass the rule upon this subject. It was discussed upon this, as well as several other of the aspects of this case, by Judge Lurton in delivering the opinion of this court in the case of Central Trust Co. of New York v. East Tennessee, V. & G. Ry. Co., 26 C. C. A. 30, 80 Fed. 624 Then; is no error in the decree appealed from, and it is affirmed, with costs.