MERCHANTS' LOAN & TRUST CO. et al. v. CHICAGO RYS. CO. (three cases), 158 F. 923

BREWER, Circuit Justice. Public interests, the necessity of a unity of operation and control of the street car system in North and West Chicago, are the stress of the argument in favor of the order of the Circuit Court.

Section 38 of the ordinance, as well as the statements of counsel, make against this contention, inasmuch as there is by that

section given to the company that has the ownership of the south side property the right to proceed into the north and west side, and thus establish a unified system for the entire city. It becomes, therefore, more a question of private rights. I think I may say for all of us — of course, I speak with a little hesitation in view of my limited knowledge of the conditions — that the ordinance tendered by the city was reasonable and fair, and that as a business proposition it would have been wise for all parties to accept it; but the court does not make contracts for parties.

It deals with legal rights, as the parties have, by contract, made them, and although it may believe that a party insisting upon those rights is probably, or even certainly, bound to suffer loss, yet while he insists it must protect him in his insistence. There is no wide discretion vested in the chan1 cellor which permits him to disturb contract rights — rights of property. This question has been before the Supreme Court more than once, and as was said in the case of Kneeland v. American Loan Co., 136 U. S. 97, 10 Sup. Ct. 953 (34 L.

Ed. 379): “The appointment of a receiver vests in the court no absolute control over the property, and no general authority to displace vested contract liens. Because in a few specified and limited cases this court has declared that unsecured claims were entitled to priority over mortgage debts, an idea seems to have obtained that a court appointing a receiver acquires power to give such preference to any general and unsecured claims. It has been assumed that a court appointing a receiver could rightfully burden the mortgaged property for the payment of any unsecured indebtedness.

Indeed, we are advised that some courts have made the appointment of a receiver conditional upon the payment of all unsecured indebtedness in preference to the mortgage liens sought to be enforced. Can anything be conceived which more thoroughly destroys the sacredness of .contract obligations? One holding a mortgage debt upon a railroad has the same right to demand and expect of the court respect for his vested and' contracted priority as the holder of a mortgage on a farm or lot..

So, when a court appoints a receiver of railroad property, it has no right to make that receivership conditional on the payment of other than those few unsecured claims, which, by the rulings of this court, have been declared to have an equitable priority. No one is bound to sell to a railroad company or to work for it, and whoever has dealings with a company whose property is .mortgaged must be assumed to have dealt, with it on the faith of its personal responsibility, and not In expectation of subsequently displacing the priority of the mortgage liens.

It is the exception and not the rule that such priority of liens can he displaced.

We emphasize this fact of the sacredness of, contract liens, for the reason that there seems to be growing an idea that the chancellor, in the exercise of his equitable powers, has unlimited discretion in this matter of the displacement of vested liens.” Now,, undoubtedly, it is true that when a receiver is appointed of railroad properties, street car or steam railroad, there is power vested in the court appointing to, under certain conditions, authorize the issue of receiver’s certificates and those certificates are sometimes given priority over mortgage liens.

But, notwithstanding I am forced to admit there have been some exceptions in the action of trial courts, the rule in the Supreme Court, emphasized in this case, is that no serious disturbance can be made of contract obligations or priority. The amount of receiver’s certificates is generally small in comparison with the value of the property concerned. In this case it appears that $822,000 of receiver’s certificates are outstanding.

Probably the condition required that something should be done to keep the plant in working, serviceable condition, and that amount is, relative to the value of the entire system, not large. But the case before us involves something more. We cannot rest it upon the theory of de minimis, a trifling matter. We have studied, each one of us separately, the plan of reorganization, the order of the court, and the ordinance, and it seems to each of us that it interferes most materially, substantially, to the destruction of vested contract liens.

There are some $13,000,000 mortgage bonds — I may not be right as to the figures, but there is at least that amount — secured by definite contracts upon specific property. This order does not provide for displacing, slightly, the priority by the issue of a minor sum in receiver’s certificates, but it takes the whole body of these contract obligations and puts them below a mortgage of from $12,000,000 to $15,000,000.

It may be wise, and I think we agree that it is, that this bond issue be made and that this railway system be unified and improved, as contemplated in the ordinance; but it is not for the court to assume the power to compel, because it believes that it is wise and good business. Parties have vested rights. Bet me put the case this way:. Supposing the Legislature of Illinois had passed

an act providing for the displacement of these mortgage liens and giving in place thereof only security Upon the property as it shall be perfected, and then subsequently to the $12,000,000 mortgage. Would the court, if the validity of that action of the Legislature were before it, say that it was within the scope of legislative power thus to disturb priority of liens, and would the court sustain the act upon the theory that it believed the Legislature was acting wisely, that it was a good business solu-, tion of a difficult situation?

Parties have inherent and sacred rights of property which cannot be disturbed, except under the law of eminent domain, or some provision of that kind, and then compensation is made. It does not lie in the power of the Legislature, or in the power of the courts, to materially affect the liens, either in the property upon which they rest, or their priority.

Of course, there can be no question about this. ' It appears from the discussion that this whole scheme is predicated upon the fact that the physical condition of the city railway system on the north and west sides is poor; that it needs improvement ; that the interests there are conflicting; that franchises are expiring, or have expired; rights are mingled and perhaps confused; and the order proceeds upon the theory that it is best for all that these separate liens and separate corporate interests shall be merged in one corporation, whose duty it shall be to borrow money enough to put the physical property in good condition.

Now, that may be a wise business proposition, and if the court had power to take hold of these things and do for the people, who are mortgage bondholders, that which it thinks best for them, we might have no hesitation in sustaining this; but every man in this country decides questions in respect to his own property for himself. Rife, liberty, and the pursuit of happiness are guaranteed to each one. They are inalienable rights, and although a man misjudges what is best for him, that fact gives no court the right to compel him to act otherwise.

In this connection, one matter deserves notice, and that is that the scheme implies the destruction of much of the property as it now exists and the replacing it with structures adapted to new conditions. In that respect it differs from many issues of receiver’s certificates, especially those of large amounts, which have been merely for the purpose of adding something new to existing property.

This rehabilitating mortgage, and it can certainly stand in no higher position than receiver’s certificates, is not simply to raise money for additional lines, extension of the system, but largely for the replacement of the present structures with something new and better. In other words, to no small extent the property mortgaged is destroyed, and new property put in its place, subject to a prior lien. This rehabilitating mortgage is not in terms limited in amount.

It is limited, however, by the fact that the moneys h> be borrowed are to be expended in the improvement of the unified system, and it is a fact, too, as stated by counsel, that a committee representing the city, a board of engineers I think he called it, has jurisdiction over the amount and character of the improvements. Now, what does that mean? It means that those improvements are not made according to the judgment of the bondholders.

It means that they are not made according to the judgment of the present corporate owners of the property, either stockholders or bondholders, but that a body outside of them, not appointed by them, is charged with the responsibility of determining what shall be done in the way of improvements. Now, I have no doubt, as was said by counsel, that the committee selected by the city of Chicago will deal fairly and honestly, and, perhaps, they being civil engineers and experts in their lines of business, with far better judgment than the trustees of these mortgages, or the officers of the corporations.

But, at the same time, no man is compelled to turn his property over to the control and management of another. At least, the courts are not authorized, except in the case of insanity or imbecility, to take one person’s property, and put it into some one else’s care to determine what is best for it. These voluntary reorganizations, which are going on all over the country do involve, sometimes, moral pressure upon certain interests to concede something in the hope that they will get a larger benefit from the reorganization, but tfye action is voluntary. They are the acts of the parties themselves.

They are making new contracts. They are entering into new relationship with one another. The individual is making the contract, and not the court for him. In reference to the superintendency by this committee, it is not provided, as I think, that that superintendence shall be under judicial control. The Circuit Court, in making this order, does not reserve to itself the power to supervise the action of the board of engineers to whom the'character and amount of the improvements are entrusted.

The full control of those properties in the rehabilitation is given to a committee not selected by the present owners, and not within judicial control. While the city names one engineer, the company a second —that is, the company that takes, these properties — a gentleman, Mr. Arnold, is selected and appointed as the third member. Yet he holds life by the same tenure that the rest of us do and may not live long, and who the city will appoint in his place cannot be foreshadowed.

At any rate, with reference to the personnel, while I do not mean to .cast any reflection upon this man, or suggest the probability of the city selecting an unfit man, it is enough that it is a selection not made by the owners of the property. As I said a while ago, it is conceded that the amount of this mortgage — the rehabilitating mortgage — is uncertain. It is limited in two ways: One, that the proceeds must be used for improvements, and another that the improvements are subject to the decision and judgment of this committee.

But it is, as shown in the plan of reorganization, something uncertain, and no man can tell certainly what will be. As the amount needed for this purpose cannot be fixed with exactness, it is impossible to fix a limitation as to the authorized issue; and hence such amount must be left without limitation except as stated above. We have hastened in our examination, because a week from to-day is fixed as the time for the expiration of the option.

Thinking that perhaps during the week the parties may come to some agreement with reference to the disposition which should be made of this property, and believing, as we do, that the system proposed has its great advantages, we have, without stopping to write out in full our views upon this or any other question, announced this decision orally. At the same time we reserve the right, each one of us, to put in writing such further expression as may seem to him desirable. The order will be that the order made by the Circuit Court is set aside, and the case remanded for further proceedings.