FARMERS' LOAN & TRUST CO. et al. v. CENTRALIA & C. R. CO. et al., 96 F. 636

WOODS, Circuit Judge, after stating the case, delivered the opinion of the court. The bill of the Missouri Car & Foundry Company, under which the receiver was appointed and the several orders made for the issue of receiver’s certificates, was doubtless demurrable, because it did not show that the demand of the plaintiff had been reduced to judgment (Scott v. Neely, 140 U. S. 106, 11 Sup. Ct. 712; Cates v. Allen, 149 U. S. 451, 33 Sup. Ct. 883, 977); and the defect was not cured by an admission of record of the existence and amount of the debt. There was no such admission.

But it does not follow, as we conceive, that tiie court was wholly without jurisdiction of the cause, and ail its proceedings void; nor, in our opinion, was jurisdiction lost upon payment of the demand of the plaintiff in the bill. “A court which appoints a receiver,” it was said in Kneeland v. Trust Co., 136 U. S. 89, 98, 10 Sup.

Ct. 950, 953, "acquires, by virtue of that appointment, certain rights, and assumes certain obligations, and the expenses which the court creates in discharge of those obligations are burdens necessarily on the property taken possession of; and this, irrespective of the question who may be the ultimate owner, or who may have the preferred lien, or who may invoke the receivership.” It is true that in the next sentence the court proceeded to say: "So, if, at the instance of a party rightfully entitled thereto, the court should appoint a receiver of property, the same being a railroad property, and therefore under an obligation to the public of continual operation, it, in the administration of such receivership, might rightfully contract debts necessary for the operation of the road, either for labor, supplies, or rentals, and make such expenses a prior lien on the property itself:” but by the use of the expression, "at the instance of a party rightfully entitled thereto,” it was not intended, we think, that the validity of a receivership, and everything done under it, should depend absolutely upon the actual or the alleged right of the plaintiff in the bill to invoke the appointment of a receiver.

Though no objection was interposed, it was doubtless erroneous on the part of the court to proceed as it did ou the bill in this case, but to hold that the validity of the proceedings in such cases will depend upon the exercise of an unerring judgment of the sufficiency of the bill to withstand demurrer would involve unendurable mischiefs. This bill was not insufficient, we think, to invoke the exercise of jurisdiction. In its general character and scope it was of equitable cognizance, and the jurisdiction of the court did not depend upon technical sufficiency or fullness of averment. Sage v. Railroad Co., 125 U.

S. 375, 8 Sup. Ct. 887; Brown v. Iron Co., 134 U. S. 534, 10 Sup. Ct. 604. A demurrer for lack of jurisdiction would have been irrelevant. • Aside from the question of jurisdiction, there is no ground for serious objection to'the certificates issued, except that to the extent of $176,0'00 there was no lawful reason for their issue, and the proceeds were applied to the payment of obligations which, without the consent of the bondholders, should not have been paid in preference to the mortgage debt.

There is dispute whether the obligations so paid were incurred by the railroad company in the construction of its road, or by others under construction contracts; but whether that dispute be resolved one way or the other is not important. The obligations were of long standing, and, though recently renewed, were entitled on no consideration, without the consent of the bondholders, to priority over the mortgage lien. It is strenuously contended that the consent of-the bondholders was obtained, both to the issue of the certificates and to the use made of the proceeds, but in the main that is not shown to be true.

Gillett, the president of the railroad company, had no authority to represent the bondholders, and his orvn testimony is that, except as president of the company, he never claimed to have such authority. If the claim was made, it should not have been accepted without tangible proof capable of being set out in the record. In matters of such importance, there should- be more than a recital in a docket entry, which, if it be evidence, is not conclusive of the fact against any but parties.

The chief reliance, however, for proof of consent, is the bondholders’ agreement, and the power of attorney given by the bondholders’ committee to Griswold. But those writings neither declare nor warrant an inference of such consent. Rather the contrary. The bondholders, it is true, clothed their committee with “full power and authority to do and perform all and every act or thing requisite or necessary to be done in and about the premises, as fully, to all intents and purposes,” as they might or could do if personally present. But what were the premises?

The recitals and other clauses of the contract show plainly enough. The bondholders thereby declared themselves “desirous of exercising, enforcing, and protecting their legal rights in the premises,” and the committee, appointed for that purpose, could not, under the general words quoted, consent to the disregard and outright destruction of the rights which they were appointed to protect. They did not attempt to exceed, nor indeed directly to exercise, their powers.

If they were authorized to appoint Griswold to represent them in the matter, they could not, and, so fár as appears, did not, attempt to give him powers greater than their own. They authorized him to represent them under the agreement, to do certain specified things, “and to do all other acts necessary to protect the bondholders’ interests”; which, of course, did not mean that those interests should be given away in favor of general unsecured creditors, in whose favor there was no cognizable équity.

It is urged next that the bondholders are represented by the trustee named in the deed of trust, and are bound by what was done, because notice was sent to the trustee, the Farmers’ Loan & Trust Company. That company, however, though nan:(id a defendant in the wise, was not in fact a party, and the notices sent to it, in our opinion, were not effective to preclude objection to the orders of the court by the trustee, when finally it appeared in the case in obedience to formal notice. For the law of the case in this respect, we cannot do bettor than refer to the opinion of Mr. Justice liarían in Hervey v.

Railway Co., 28 Fed. 169, and to the opinion of the supreme court in the same case on appeal, in Union Trust Co. v. Illinois M. Ry. Co., 117 U. S. 434, 6 Sup. Ct. 809.

We quote from the latter opinion at length: “In regard to the fact that neither the Paris & Decatur bondholders nor their trastee were parlies to the suit when the order of October 9, 187(5, was made, the commissioner tools the view, which the circuit court confirmed, that, while they ought to be heard before the order was made conclusive against them, yet, as the objections to the merit of the order would not have been availing if marte before it was entered, and the money had been actually and faithfully applied, under the order of the court, to the improvement of the mortgaged property, no equitable reason appeared why the bondholders should keep ilie benefits and escape the burden. * ⅜ * Under these circumstances, the Paris & Decatur trustee and its bondholders in. court, through it, can be heard to make no other objections to the orders made, except such as arise ;is to the merits of the expenditures made under them.

The view of the commissioner and the circuit court was that the bondholders should have such rights and equities as they could have properly claimed as parties ab initio, and that this view should apply against them as well as for them. In this we concur. The principies properly applicable to this branch of the case were well expressed by Mr.

Justice Harlan in his opinion of February 2!), 188-1, as follows: ’Those who take receiver’s certificates must be deemed to have taken them subject to the rights of parties who have prior liens upon the property, and who have not, but should have been, brought before the court. While the court, under some. circiunstance.s, and for some proposes, and in advance of the prior lienholders being made parties, may have jurisdiction to charge the property with the amount of receiver’s certificates issued by its authority, it cannot, without giving such parties their day in court, deprive them of their priority of lien.

When such prior lienholders are brought before fhe court, they become entitled, upon the plainest principles of justice and equity, to eolitosl the necessity, validity, effect, and amount of all such certificates, as fully as if such questions were then, for the first time, presented for determination. If it appears that they ought not to have been made a charge upon the properly, superior to the lien created by the mortgages, then the contract rights of the prior lienholders must be protected.

On the other hand, if it appears that the court did what ought to have been done, even had the trustee and the bondholders been before it when the certificates were authorized to be Issued, the jiroperty should not be relieved from the charge made upon it, in good faith, for its "protection and preservation. Of these rules or principles the parties who inaugurated this litigation cannot justly complain.’ ” The amount expended in payment of objectionable claims, being §167,315.51, represents eer tilica tes sold at a discount of 5 per cent, to the amount of §176,121.59. It appears that W. S.

Ingraham and Eobert Rodman, who were members of the bondholders’ committee, were holders of demands upon which the improper payments were made, and received payment thereof knowing that the money was of the proceeds of receiver’s certificates. There seems to be no question of the fact, and to the extent of the bonds held by them the certificates should be deemed valid.

The decree below should be modified so as to declare invalid the certificates held by the Equitable Trust Company to the amount of $176,000 face value, less the interest therein of Ingraham and Kodman, to be determined according to the number of bonds held by them in proportion to the whole number outstanding; they to that extent not sharing in the surplus fund to be distributed among bondholders. The decree is therefore reversed, and the cause remanded, with direction to enter a decree in conformity with this opinion.