ATCHISON, T. & S. F. RY. CO. v. OSBORN, 148 F. 606

ADAMS, Circuit Judge, after stating the case as above, delivered the opinion of the court. The deed from the original purchasers of the railroad to the appellant, the Atchison, Topeka & Santa Fé Railway Company, obligates it to pay all the debts and liabilities which the original purchasers were required to pay.

Accordingly, our inquiry is limited to a consideration of the obligations imposed upon the original purchasers; and, as this depends upon the construction to be placed' upon the interlocutory and final decrees entered in the foreclosure suit, it becomes necessary to carefully consider them with the purpose of ascertaining their true meaning. In order to do so it is well first to advert to the state of law on the subject in question at the time the decrees were entered. It should be presumed that the chancellor passed all the orders and decrees in the light of, and conformably to, existing law.

By that, their meaning may well be elucidated. ' The order appointing.the receivers was interlocutory only. Its function was to lay down a scheme for holding and operating the railroad pending the foreclosure suit. No claimant acquired any right to the property or its income by virtue of that order which might not be modified by later orders or by provisions of the final decree. In other words, no vested rights accrued to any such claimant by the provisions of that order. Kneeland v. American Loan Co., 136 U. S. 89, 97, 10 Sup. Ct. 950, 34 L. Ed. 379; Louisville, Evansville & St. Louis Railway Co. v.

Wilson, 138 U. S. 501, 506, 11 Sup. Ct. 405, 34 L. Ed. 1023; Gregg v. Mercantile Trust Co., 48 C. C. A. 318, 109 Fed. 220, 226; Mather Humane Stock Transp. Co. v. Anderson, 22 C. C. A. 109, 76 Fed. 164. The income of a railroad while in the hands of a receiver is subject to equitable charges of a different character and for different reasons from those to which the corpus of the fund realized by a sale is subject. Fosdick v. Schall, 99 U. S. 235, 25 L. Ed. 339; Union Trust Co. v. Souther, 107 U. S. 591, 2 Sup. Ct. 295, 27 L. Ed. 488; St. Louis, etc., Railroad Co. v. Cleveland, etc., Railway, 125 U. S. 658, 8 Sup.

Ct. 1011, 31 L. Ed. 832; Gregg v. Metropolitan Trust Co., 197 U. S. 183, 25 Sup. Ct. 415, 49 L. Ed. 717; Blair v. St. Louis, etc., Railroad (C. C.) 22 Fed. 471. The lien created by the mortgage in favor of the bondholders was a vested right subject only to the payment of a few unsecured matured claims for operating expenses, equipment, and the like, necessary to equitably restore to unsecured creditors that which by the nonpayment of their claims when due amounted to a diversion of the fund in favor of the mortgage creditors; or, in the language of Mr.

Justice Brewer in the Kneeland Case, subject only to the payment.“of a few unsecured claims which by the rulings of this court have been declared to have an equitable priority.” Fosdick v. Schall, supra; Kneeland v. American Trust Co., supra; Gregg v. Metropolitan Trust Co., supra; Southern Railway v. Carnegie Steel Co., 176 U. S. 257, 20 Sup. Ct. 347, 44 L. Ed. 458.

Unsecured claims for damages aris*-mg from negligence of the mortgagor company before the appointment of receivers had not, before the decrees were made in this case, or since then, been recognized as conferring upon the holders an equity for their payment over the mortgage creditors. On the contrary, such claims had been declared by this court, vThen the learned chancellor who passed the decrees in this case was one of its honored members, not to be entitled to any such preferential right. St. Louis Trust Co. v. Riley, 16 C. C. A. 610, 70 Fed. 82, 30 L. R. A. 456. See, also, Atlantic Trust Co. v. Dana, 62 C. C.

A. 657, 128 Fed. 209. In the light of the foregoing well-settled propositions, the decrees now in question were entered. On their true

interpretation depends the conclusion to be reached in this case. If the purchasers at the master’s sale purchased the railroad and received deeds or conveyances thereof subject to the condition that they should pay all liabilities for damages incurred by the negligent operation o f the road before the receivers were appointed, then the decree ordering the appellant railway company, which holds under and through them and subject to all their assumed liabilities, to pay the same, is right and should be affirmed.

It may readily be conceded that, by the interlocutory order appointing the receivers, the chancellor intended to subject the earnings or income resulting from the operation of the railroad to the payment, among other things, of claims like that of Osborn.

In fact, by the first order made on December 23, 1893, before its modification on January 30, 1894, the chancellor in express words declared that the order appointing the receivers was made on condition that all demands and liabilities due or owing by the railroad, including damages for injuries to employés or other persons and to property, should be paid either out of the earnings of the road while in the hands of the receivers or out of other funds in the hands of the receivers, or, “if not sooner discharged, then the same shall be paid out of the proceeds of the sale of the road.” But, as already seen, this order confers no vested rights upon any claimant and was quickly supplanted by another one.

On January 10, 1894, doubtless out of deference to the then recently expressed opinion of Mr. Justice Brewer in Kneeland v. American Loan Company, supra, wherein he announced that courts had no right to make the -appointment of a receiver conditional upon the payment of unsecured indebtedness, the modified order found in the statement of the case was made, eliminating the condition found in the order of December 23d, and also striking out that part of the order requiring the unsecured liabilities, if not sooner discharged, to be paid out of the proceeds of the sale of the road.

It may reasonably be concluded that the chancellor, by the modification and correction of the interlocutory order, in the way just indicated, intended that such debts should not be paid out of the proceeds of the sale, or in fact in any way other than out of the earnings. We thus observe that, at the initiation of the proceedings, the chancellor discriminated in a marked manner between payment out of income and out of proceeds of sale, and clearly, in the new order, limited the fund out of which payments should be made to the earnings of'the road.

The claim in question not having been paid out of the earnings, it became subject to the provisions of the final decree. The chancellor, still bearing in mind the equitable rule he had recognized by the amende ment of January 10, 1894, namely, that he could not lawfully arbitrarily impose upon the purchasers the condition of paying unsecured demands, or, in other words, require their payment out of the proceeds of the sale before the mortgage debt was satisfied, apparently adjusted the final decree to the requirement of that rule.

The interlocutory order was now to be entirely superseded, and the rights of the parties were to be finally determined and a final decree entered fixing the same. What was done? The chancellor certainly does not order and decree that the purchasers shall pay as

part consideration for and as a condition to securing title to the railroad, over and above the sum bid, “all indebtedness and liabilities contracted and incurred by the railroad in the operation of its road prior to the appointment of the receivers.” If he had so intended, the words just quoted would have accurately expressed that intention. Nothing more would have been necessary.

But he immediately qualified the general words used, by providing that the debts and liabilities to be paid by the purchasers should have a certain quality additional to that of having been incurred before the apoointment of the receivers, namely, they should be such as “are prior in lien tO' said general mortgage”; and then, out of further and abundant precaution, and apparently for the purpose of providing for an adjudication of the question'whether the required quality determinative of the right of priority in lien existed, he provided that they should be paid “upon the court adjudging the same to be prior in lien to said mortgage and directing a payment thereof.” Still further evincing a purpose to subject the purchasers to payment of only such debts as were in fact prior in lien to the general mortgage, the chancellor provided that, if such debts and liabilities are not paid on demand, the claimant may “file his petition in this court to have such claim enforced against the property”; but “such purchaser or purchasers and his or their successors or assigns shall have the right to make defense to any claim, debt or demand so sought to be enforced, and either party shall have the right to appeal from any judgment, decree or order made thereon.” This clause cannot, in our opinion, mean what is contended for by appellee’s counsel, that a claimant may present his petition to the Circuit Court merely for the purpose of having that court ascertain and find that it was a claim within the class mentioned in the interlocutory order of January 10, 1894, which was to be paid out of the earnings of the road.

It obviously has a broader meaning. The petition was to be presented to secure an order for the enforcement of the claim, not against the earnings as only contemplated by the interlocutory order, but against the property itself in the hands of the purchasers or their assigns. In order to secure such an order, the claim must be shown to be prior in lien to the general mortgage.

To meet an issue of that kind, the provision was made for bringing in the purchasers or their assigns and conferring upon them the right to defend against the enforcement of the claim upon their property and to appeal from any adverse decision. This elaborate machinery for the institution of a proceeding and bringing the parties interested was not devised merely to ascertain that the claim belonged to a class which its very existence as a claim demonstrated. The order confirming the master’s sale and the deed executed by him each contain the identical language found in the final decree already referred to.

It sems to us that the learned chancellor endeavored in those three documents most industriously to accurately discriminate in the kind of liabilities incurred before the appointment of the receivers which the purchasers were required to pay in addition to the sum bid by them for the property. The provisions seem to us to admit of no doubt as to their meaning. They carry the obvious implication that some debts or liabilities contracted or incurred by the old railroad prior to the appointment of the receivers were not of equitable cognizance and constituted no lien prior to the mortgage lien.

Such was the settled law, and such the learned chancellor had himself declared in the Riley Case.

The obvious purpose of the provisions above referred to, requiring only those debts to be paid which were “prior in lien to the general mortgage,” and that, too, only “upon the court adjudging the same to be prior in lien thereto,” was to distinguish between such as were not of that character, and therefore, under decisions well known to the chancellor, not entitled to take precedence over the mortgage creditors and those “few unsecured claims which by the rulings of the Supreme Court” were entitled to equitable priority.

Learned counsel for the appellee call attention to the following provisions of the interlocutory order appointing receivers:' — • “And it appearing to the court that the defendant company owes debts and has incurred liabilities which the holders thereof could, without any interference with the legal or equitable rights of the complainant under the mortgage set out; in the bill, collect by proceedings at law from said defendant by seizing Us rents, income, and earnings, and in other lawful modes, if not restrained from so doing by tills court, and that it would he inequitable and unjust for tlie court to deprive said creditors of their legal right to collect Their several debts, by appointing receivers to take and receive the earnings of said road during the pendency of this suit, as prayed by the complainant, without making suitable ■ provision for the payment of such debts and liabilities." ■ — and earnestly urge that that

preamble settles the law of the case, was unappealed from, and is now binding upon the railway company. We cannot give our assent to any such view. The authorities already referred to clearly establish the doctrine that the interlocutory decree appointing receivers confers no vested rights upon any outside creditor and makes no provisions which cannot be modified or changed later or in the final decree. The recital referred to orders nothing or adjudges nothing, and, if it did, was not an appealable order prior to the rendition of the final decree. It is next urged that the true

interpretation of the final decree, wherein it refers to the obligation upon the purchasers to pay any indebtedness and liabilities contracted or incurred by the railroad company prior to the appointment of the receivers, "which are prior in lien to said gen eral mortgage,” is that the last italicized words constitute a statement that all such indebtedness and liabilities so incurred prior to tire appointment of the receivers are in fact prior in lien to the general mortgage.

In other words, the contention, as we understand it, is that the reference in the final decree to “the indebtedness and liabilities contracted or incurred by the railroad prior to the appointment of the receivers” is to such claims, as a class, created by the order appointing the receivers of date June 10, 1894,- and that all such claims were by the language of the final decree declared to be prior in lien to the general mortgage. We are unable to adopt that view of the decree. It is, in our opinion, not warranted by the language actually employed or the necessary implications already referred to.

Moreover, it overlooks or fails to give significance, to several important provisions of the decree already referred to, and in that respect violates a well-known rule of construction of contracts and other written documents. A decree as so interpreted would be so out of harmony with and so contrary' to existing law and practice in equity that we would not assume it to have been made unless the language employed imperatively demanded it.

We cannot, therefore, in view of what has been said, agree to the contention of learned counsel for the appellee that the claim of Osborn was ever adjudicated either by the interlocutory decree or final decree to be prior in lien to the general mortgage. It has never been so adjudicated, and until it has been no order should be made directing the appellant railway company to pay it. But it is contended that, since the decrees were entered in the foreclosure suit, there has been a harmonious

interpretation of them by state and federal courts and a cotemporaneous construction of them by the railway company, to the effect that all liabilities of whatsoever character incurred by the old company were by those decrees imposed as obligations upon the new company. Our attention is first called, in support of that contention, to the case of Goodwin v. Atchison, Topeka & Santa Fé Railway Company, 55 C. C. A. 337, 118 Fed. 403, decided by this court. Judge Thaj^er, in delivering the opinion, disposed of the case solely on the ground that, by the voluntary appearance of Mrs.

Goodwin and submission of her cause upon its merits to the special master appointed in certain supplemental proceedings therein described, to subject unmortgaged assets of the old company to the payment pro rata of unsecured demands against that company, she was concluded by the final judgment of the Circuit Court, confirming the master’s report and disallowing her claim, from again contesting the same matter in an intervening petition based on the decrees .rendered in the foreclosure suit.

After so disposing of the appeal, Judge Thayer took occasion to say: ■ “Neither the order appointing receivers for the Atchison, Topeka & Santa Fé Railroad Company, nor the decree of foreclosure, determined that the claim in controversy was preferential and must be paid in any event. The order appointing receivers placed the claim in the class of preferential demands provided the intervener succeeded in showing that she had a valid demand against the railroad company.

The question of the validity of the claim was left open for adjudication by the order appointing receivers, and. as the intervener failed to show that the claim presented was a legal and lawful demand, her application for relief is not strengthened by anything con-iiiineti iu the order appointing receivers, or in tlio decree o£ foreclosure und sule, or in the order approving the sale.” This utterance is claimed by learned counsel for appellees to constitute a construction of tlie decrees in the foreclosure suit iu harmony with their construction. We are unable to so regard it.

It is at best a construction of the order appointing the receivers.

It holds, as we hold, that such order placed appellee's claim in a class of preferential demands, which, if determined to be valid, was entitled, according to the terms of that order, to payment “out of the earnings of the road;” hut it does not hold or intimate, as we understand it, that, notwithstanding the provisions of the final decree superseding the interlocutory order, a valid claim iu that class against the old company constituted an obligation against the new one, without a hearing and adjudication that it was prior in lien to the general mortgage.

It is next urged that the case of Atchison, Topeka & Santa Fé Railway Co. v. Cross, 63 Kan. 564, 66 Pac. 620, affords another instance of construction iu harmony with the theory of appellee’s counsel. That was a case in which Cross, having obtained a judgment against the old company iu the state court for $4,000 with interest for the negligent killing of his son, had presented that judgment to the special master appointed in the supplemental proceedings and secured an allowance and confirmation thereof hv the court of $4,000 witliout interest.

Cross afterwards brought an action in the state court for the interest which had accrued on that judgment, amounting to about S800. The Supreme Court of Kansas held that the order of allowance by the special master, when confirmed by the circuit court, was conclusive as to the extent of the railway’s liabilities, and that Cross could not relitigate the question of interest in another action.

Having thus effectually disposed of the case, the court made use of the following language in its opinion: „ “It is unnecessary to discuss whether, under the terms of the decree con-firmin'.; the sale of the railroad property, the purchasers became liable for Ihe pnvment of the judgment held by defendants in error against the old company without an order of court "adjudging the same to be prior in lien to the general mortgage and directing payment thereof.’ The quoted language has received mush attention from counsel, and its meaning, when read in connection with other pails of (he decree, is the subject of totally divergent views.

The decision of another question in the case is, in our judgment, conclusive against recovery by the defendants in error.” For the reasons just stated there was no discussion or determination of the construction of the final decree or order confirming the sale in the foreclosure suit.

Iu the last-mentioned case it appears by way of evidence that the Circuit Court, in which jurisdiction of the foreclosure suit and the parties thereto was reserved by the court, at one time declared a judgment rendered against the old railroad company in the state court, in favor o f one Elder for damages occasioned by negligence, to be a lien upon the properly of the new company and ordered its payment by the latter company, and that it was paid as ordered.

It also appears that, notwithstanding the Circuit Court had ordered that the Cross judgment be allowed against the unmortgaged assets iu the hands of the receiver in the supplemental proceedings, and to be paid pro rata with other claims against such assets, the railway company voluutarilv paid the sum of $4,000 out of its own funds. These are the only two instances of conduct of the railway company looking towards a construction of the obligation imposed upon it by the decrees in the foreclosure suit brought to our attention.

They are not sufficient to constitute proof of any cotemporaneous construction of the decrees. Why the railway company paid Cross $4,000 when his claim was adjudged to be entitled to participate in the unmortgaged assets only, or why it submitted to a decree, without appeal, obligating it to pay the Elder judgment, is only a matter of conjecture. There being no obligation to' pay the first, and the second having been paid, without appeal, would naturally suggest that the railway company did so as a matter of policy.

If it saw fit for airy reasons to make a voluntary donation of $4,000 to Cross, that fact certainly should not be made use of to establish a legal liability to pay all such claims that might thereafter be presented ; and, if it saw fit, for any reasons satisfactor}'- to itself, to pay the judgment awarded in favor of Elder without an appeal to this court, that fact, in our opinion, affords no legal ground for holding that it might not thereafter contest any similar demand. Facts of which we have no knowledge may have appeared in those cases justifying or requiring the payments as made.

Whatever may have been the reasons that induced the' railway company to pay them are not brought to our attention. In these circumstances there is nothing before us to establish such a cotemporaneous construction as concludes the railway company from now insisting upon its rights as fixed by the decrees properly interpreted.

It results from the foregoing that any claimant of an indebtedness or liability against the old railroad company, who had not secured payment thereof out of the earnings of the road while in the hands of receivers, as provided by the interlocutory decree of January 10, 1894, was by the final decree given the opportunity to establish on principles of equity that his demand was prior in lien to the general mortgage and to secure an order from the court to that effect.

This was to be established on a hearing at which purchasers or their assigns might be present and heard in defense and enjoy the usual right of appeal to a higher court, if defeated. This construction is a rational one in harmony with established principles of law and practice in equity. The other construction claimed by appellees is, in our opinion, forced and unnatural, and deprives the purchasers and assigns of their property without a day in court or an opportunity to be heard in defense of their rights.

The decree must be reversed, and the cause remanded, with instructions to proceed in accordance with the principles laid down in this opinion.