LOVE et al. v. NORTH AMERICAN CO. et al., 229 F. 103

CARLAND, Circuit Judge. This is a petition in intervention filed June 14, 1914, wherein the Corporation Commission of the state of Oklahoma and the United States Fidelity & Guaranty Company pray that the sum of $88,751.86 be declared to be entitled to preferential payment as against the claims of the bondholders and other general creditors of the St. Louis & San Francisco Railroad Company, hereafter called the Frisco Company. The claims of interveners were allowed by the District Court, hut denied a preference.

The facts conditioning the preferential character of the claims are as follows: On July 3, 7, and 31, 1911, and on September 14, 1911, the Corporation Commission of Oklahoma made five separate orders in cases pending before it, wherein the Frisco Company was a party, prescribing certain rates for the transportation of freight. The Frisco Company appealed from said orders to the Supreme Court of Oklahoma. The orders were superseded by the giving of a supersedeas bond in each case signed by the Frisco Company as principal and by the Fidelity & Guaranty Company as surety.

The condition of the bond in each case was as follows: “Now, therefore, if the said St.

Louis & San Francisco Railroad Company shall refund to the Corporation Commission of the state of Oklahoma, for the parties entitled thereto, all charges which said company may collect or receive, pending said appeal, in excess of those fixed Or authorized by the final decision of the Supreme Court of the state of Oklahoma on appeal, * * * then this obligation shall become null and void; otherwise, to remain in full force and effect.” The Supreme Court decided the appeals December 5, 1912 (35 Okl. 214, 128 Pac. 900 ; 35 Okl. 220, 128 Pac. 903 ; 35 Okl. 224, 128 Pac. 904 ; 35 Okl. 229, 128 Pac. 907; 35 Okl. 233, 128 Pac. 908), and the rates prescribed by the Supreme Court were made effective as of the original date of the orders appealed from.

The rates prescribed by the Supreme Court were higher than the Corporation Commission rates, but lower than the regular rates prescribed and collected by the Frisco Company. It thus happened that there became due to the parties entitled thereto, namely, the shippers of freight, from the Frisco Company, $88,751.86 as excessive charges for the transportation of freight. This is the demand which the interveners ask to have allowed as a preference. The Fidelity & Guaranty Company paid $12,124.51 of this amount to the Corporation Commission for the benefit of the parties entitled.

The Fidelity & Guaranty Company on July 23, 1908, entered into a contract with the Frisco Company, whereby it agreed to sign all bonds or instruments which the Frisco Company should desire to execute for a certain consideration specified in the contract, and it is conceded that the Frisco Company paid the surety company the sum of $580 for signing the supersedeas bonds in question. On May 27, 1913., on a bill filed by the North American Company, an unsecured creditor of the Frisco Company, receivers were appointed for said company. On May 27, 1914, the Bankers’ Trust Company and Neill A.

McMillan, trustees under the general lien mortgage of the .Frisco Company, commenced proceedings in which the appointment of receivers ,was prayed for, and this suit so commenced by the trustees was afterwards, on the 22d day of June, 1914, consolidated with the suit brought by'the unsecured creditor on the 27th day of May, 1913. It thus appears that the bondholders took no proceedings to impound the revenue of the Frisco .Company until May 22, 1914.

The claims of the shippers arose at the time the Supreme Court of Oklahoma decided the appeals, namely, December 5, T912, which was within six months from the date on which the receivers were appointed. Subsequent to the collection of said excess charges by the Frisco Company there was at all times in its treasury, down to the date of the appointment of the receivers, an amount of money equal to or in excess of the aggregate of the sums so collected.

The gross receipts of the Frisco Company during the period from July 1, 1911, to May 27, 1913, were in excess of its actual operating expenses, and since the appointment of the receivers the gross receipts have continuously been in excess of its actual operating expenses.' During the period from July 1, 1911, to May 27, 1913, the Frisco Company paid large sums in excess of the excess charges so collected by way of interest on its mortgaged- indebtedness, and during the period of the receivership the receivers have expended for betterments and improvements sums in excess of $1,000,000 as well as sums in excess of said excess charges by. way of interest on defendants’ bonded indebtedness.

When the receivers were appointed, they received from the Frisco Company, as shown by their first bimonthly report, over $600,000 in cash.

It also appears that, eliminating all items except current'receipts and current expenses, the earnings and operating expenses of the Frisco Company, from May 27, 1913, to April 30, 1914 (all prior to any action by the bondholders), were as follows: Earnings ....................................................$48,380,219.06 Operating expenses ......................................... 35,449,360.17 Leaving a balance of earnings over operating expenses of.................................$12,930,858.89 The question now might be properly asked, to whom do the excessive charges received by the Frisco Company for the transportation of freight belong?

They certainly do not belong to the general creditors of the Frisco Company, nor to the bondholders, nor the Frisco Company itself. Without question they belong to the shippers. We must not be deceived as to the true status of this claim, nor allow the bond, or the fact that the claim is presented by the Corporation Commission, to blind us to the fact that the claim is one due to the shippers for excessive charges paid by them to the Frisco Company for transportation of freight. The shippers not only paid the lawful charge, hut they did more. They paid an excessive charge.

That payment was an illegal exaction, and, as against the railroad company, and volunteers, like the receivers, the money belonged to the shippers after the payment the same as before. It will be presumed that it was a part of the money in the treasury of the company which passed to the receivers. That money came into the hands of a court of equity. What ought such a court to have done with it? Surely it could do nothing but direct that it be returned to the shippers to whom it belonged.

It having been paid to the bondholders, or for permanent betterment of the property for their benefit through the agency of a court of equity, that court, as a court of conscience, can do no less than direct its restoration. There is another aspect in which petitioners’ equity appears equally strong. The railroad company got this money into its treasury by superseding rates that were fixed "by authority of the state. When those rates were sustained, the carrier was bound to restore its excessive exactions. This was a duty not only to the shippers.

It was a public duty owing to the state whose orders had been superseded. It is a duty which this court and the Supreme Court have always been scrupulously careful to safegard when superseding rates pending judicial inquiry as to their validity. It is a duty which a court of equity, that has taken over the business of a public carrier by means of a receivership, ought to be equally careful to enforce. Petitioners’ claim also comes within the rule which underlies the right to a preferential payment. Freight rates are the lifeblood of railroad operation.

It will not be contradicted that, if there were no freight rates paid in the United States, not a wheel would turn on any road. What does the law say in regard to the allowance of preferences?

We accept the law as established by the Supreme Court of the United States, and by this court, as follows: The class of claims which under the decisions of the Supreme Court may lawfully receive an equitable preference in payment out of the income or out of the corpus of the property of a mortgaged railroad over the bondholders secured by a prior mortgage is limited to claims incurred for the current expenses of the ordinary operation of the mortgaged property in the usual course of the business of the mortgagor. The test of the preferential equity of a claim is its consideration.

If its consideration was a current expense of the ordinary operation of the property of the mortgagor incurred in the usual course of its business, for labor, supplies, and like things, necessary for the operation of the railroad, within a limited time, usually not exceeding six months anterior to the appointment of the receiver, the claim may be preferred in payment, otherwise it may not be. Illinois Trust & Savings Bank v. Doud, 105 Fed. 123, 124, 129, 44 C. C. A. 389, 390, 395, 52 L. R. A. 481; Rodger Ballast Car Co. v. Omaha, K. C. & E. R. Co., 154 Fed. 629, 632, 83 C. C. A. 403, 406; Blair v. R. R. Co. (C.

C.) 23 Fed. 523; Whiteley v. Central Trust Co., 76 Fed. 74, 75, 77, 22 C. C. A. 67, 34 L. R. A. 303; Gay v. Hudson River Electric Power Co. (C. C.) 182 Fed. 904, 907, 909; Pennsylvania Steel Co. v. New York City R. Co. (C. C.) 165 Fed. 485; Farmers’ Loan & Trust Co. v. Northern Pacific R. R. Co. (C. C.) 68 Fed. 36, 41, 42; Fordyce v. Omaha City & E. Ry. Co. (C. C.) 145 Fed. 544, 556, 557; Chicago & A. R. Co. v. U. S. & Mex. Trust Co., 225 Fed. 940,-C. C. A.-; Martin Metal Mfg. Co. v. Same, 225 Fed. 961,-C. C. A.-.

We think that what has been heretofore said establishes that the claim of the shippers is a claim incurred “for the current expenses of the ordinary operation of the railroad in the usual course of business of the road.” On principle it .cannot be distinguished from payments to sureties who have signed bonds to stay the execution of judgments and claims for holders -of unused tickets for refunds, and many other like charges which are habitually allowed, and have been allowed in the receivership of the Frisco Company.

We are aware that, when a surety company signs a bond for an independent consideration, it will not be subrogated, when subrogation would prejudice the rights of persons having independent equities. That is not the case here. The principle stated, however, in our judgment, ought never to be applied as against the creditors on whose behalf the bond is given. The bondholders of the Frisco Company have no equity that is superior to that of the surety company.

The judgment appealed from is therefore reversed, and the cause remanded to the District Court, with instructions to allow the claim of the Fidelity & Guaranty Company, in the sum of $12,124.51, with legal interest from the date that the surety company paid the same, and also to allow the claim of the Corporation Commission, for the benefit of the people entitled thereto, in the sum of $76,627.35, with legal interest from December 5, 1912, as preferred claims, as against the claims of the bondholders and other general creditors of the Frisco road.