SUPREME JUDICIAL COURT.
r ' .
cumberland county.
WESTON F. MILLIKEN Et Al., ;
THE PORTLAND & OGDENSBURG R. R. CO. Et
. Hearing before Hon. C. W. Walton, upon the motion filed
March 2d, A.D. 1885, that the Receiver may be directed to
pay certain matters from the earnings and other cash receipts,
and also that the proceeds of fifty thousand [50,000] dollars
of Receiver's certificates be applied to such payments, said
fifty thousand [50,000] dollars being a part of the original
authorized issue of two hundred fifty thousand [250,000]
dollars of Receiver's certificates.
\ - •
By an amendment filed February 26th, A.D. 1885, Philip
Henry Brown and Thomas H. Haskell as trustees under the
prior mortgage of November 1st, A.D. 1870, Luke P. Poland
and Philip Henry Brown as trustees under the subsequent
mortgage of January 1st, A.D. 1875, the Union Mutual Life
Insurance Company of Portland, holder of bonds and cou¬
pons secured by the mortgage of November 1st, A.D. 1870,
the First National Bank of Portland, holder of coupons
which it claims are secured by said mortgage, and Daniel
Als.
2
Roberts of Burlington, State of Vermont, holder of bonds
secured by the mortgage of January 1st, A.D. 18T5 have all
been made parties to this cause.
Weston F. Milliken, Nathan Webb and Horatio N. Jose,
trustees under the mortgage of November 1st, A.D. 1871, are
parties to the bill; and the City of Portland, holding bonds
to the amount of thirteen hundred and fifty thousand [1,350,-
000] dollars secured by said mortgage of November 1st,
A.D. 1871, has been notified of this petition and appears to
be heard upon it. Also Augustus F. Moulton, representing
the estate of J. S. Libby, who was one of the largest holders
of floating debt existing at the time the Receiver was ap¬
pointed, appears to represent the interest of that estate.
Notice upon the petition for this hearing was ordered re¬
turnable first Tuesday of April, A.D. 1885 ; and has been
duly given as ordered upon all the parties above named, ex¬
cept Webb, Milliken and Jose, who are the petitioners, and
except the estate of J. S. Libby, which is not formally made
a party, but voluntarily appears.
Thus all interests are present to be heard, or have had op¬
portunity therefor.
It appears by the bill, that the coupons attached to the
bonds secured by the mortgage of November 1st, A.D. 1871
to Milliken, Webb and Jose have been in default since the
first day of November, A.D. 1876; that upon default the
trustees to whom the mortgage ran, were entitled to take
possession of the railroad, but did not take possession, be¬
cause, as alleged in the bill, "the trustees upon inquiry as¬
certained that the railway was being honestly and economi-
3
cally operated by said Portland & Ogdensburg Railroad Com¬
pany, and all the earnings of said railway which were not
required for operating and maintaining the same, were hon¬
estly applied by said Portland & Ogdensburg Railroad Com¬
pany to the payment of the interest secured by said prior
mortgage, or to the necessary improvement of said line of
railway, so that the earnings of said railway were honestly
and economically appropriated, precisely the same as they
would necessarily have been applied by the trustees if they
had been in possession of said railway and operating the
same, and with more economy and to better advantage even
than could have been done by the trustees, and furthermore,
a majority and indeed, nearly all the holders of the bonds,
secured by the mortgage of November 1st, 1871, requested
the trustees to allow said railway company to remain in pos¬
session, so long as the same might be done with advantage to
the property covered by the mortgage."
Therefore it appears that the trustees under the mortgage
purposely failed to take possession, at the request of nearly all
of the holders of the bonds secured by the mortgage ; be¬
cause they deemed it better for all concerned that the cor¬
poration should operate the railway, rather than it should be-
operated by the trustees.
Matters thus continued until the 19th day of March, A.D.
1881, when the trustees under the mortgage of November,
A.D. 1871 finding the corporation unexpectedly embarrassed,
to such an extent that it could not safely operate the railway
longer, filed a bill in this cause setting out that fact, also set¬
ting out that a large amount of money was required to place
the railway in a condition where it could be safely and eco¬
nomically operated, and further that the trustees had no
4
means of their own or available for the purpose of putting
the road in condition; and therefore asked the aid of the
court in equity, and especially that a receiver should be ap¬
pointed with authority to raise the money necessary for put¬
ting the road in condition.
Between the default of coupons aforesaid in A.D. 18T6
and the filing of the bill, the floating debt for material and
supplies and some incidental matters, all of which were nec¬
essary for the immediate operation of the road, was con¬
tracted as shown in schedule B attached to the decree ap¬
pointing the Receiver, hereafter referred to, and in the amend¬
ments to schedule B, afterward filed by the Receiver May,
1884, and attached to the report of the masters made March
30th, A.D. 1885.
This floating debt was all incurred within a short time be¬
fore the Receiver was appointed, and upon the expectation of
the company and of the parties giving the credit, that they
would be paid from the earnings of the railroad during the
summer which followed the appointment of the Receiver. It
ought to be stated in this connection, that the earnings of
the railroad during the months of July, August, September
and October are very largely in excess of any other period
of the year ; and that it was necessary for the corporation al¬
most every year while it was operating the railroad, to carry
along its accounts coming due in the winter and spring
months, until they could be paid from the surplus earnings
of the summer and fall months.
By decree entered on the 27th day of March, A.D. 1884,
Samuel J. Anderson was appointed Receiver. Receiver's cer¬
tificates were authorized to the amount of two hundred fifty
5
thousand [250,000] dollars; but none to be sold nor the pro¬
ceeds thereof used, except for the purpose of making the
track and bridges safe, and for purchasing two locomotives,
until further order of the court. Of that scrip two hundred
thousand [200,000] dollars have been sold or are needed for
the above purposes; and fifty thousand [50,000] dollars re¬
main to be disposed of, and none of the fifty thousand [50,000]
dollars will be required for the purposes of making the track
and bridges safe or of purchasing locomotives.
The decree appointing a receiver reserved for further consid¬
eration, the question of payment by the Receiver of the notes
and other obligations given for the construction of that por¬
tion of the railway extending from Scott's Mills to the eastern
line of the State of Vermont, and of the principal of the
mortgage notes set out in schedule A attached to that de¬
cree, being the notes secured by mortgages upon the office
grounds, freight grounds and shop grounds in Portland and
Deering, and of the coupons and scrip due or coming due
upon the bonds secured by the mortgage dated November
1st, A.D. 1870, and of the current debt per schedule B.
This petition brings before the Court the question of pay¬
ment by the Receiver of all the matters thus reserved for
further consideration.
The petition sets out and it is proved, that the Receiver
down to the close of his last report, namely the first day of
January, A.D. 1885, had received from the earnings of the
road, and from assets on hand at the time when he was ap¬
pointed receiver, and not embraced within any mortgage, the
net amount of ninety-six thousand five hundred two dollars
and fifty-four cents [196,502.54]. All of this we say was
equitably and justly applicable to the payment :
6
1st. Of the current liabilities for supplies and labor ex¬
isting at the time when said receiver took possession ; and,
2d. Of the coupons and scrip secured by the prior mort¬
gage, dated November 1st, A.D. 1870.
The whole amount of the current liabilities for supplies and
labor at the time the Receiver was appointed was about thirty,
nine thousand dollars [139,000] ; the amount of past due cou¬
pons and scrip secured by the mortgage of Nov. 1st, A.D.
1870 is eighty-one thousand five dollars and seventy cents
[•181,005.70] and interest thereon; the assets not covered by
mortsfagm ^ud net earnings which have come into the hands
o o o
of the Receiver to the first day of January, A.D. 1885, and
what net earnings have since come into the hands of the Re¬
ceiver, would have been sufficient, if not applied to other pur¬
poses, to have paid all said current liabilities, past due cou¬
pons, scrip for past due coupons and interest thereon ; and
said current liabilities are of the class of liabilities which,
according to the practice of the Equity courts in cases like
the present, are paid from the net earnings coming into the
hands of the Receiver. The petition sets out that the com¬
plainants apprehend the holders of the coupons in arrears
secured by the mortgage of November 1st, A.D. 1870, unless
soon paid, will proceed to foreclose the mortgage secur¬
ing the same, and it is vital for the interests of the hold¬
ers of the bonds secured by mortgage to complainants,
that such foreclosure should not be permitted, and im¬
portant that it should not be attempted; and that it
is further for the interest of said holders of bonds se¬
cured by the mortgage to complainants, that said current
liabilities, coupons in arrears and coupons hereafter coming
due, should not be allowed to accumulate, but should be
7
paid, as fast as the same can well be paid with due regard to
the safe and economical operation of the railway and the
payment of the liabilities incurred and which may be in¬
curred by the Receiver; that more than fifty thousand [50,-
000] dollars of the net earnings have been diverted to the per¬
manent improvement of the railway ; and that it is equitable,
that the fifty thousand [50,000] dollars of Receiver's certifi¬
cates remaining unsold, should be sold, and the proceeds used
to replace the net earnings and other assets thus diverted to
permanent improvement; and that for the reasons aforesaid,
it is for the interest of all the parties to the cause and equi¬
table, that the Receiver should be authorized to provide for
the payment of the various matters hereinbefore set out, in¬
cluding portions of the principal of notes secured by mort¬
gages upon the office grounds and other terminal property,
and the interest and portions of the principal of notes given
for the purpose of constructing said extension from Scott's
Mills to the east line of the State of Vermont.
The matters hereinbefore set out, so far as they are mat¬
ters of fact are proved, or not disputed.
Consequently the complainants petition, that the Receiver
may be authorized to sell said remaining fifty thousand [50,-
000] dollars of certificates, or so much thereof as may be
necessary, and apply the proceeds thereof, or any other mon¬
eys in his hands not needed for the matters to which he is
authorized to apply such moneys by the decree appointing
him receiver, in the following order, to wit:
1st. To the pajunent of the current liabilities shown upon
schedule B, as amended and corrected. A corrected list is
produced by Mr. Dana at this hearing.
8
2d. To the payment of past due coupons secured by said
mortgage of November 1st, a.d. 1870, and of scrip represent¬
ing said coupons, and of interest on said coupons and scrip, in
the order in which the same come due. Under this clause
there should be a special order about the First National
Bank coupons, and a determination as to their priority or
time of payment.
8d. To the payment of .coupons secured by said mort¬
gage of November 1st, a.d. 1870 hereafter coming due and
interest thereon, all in the order in which the same may
become payable.
4th. After providing for all other matters to which the
Receiver is authorized to apply moneys in his hands by this
or previous orders, to make payment upon the principal of
the mortgages secured by office grounds and other terminal
grounds at Portland and Deering, and upon the principal or
interest of notes given for the construction of the portion of
the railway from Scott's Mills to the east line of the State
of Vermont; so far as the Receiver may find it necessary and
deem it advisable to make such payments, in order to prevent
foreclosure, the sale of bonds pledged, the expense of litiga¬
tion and other costs.
The trestees believe good faith and an equitable adminis¬
tration of the assets , in the hands of the Receiver require,
that the Court should direct the Receiver to pay the floating
debt existing when the Receiver was appointed ; and which
was incurred within a short time before his appointment for
materials, or supplies, or ordinary improvements, on the
expectation that the same would be paid for from the cur¬
rent earnings of the railroad. They do not claim to limit
9
this to debts incurred within any specific period, say within
six months or twelve months.
This we consider to be in accordance with the later decis¬
ions.
Fosdiek v. Schall, 99 U. S. pp. 252 and 253.
On p. 253 the court says : "It is within the power of the
court to use the income of the receivership to discharge ob¬
ligations, which, but for the diversion of the 'funds, would
have been paid in the ordinary course of business."
On p. 254 the court says: "Under such circumstances it
is easy to see, that there may sometimes be a propriety in pay¬
ing back to the income from the proceeds -of the sale, what
has thus been diverted from the current debt fund in order
to increase the value of the property sold. No fixed and in¬
flexible rule can be laid down for the government of the
courts in all cases."
In Hale v. Frost, 99 U. S. p. 389, net earnings while the
road was in the possession of the Receiver, were applied to
pay for car springs, spirals and supplies furnished before his
appointment; although it appears, p. 391, that the account
for supplies, which was still current and alive, ran over a
time of some two years.
It was considered by some courts that the supplies thus to
be paid for from the net earnings in the hands of the Re¬
ceiver, must have been furnished within a period of six months
before the Receiver was appointed.' This arbitrary rule will
be found upon examination to have originated in Illinois,
under Judge Drummond of the United States Circuit Court,
10
ill analogy to the statute law of that state, which gives ma¬
terial men six months lien.
This matter of time or limit, within which supplies and
material bills have accrued, is fully explained in the case and
the notes to the case of Blair v. The St. Louis Railroad Co.,
22 Federal Reporter, p. 472.
Judge Brewer in the opinion in that case said, p. 474 : " Or¬
dinarily six months was the longest time T have noticed
as given. Ordinarily I think this is ample. Perhaps in
some large concern with extensive lines of road and a com¬
plicated business, a longer time may be necessary ; certainly,
so far as the present road is concerned, six months is ample.
If a person permits a claim to continue longer than that, he
certain^ has no right to be considered other than a general
creditor, with no preference over a secured debt."
This observation of Judge Brewer is however reviewed by
Judge Treat in the same case, 22 Federal. Reporter, p. 770,
where Judge Treat says: "Judge Brewer reviewing the au¬
thorities cursorily intimated that the demands which had ac¬
crued within six months," etc.; and Judge Treat took the
particular claim then under discussion out of the six months
rule.
The notes to the opinion of Judge Brewer, especially on
p. 478, show beyond all doubt that the question as to the
period of time is flexible, depending upon circumstances.
The circumstances of this railroad company, as already
shown, were peculiar, arising from the fact that a very large
portion of its earnings accrued in the late summer and early
11
fall months ; and some of the claims are also peculiar, aris¬
ing from the fact that they are continuous accounts, mate¬
rials or labor being furnished continuously and payments
being made at intervals, and payments also at . some periods
of the year being comparatively larger than at other periods
of the year. •
In Burnham v. Bowen, 111 U. S. p. 776, which is the
✓
latest case, a Receiver was appointed in the early part
of a.d. 1875 ; the coal for which the claim was made was
furnished during the year a.d. 1871, but the precise time of
the year was not given. The court says : " From what dates
appear however, we are satisfied that at the time of the ap¬
pointment of the Receiver, this was one of the current debts
for operating expenses, made in the ordinary course of a con¬
tinuing business, to be paid out of the current earnings, and
that the payment would have been made at the time agreed
on, if the company had remained in possession."
It further appeared in that case, that, in accordance with
the practice acceptances were given by the company for the
account upon monthly settlements, " with a somewhat ex¬
tended credit to meet the business requirements of what may
have been, and probably was at the time an embarrassed rail¬
road company." This case shows that the equities are not
changed by taking notes in settlement of accounts for
supplies.
We think the above references dispose of all questions
which can arise in this case, as to the time when these liabili¬
ties were incurred.
Some of the cases seem to suggest a special equity arising
12
from the fact that the trustees, as in this case, have omitted
to take possession for a long period after the coupons de¬
faulted,—thereby holding out the company to incur liabilities
for material and supplies and necessary improvements or-bet-
terments, which the trustees would have been compelled to
incur, if themselves in possession.
Judge Treat, in the case of Blair v. The St. Louis Rail¬
road Co. already referred to, seems tfo regard this as a special
equity, and in some cases in the Supreme Court of the United
States similar facts are set out in the opinions as strengthen¬
ing the general equity ; but upon the whole we think there
is no such special equity. It was said by the court in Fos-
dick v. Schall, ante, and reaffirmed in Burnham v. Bowen,
ante, " that the income out of which the mortgagee is to be
paid, is the net income, obtained by deducting from the gross
earnings what is required for necessary operating and man¬
aging expenses, proper equipment and useful improvements" ;
and that " what may properly be termed the debts of the in¬
come should be paid from the income, before it is applied in
any way to the use of the mortgagees " ; and " that the busi¬
ness of a railroad should be treated by courts of equity under
such circumstances as a 'going concern,' not to be embar¬
rassed by any unnecessary interference with the relations of
those who are engaged in or affected bv it."
o o •>
In other words, if it appears that there are demands for
current expenses remaining unpaid, and if also there appears
no suggestion, as is the fact in the case at bar, that there has
been misappropriation or waste of the earnings, it follows as
a matter of mathematical demonstration, that the mortgagees
have received more interest than the net income, or in other
words more than the trustees could have paid them if the
1-3
trustees had been in possession ; or it follows that more than
the net income has been applied to bettering the road, thus
increasing the security of the mortgage bondholders. From
this appears the equity, that the outstanding liabilities for
current expenses represent equivalent amounts which have
gone to the benefit of the bondholders, and which should be
paid back out of the income of the road subject to the con¬
trol of the equity courts.
•t ; . '
Judge Brewer in Blair v. The St. Louis Railroad Co. ante,
p. 479 seems to simmer the whole down to this principle.
He says 44 There is no implied agency," meaning agency
on account of the mortgagees, 44 and I do not think that the
rulings of the Supreme Court are based upon any such doc¬
trine ; the idea which underlies them I take to be, that the
management of a large business, like that of a railroad com¬
pany, cannot be conducted on a cash basis; but temporary
credit under the nature of things is indispensable. A time
to settle and adjust these various matters is indispensable,
»
because of the nature of things. Therefore such temporary
credits must be taken as assented to by the mortgagees; be¬
cause both the mortgagees and the public are interested in
keeping up the road, and having it preserved as a 4 going con¬
cern,' and whatever is necessary to accomplish this result
must be taken as assented to by the mortgagees."
Again he says, p. 475: 44 Out of what shall these claims be
paid ? Ordinarily, of course, out of the earnings of the
road, and ordinarily out of such earnings alone. The ap¬
pointment of a Receiver ought not to give them a priority
which they had not before."
14
To look into this equity a little deeper! The proofs show
that there are in the hands of the Receiver, besides the prop¬
erty which is covered by the mortgage:
1st. A net balance of about $3,000 of assets not mort¬
gaged, and which belonged to the corporation itself and were
in existence at the time the Receiver took possession, in ex¬
cess of balances which were due from the corporation itself
at the time the Receiver took possession, and which have
been paid by the Receiver.
Clearly the mortgagees had no lien upon this balance of
$3,000 ; but it was part of the current earnings of the road
made before the Receiver was appointed, out of which the
current liabilities were expected to be paid. The equity
applying that $3,000 to the current liabilities is clear, and'
does not come in issue with any other equity.
2d. In addition to the above, the Receiver has in his
hands net earnings, coming from the operation of the road
between the time of his appointment and the first day of
January last, of $93,099.04, and also net earnings accrued
since January first. To whom do these net earnings belong?
It is a well settled principle of law, that the net earnings
of mortgaged property accruing previously to mortgagees
taking possession, do not belong to the mortgagees; and this
lias been expressly decided in this State in Emerson v. The.
European & North American Railway, 67 Me. p. 387.
But earnings accruing after mortgagees take possession, be¬
long to the mortgagees; and if the trustees under either of
these mortgages had been able to obtain possession with-
15
out applying to an Equity court, tliey could have taken the
earnings by the strict rules of the common law, and no
person could have taken them from them; and none of these
equitable principles which we have considered, would have
intervened.
But the trustees could not do this, and asked therefore
the interposition of the Equity court; and the railroad from
the day the Receiver was appointed, has been in possession
neither of the mortgagors nor of the mortgagees, but of the
court; and the net earnings are not the property of the
mortgagors nor of the mortgagees, but are to be disposed of
in accordance with equitable principles.
And the Equity courts, in the decisions already referred
to, have said that it was not equity for the courts, by ap¬
pointing a Receiver, to summarily take the bread out of the
mouths of the supply men and laborers, nor to fail to rec¬
ognize that the business of a railroad must be treated as
a " going concern," nor to fail to further recognize the equity,
that if the current supply and labor bills remain unpaid,
there probably has been a diversion of the funds of the road
in favor of its mortgage creditors, which the Equity courts
can within certain limits justly replace.
The courts cannot apply net earnings which come into their
hands to pay the floating debt ad libitum ; and therefore they
limit the power by the principle laid down in Burnham v.
Bowen ante, namely, that the business of a railroad must be
regarded as a " going concern," and by the fact stated by
Judge Brewer and already cited, that "the management of a
large business like that of a railroad, cannot be conducted on
a cash basis, and that temporary credit in the nature of
things is indispensable."
16
Farther explanation of this doctrine may be found in the
able articles of George Tucker Bispham in the Southern Law
Review, Vol. 6, p. 535; and of Leonard A. Jones in the
Southern Law Review, Vol. 4, p. 18; in Union Trust Co.
v. Souther, 107 U. S. p. 591; in Miltenburger v. Logans-
port Railway Co., 106 U. S. p. 286; and in Dow v. The Rail¬
way Co., 20 Federal Reporter, pp. 266 and 267.
In this case the decree appointing the Receiver expressly
reserved the question of the payment of these supply bills.
So far as the present powers of the Court are concerned, this
reservation is equivalent to an express provision of the
original decree, that the Court would thereafterward direct
them to be paid, if it should deem it proper so to do.
In some of the cases cited, it has been distinctly held, that
it was not important whether the original decree did or did
not contain a provision upon this point; and in Burnham v.
Bo wen ante, the Supreme Court called distinct attention to
the fact, that in the order appointing a Receiver no especial
provision was made for debts owing for current expenses,
and this did not prevent the court in that case from directing
their payment. This point was also expressly so ruled by
Judge Brewer in Blair v. St. Louis Railroad Co. ante.
We have proved by Mr. Dana, the cashier of the Receiver,
and by the Receiver, a statement of the Receiver's present
assets and estimate of future assets to July 1, 1885, appli¬
cable to payment of coupons and floating debt, made as of
February 28, A.r>. 1885, with the following result:
Balance of assets available Feb. 28, 1885, $10,000
Estimated net earnings to July 1, 1885, 20,000
IT
Old rails to be sold, ^ • 20,000
Certificates unsold, $10,000 and $50,000, 60,000
Total, ' - " $110,000
Less certificates needed for making road
and track safe, say, 10,000
$100,000
CONTRA.
Amount of coupon scrip secured by
mortgage of Nov. 1st, a.d. 1870,
unpaid, $ 9,477.00
Coupons secured by mortgage of Nov.
1st, 1870, due Jan. 1, 1884, July 1,
1884, and Jan. 1, 1885, 72,615.00
Interest to April 1, 1885, on scrip and
coupons, ■ 4,163.65
Floating debt, 38,388.55
Total, . $124,644.20
The probable earnings for the months of July, August,
eptember and October next are shown by the evidence to
e so large, that we claim, and we have proved by the Re-
siver that by the close of the month of October, the Re-
siver, if authorized to apply the proceeds of fifty thousand
50,000] dollars of the Receiver's certificates to payment
f coupons and floating debt, will probably have provided
>r all his current expenses, floating debt, past due coupons
nd coupons coming due July, 1st, a.d. 1885; and will thus
ave a clean sheet, without interfering with such further nec-
ssary improvements as the railroad may require.
WILLIAM L. PUTNAM, of Counsel for
Weston F. Melliken^
Nathan Webb,
IIokatio N. Jose,
Trustees and Petitioners.