UNION TRUST CO. V. MORRISON, 125 U. S. 591 (1888)

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U.S. Supreme Court

Union Trust Co. v. Morrison, 125 U.S. 591 (1888)

Union Trust Company v. Morrison

No. 84

Argued and submitted November 10, 1887

Decided April 2, 1888

125 U.S. 591


The entire rolling stock of a railway company in Illinois was covered, as well as all its other property, by a mortgage to trustees to secure an issue of outstanding bonds. A judgment creditor of the company being about to levy upon some of the rolling stock, the company filed a bill in equity to restrain the levy and to set aside the judgment as obtained by fraud, and an injunction issued restraining the creditor from making the levy, a bond with surety being first filed conditioned to pay the judgment debt if the injunction should be dissolved. The surety in that bond took as security a chattel mortgage of four locomotives. Proceedings were then taken for the foreclosure of the mortgage, and a receiver of all the property covered by the mortgage was appointed. Several suits against the company were then pending in which appeal had been taken and appeal bonds given in order to protect the rolling stock. The receiver then suggested, making special mention of the above recited case, that the sureties should be protected in the event of adverse decisions, and the court authorized him in his discretion to protect such sureties as ought to be protected, by reason of the protection afforded to the property and assets of the company, by the giving of their bonds, and an order was made that all persons having claims or liens against the property or its proceeds should file intervening petitions on or before a day named. The surety in the injunction bond intervened within the time fixed, setting forth the facts, and that judgment had been recorded against him, and asking to be protected from the consequences of signing the bond, as the receiver had not been able to pay the debt of the judgment creditor. The property covered by the mortgage was then sold and purchased by persons representing the bondholders, and it was referred to a master to report upon the intervening claims. The trustee and the receiver objected to the allowance of the claims of the surety on the injunction bond on the ground that the execution in the original suit could not become a lien upon the property as against the mortgage bondholders, and on the further ground that the surety had not paid the judgment debt. The surety then paid the judgment debt, and filed a supplemental petition setting that fact forth and repeating this original application, but the master rejected the claim on the ground that the payment was not made when he filed his original claim, nor until the time had expired for claims to be presented. Held:

Page 125 U. S. 592

(1) That the claim was presented in time, and that although the surety had not paid the judgment when the claim was presented, he was entitled in equity to be protected from making the payment.

(2) That the purchasers at the foreclosure sale, having been represented in the foreclosure proceedings by the trustees of the mortgage were bound by whatever bound the trustees, including the, orders of the court respecting the paramount liens of the intervening claimants.

(3) That as, until the mortgage was enforced by entry or judicial claim, the personal property of the company was subject to its disposal in the ordinary course of its business, and to be seized and taken on execution for its debts, subject, however, to the contentions of the mortgage trustees, the act of the surety on the injunction bond had operated to keep the property together, and to keep up the railroad as a going concern.

(4) That the taking of the chattel mortgage by him showed that he intended to look to the property, and not alone to the personal security of the company.

(5) That the evidence referred to in the opinion showed that the receiver received moneys from which he might have paid the judgment debt.

(6) That the purchasers of the property accepted a deed, executed under order of court, in which they recognized the right of the surety as an intervenor.

The court does not intend, in this case, to decide anything in conflict with Burnham v. Bowen, 111 U. S. 776, and only decides that this claim, being based upon a bona fide effort by the intervenor to preserve the fund from spoliation after the mortgage debt was in arrear and the right to reduce to possession had accrued, the claimant can pursue earnings which had been appropriated to the purchase of property that had been added to the fund.

The action of the intervenor not being taken for the purpose of being subrogated to the questionable rights of a judgment creditor, the Court expresses no opinion upon the rights of an execution creditor, levying on the personal property of a railroad company in Illinois, as against those of a mortgagee.

The Court stated the case as follows:

This case grows out of the foreclosure of a mortgage given by the Cairo and St. Louis Railroad Company on the second day of October, 1871, to the Union Trust Company of New York to secure the payment of 2,500 bonds of $1,000 each, with interest semiannually. Morrison, the appellee, intervened in the proceedings by petition, claiming a lien on the property mortgaged by reason of having become liable as surety on an injunction bond given to obtain an injunction

Page 125 U. S. 593

to prevent an execution sale of a portion thereof. The court below, by a decree dated May 4, 1884, allowed his claim, amounting to the sum of $15,352.19, with interest from May 20, 1882. The purchasers at the foreclosure sale (who purchased on behalf of the bondholders) having transferred the property to the St. Louis and Cairo Railroad Company (organized for that purpose), said company was allowed to become a party to the proceedings for the purpose of appealing from the decree, and did appeal from the same in connection with the Union Trust Company. The case is now before us on that appeal.

The facts necessary to be understood in the determination of the case are as follows:

The Cairo and St. Louis Railroad Company was a corporation of Illinois, owning and operating a railroad in that state, extending from Cairo to a point opposite St. Louis. The mortgage referred to purported to convey and embrace all the property and assets of the company, real, personal, and mixed, then held and owned or thereafter to be acquired, and the tolls, incomes, rents, issues, and profits thereof, and it contained provisions authorizing the mortgage trustee (the Union Trust Company) to take possession of said property and assets in case of default, for a certain period of time, in the payment of interest, or of the installments of a sinking fund provided for, and gave said trustee power on such default to declare the principal due. The railroad company made default in the payment of interest in October, 1873, and at every subsequent period of payment, and never paid any installments of the sinking fund.

Meantime, the company was harassed by suits, and, among others, one Henry Holbrook, on the 26th of November, 1872, recovered a judgment against it in the Circuit Court of St. Clair County. Illinois, for the sum of $9,500, besides costs. Execution was issued, but not levied. But in October, 1874, an alias execution was issued, and the Sheriff of St. Clair County threatened to levy upon the rolling stock of the company, a great part of which was in that county, opposite St. Louis. The company, believing the judgment to have been fraudulently

Page 125 U. S. 594

and wrongfully obtained, filed a bill in equity in the St. Clair Circuit Court to enjoin Holbrook from proceeding to its collection. An injunction was granted accordingly on the 30th of December, 1874, but only upon the condition that the company should give an injunction bond, with sureties, for the payment of judgment and costs if the injunction should be dissolved. Morrison, at the request of the company, executed such bond as surety. In February, 1877, the bill for injunction was dismissed, and in June, 1879, the decree of dismissal was affirmed by the Supreme Court of Illinois, and the injunction was definitively dissolved. Thereupon Holbrook sued Morrison on the injunction bond, and on the 30th of September, 1880, recovered judgment against him for the sum of $13,965.

Prior to this time, in November, 1877, the trust company declared the principal of the bonds due and filed a bill in the court below to have a receiver appointed and the mortgage foreclosed. Henry W. Smithers was appointed receiver, with power to operate the road and equip it and keep it in repair and to pay all amounts due and owing by the railroad company for labor or supplies that might have accrued in the operation and maintenance of the railroad property within six months immediately preceding. The receiver, on taking possession of the property, found a number of suits against the company pending on appeal, and claims for protection on the part of those who had become sureties on the appeal bonds, and on the 29th of December, 1877, he presented a petition to the court asking its advice and instruction in regard to said bonds and whether he should protect the sureties in the event of adverse decisions in any of the cases. He stated the fact that such appeal bonds were given by some of the officers of said railroad company, with others as sureties, in order to protect the rolling stock or other personal property of said railroad company from levy or sale under execution pending the determination of the appeals, in each of which cases execution on the judgment or decree was either levied on personal property of said railroad company or the levy thereof threatened at the time of taking the appeal and giving the bond. He mentioned the Holbrook case in particular, which was then pending before

Page 125 U. S. 595

the Supreme Court of Illinois on appeal, and called attention to the injunction bond given in that case, and he expressed his concurrence in the statement of the sureties generally that they had become such on the assurance of being protected, and that their action had been to the benefit of all parties interested in the property of the company, since, in default of payment, it would have been sacrificed to meet the demands. The court, on consideration, made a decree authorizing the receiver, in his discretion, to prosecute or defend the appeals and cases according as the interests of the receivership should in his judgment be best promoted, and to protect such sureties as in his judgment ought to be protected in equity and good conscience by reason of the protection afforded to the property and assets of the company by means of the giving of such bonds. And, for the purposes of this decree, the receiver was authorized to use and pay out any moneys coming into his hands as such receiver, over and above expenses for operation and repairs. The receiver, for alleged lack of funds coming into his hands, failed to protect any sureties except two, one Rosborough and one Pellet.

On the 16th of May, 1881, a decree was made in the foreclosure suit, ascertaining the amount due on the bonds and coupons to be $4,301,157.53, and directing a sale of the mortgaged premises to satisfy the same. The decree required all persons having claims or liens against the railroad and property, or against the proceeds of the sale thereof, to file intervening petitions on or before the 1st day of July, 1881.

In accordance with this order, Morrison, on the 30th day of June, 1881, filed his intervening petition setting up the facts respecting his becoming surety on the injunction bond, the preservation of the rolling stock by means thereof, the proceedings in the case, and the proceedings against himself on the bond, resulting in the judgment rendered against him on September 30, 1880. He also set out the copy of a mortgage on four locomotive engines given to him by the railroad company in June, 1875, by way of indemnity against his liability on the injunction bond, which mortgage was duly recorded in the clerk's office for St. Clair

Page 125 U. S. 596

County, but was never enforced by him, he stating the fact to be that the said company and the receiver had used the said locomotive engines continuously since the execution of the said mortgage, and the same were then in the possession of the receiver, and were to be sold at the sale of the property under the said decree of foreclosure. He further set out a copy of the petition presented to the court by the receiver, asking for instructions as before stated, and bringing to the notice of the court the Holbrook judgment and appeal and the injunction bond given in that case. He further stated that the receiver, since his appointment, had not been able, out of the earnings of the railroad, to pay the judgment of Holbrook, and thus protect the sureties on this injunction bond. His petition closed with a prayed for a decree that he should be fully protected from all the consequences of signing the said bond, and from the judgment recovered against him and for further relief.

On the 5th of July, 1881, an order was made declaring that no claim presented or filed after the 1st of July, 1881, should be received or filed, and that all claims not so filed on or before that date should be forever barred from any benefit under the decree, or from the property, or the proceeds of its sale.

On the 14th of July, 1881, the railroad and other property covered by the mortgage were duly sold in accordance with the decree of May 16th, and Josiah A. Horsey and Charles J. Canda, on behalf of the bondholders, became the purchasers for the sum of $4,000,000, which sale was on the same day ratified by the court, and an order was made referring to a special master, Frank H. Jones, all the intervening claims and petitions filed in the cause, to take proof and report his conclusions of fact and law thereon for the consideration of the court and to give notice to the parties of the time and place of taking testimony.

On the 1st of August, 1881, an order was made referring it to a master to examine and report the amount of receiver's certificates remaining unpaid, and of all claims against the receivership or railroad assets in the receiver's possession, as shown by intervening petitions or claims filed in the cause before July 1st, for labor, supplies, or other claims, and whether

Page 125 U. S. 597

there was sufficient showing in the several cases to warrant funds to be paid into court to cover the same; also the probable amount of costs and fees. The object of this order was to ascertain how much money the purchasers should be required to pay into court, and how much of their bid might be paid in bonds.

On the 19th of August, 1881, the Union Trust Company and the receiver filed a joint answer to Morrison's petition of intervention in which all its material statements were admitted, but while admitting that the Sheriff of St. Clair County did threaten to levy on the railroad company's locomotives and rolling stock, they denied that, as against the bondholders and the Union Trust Company mortgage, the execution was a lien on said locomotives and stock paramount to that of the mortgage. They also denied that the chattel mortgage alleged to have been given by the railroad company upon certain locomotives for the purpose of securing the sureties on the injunction bond could have any effect or create any lien on said property paramount to that of the Union Trust Company mortgage. The respondents admitted that the railroad company and the receiver had continually used the engines and property owned by the company in 1875, but whether they were the same which were included in the alleged chattel mortgage they could not say. They admitted that the receiver had not paid, and had not been able out of the earnings of the road to pay, the judgment of Holbrook, and submitted to the court that if he had been able, he would not have had any right or authority to pay the same. They further alleged upon information and belief that the judgment remained wholly unpaid, that neither Morrison nor the railroad company had paid it, and they submitted to the court that there was no liability on the part of the receivership or of the property for the payment of the judgment.

On the 22d of December, 1881, an order was made by the court by which, after reciting that Horsey and Canda had paid to the commissioner the full amount of their bid for the railroad property and assets, namely, in cash, $100,000, and the residue in first mortgage bonds of

Page 125 U. S. 598

the railroad company, it was ordered and decreed that the commissioner should execute a deed of conveyance of the said property and assets to the said Horsey and Canda, to be held subject to all taxes legally due, to the lien of all unpaid receiver's certificates:

"and also subject to the lien of any and all claims against the said railroad property and assets which are now before this Court by intervening petitions, and which shall be, upon final determination and adjudication, decreed to be paid as liens paramount to the indebtedness secured by said mortgage or deed of trust."

On the 19th of January, 1882, the receiver was also directed to make a conveyance to the purchasers in order to cover certain real estate, rolling stock, and other property which had been acquired by him during his receivership and to deliver the possession of all such real estate and other property to the purchasers or their grantees, when the commissioner's deed should be presented to him and demand should be made. The receiver made such conveyance on the 30th of January, 1882, and on the 31st, Horsey and Canda conveyed all the property to the St. Louis and Cairo Railroad Company, the appellants, and on the following day, February 1, 1882, the receiver delivered the railroad and all its appurtenances to said company.

As the Union Trust Company and the receiver, in their answer to Morrison's intervening petition, raised the objection that he had not paid the Holbrook judgment (though, of course, he was bound to pay it), he filed a supplemental petition on the 5th of June, 1882, stating that he had paid the judgment on the 29th of May previous, amounting on that day, for principal and interest, to the sum of $15,352.19, and repeated his original application for relief. To this supplemental petition the Union Trust Company and the receiver filed an answer by which they denied that Morrison had paid the judgment; recited the previous orders requiring claims to be filed by the 1st of July, 1881, and barring those not so filed; the sale of the property, the conveyance thereof to Horsey and Canda, and by them and the receiver to the new company, and the delivery of the railroad property to said company,

Page 125 U. S. 599

and averred that there were no proceeds of the sale in the hands of the receiver out of which payment could be made to Morrison upon his claim.

On the 19th of December, 1883, the special master, Frank H. Jones, to whom at the time of the sale of the railroad, had been referred intervening claims and petitions filed in the cause, made a report in which he set forth in detail all the facts and circumstances in relation to the intervening petition and claim of Morrison, as they have been already stated, and the evidence taken by him thereon. The only point contested by the respondents was the fact of payment by Morrison and its effect under the previous orders of the court. The evidence reported by the master, however, showed that Morrison did actually pay the judgment at the time stated in his supplemental petition, and the master so found. The exception taken on this point by the respondents, based on the fact that Morrison, in order to make the payment, raised the money on his note, and that it did not appear that he had paid his note, is too trivial for serious consideration. The conclusion reached by the master was that the claim was barred because Morrison had not actually paid Holbrook's judgment when he filed his original petition, and did not pay it until after the time had expired for claims to be presented -- namely July 1, 1881.

Morrison excepted to the report, and on the 5th of May, 1884, the court sustained the exception and allowed the claim, and decreed that Morrison had an equitable lien for the payment thereof against the property sold under the decree of foreclosure, and transferred to the St. Louis and Cairo Railroad Company, with leave to apply to the court for further relief if the claim should not be paid before the first Monday of September then next. This is the decree from which the appeal is taken to this Court.

Page 125 U. S. 607

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