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U.S. Supreme Court

Southern Railway Co. v. Carnegie Steel Co., 176 U.S. 257 (1900)

Southern Railway Company v. Carnegie Steel Company

No. 8

Argued October 13-14, 1898

Decided January 29, 1900

176 U.S. 257


In a decree for the foreclosure and sale of a railroad property under a mortgage, power was reserved by the court to compel the purchaser to pay any and all receivers' debts or claims adjudged or to be adjudged as prior in lien or equity to the mortgage debts or entitled to preference in payment out of the proceeds of sale. Held that the rights of creditors whose claims had been filed were not affected by the sale of the property or by the fact of its transfer to the purchaser, nor did the reservation in the order of sale prevent the purchaser from contesting upon their merits any claims allowed after the purchase under the decree of sale.

A railroad mortgagee, when accepting his security, impliedly agrees that the current debts of a railroad company contracted in the ordinary course of its business shall be paid out of current receipts before he has any claim upon such income, that, within this rule, a debt not contracted upon the personal credit of the company, but in order to keep the railroad itself in condition to be used with reasonable safety for the transportation of persons and property, and with the expectation of the parties that it was to be met out of the current receipts of the company, may be treated as a current debt, that whether the debt was contracted upon the personal credit of the company, without any reference to its receipts, is to be determined in each case by the amount of the debt, the time and terms of payment, and all other circumstances attending the transaction, and that, when current earnings are used for the benefit of mortgage creditors before current expenses are paid, the mortgage security is chargeable in equity with the restoration of the funds thus improperly diverted from their primary use.

Page 176 U. S. 258

A general unsecured creditor of an insolvent railroad corporation in the hands of a receiver is not entitled to priority over mortgage creditors in the distribution of net earnings simply because that which he furnished to the company prior to the appointment of the receiver was for the preservation of the property and the benefit of the mortgage securities. Before such a creditor is accorded a preference over mortgage creditors in the distribution of net earnings in the hands of a receiver of a railroad company, it should reasonably appear from all the circumstances that the debt was one to be fairly regarded as part of the operating expenses of the railroad incurred in the ordinary course of business, and to be met out of current receipts.

This case is here upon a writ of certiorari for the review of a final decree of the United States Circuit Court of Appeals for the Fourth Circuit allowing certain claims of the Carnegie Steel Company, Limited, as preferential debts chargeable upon current receipts arising from the operation of certain railroad properties in the hands of receivers.

On the 15th day of June, 1892, William P. Clyde, John C. Maben, and William H. Goadby, citizens of New York, suing for themselves and other creditors and stockholders of the Richmond and Danville Railroad Company and of other defendant corporations, exhibited in the Circuit Court of the United States for the Eastern District of Virginia a bill of complaint against the Richmond and Danville Railroad Company and the Richmond & West Point Terminal Railway & Warehouse Company, Virginia corporations. The bill made the following case:

The Richmond and Danville Railroad Company (hereafter called the Danville Company), in addition to its own line extending from Richmond to Danville, with a twelve-mile branch, being 152 miles of road, through the purchase or the acquisition of stock, or by written lease or operating contracts, obtained the possession and control of more than twenty other railways built under the respective charters of and owned by the corporations named in the bill. It also owned the entire capital stock of the Baltimore, Chesapeake & Richmond Steamboat Company, and through it operated a line of steamers between Richmond, West Point, and Baltimore. Its authorized and outstanding capital stock was five

Page 176 U. S. 259

million dollars, the larger part being owned by its codefendant company.

The lines of railway comprising this system, known as the Danville system, were in Virginia, North Carolina, South Carolina, Georgia, Alabama, and Mississippi, and reached many of the most important trade centers of those states.

For more than five years prior to the institution of that suit, the Danville Company had held in possession and substantial control all the railways of the other companies in connection with its own road as a single system. Over a large portion of the mileage, the engines and cars in traffic service were used without any fixed apportionment thereof to any specific portion of the system, and the income derived from the operations of the parent and auxiliary, leased, and operated liens was received and distributed through a common treasury, with no separation of the earnings and expenses of the several properties except by entries in books of account apportioning the gross income and expenses on some approximate but arbitrary basis of division as between the different lines over which the traffic yielding the revenue had passed.

The total mileage of the auxiliary portion of the Danville railroad, added to its own mileage, aggregated 3,320 miles, exclusive of its steamer service.

The aggregate outstanding capital stock of the lines constituting the system, together with the stock of the steamboat company, amounted to $43,482,950, of which $10,707,354 was neither owned nor controlled by the defendant companies.

Through the ownership of all or a majority of the stock thereof, some of the roads were operated by the Danville Company as proprietary lines. Others were operated upon the basis of a fixed rental or payment of net earnings, or a guarantee of interest on bonds or dividends of stock, or both.

In consequence of the absorption of such roads in its system by lease or contract, the bonded debts and rental obligations which the Danville Company had assumed and became liable for amounted to $71,128,126. Its own direct bonded debt was $16,136,000, making the total bonded and rental debt of the Danville system $87,314,126.

Page 176 U. S. 260

The bonded debt resting on the Danville road proper and equipments was in five separate issues of securities; that resting on its auxiliary and operative lines was embraced in fifty-nine different classes of securities issued by the several companies, secured by separate mortgages or deeds of trust covering different sections of the controlled roads or their equipment, capable of separate default or foreclosure, besides five stock guaranties, representing certain of its rental obligations, also secured by provisions for reentry on default.

The Danville Company also had outstanding car trust obligations of its own and leased lines amounting to $1,542,824, and a floating debt of over $5,000,000; also an emergency loan of $600,000, advanced by those interested in the property to prevent default on April 1, 1892.

Besides all such outstanding fixed liabilities on account of its own road and controlled lines, the directors of the Danville Company had pledged its credit and subjected it to other heavy liabilities, to enable its codefendant, the Richmond & West Point Terminal Railway & Warehouse Company (to be hereafter referred to as the Terminal Company) or certain of its controlled companies to acquire the stock control of other lines of railroads not directly connected with or operated by the Danville Company and in which it had no interest whatever. Its board of directors had issued $6,000,000 of bonds of the Danville Company, executed jointly and severally with the East Tennessee, Virginia & Georgia Company, and guaranteed by the Terminal Company "Cincinnati Extension Bonds," which were secured by a trust pledge of preference and ordinary shares of the Alabama & Great Southern Railway Company, Limited. Those bonds had been sold in open market, and apparently constituted an outstanding liability of the Danville Company, but for which it received no valuable consideration whatever. It had executed the same as mere accommodation paper and as a partnership adventure, and was only protected against loss by the above pledge of corporate stock of uncertain value, because it was subject to heavy prior mortgage debts, and the line of road of the particular corporation issuing such stock was a

Page 176 U. S. 261

central link in the system of the East Tennessee Railway system over which the Danville Company had no control whatever.

By reason of the absolute stock control which the Terminal Company had over the Danville Company, it compelled the latter company, about June 1, 1891, to become the assignee and guarantor of a written lease executed by the Central Railroad & Banking Company of Georgia, of all its system of railroads and steamer lines for a long-term of years to the Georgia Pacific Railway Company, whereby the Danville Company became bound to operate the Central System and to assume and pay all the interest on the bonded debts and all the rental obligations of the Central Railroad & Banking Company, and the Danville Company was compelled to execute and deliver a bond of $1,000,000 to faithfully perform all the covenants in such lease. The result of the operation of the Central-Georgia system of roads had been a constant and heavy loss to the Danville Company.

The bill next set out the relations between the Danville Company and the Terminal Company, and also describes what is known as the Tennessee system, having 2,318 miles in length of proprietary, leased, and operated roads.

It then stated that the five several issues of bonds of the Danville Company were secured by mortgages to divers trustees, and constituted liens of varying rank upon some portion of its road, franchises, and equipment; that the bonds issued by the Danville and Terminal Companies, as well as a large majority of the several issues of bonds resting on the different separately mortgaged sections of the Danville system, were owned by a large and constantly shifting number of persons and corporations, who were scattered in many different states and countries and had no organization or registration; that what was known as the emergency loan, for which the income of the Danville system was pledged, was advanced in equal sums by a considerable number of persons, many of whom preferred not to have their names or advances disclosed; that the plaintiff, Maben, was a registered stockholder of the Danville Company; that the plaintiffs were

Page 176 U. S. 262

owners of a large amount of the common preferred stock of the Terminal Company and of its six and five percent bonds, of the Danville Company's debenture and five percent bonds, and of different classes of bonds resting on parts of the Danville system, and some of them were creditors of the Danville Company on account of advances made to the emergency loan, and entitled to the security given therefor; that, while nominally distinct corporations, the actual transactions and financial arrangements between the Terminal Company, conducting no active business as a security company, with no assets except stocks and bonds (but holding nearly the entire capital stock of the Danville Company) and the Danville Company, as a corporation operating a large system of railways, separately organized and mortgaged, had resulted in serious complications; that such community of heavy and extra hazardous liability and hypothecation indissolubly connected the financial operations of the Danville and Terminal Companies, so that the unrelieved embarrassment of either company would necessarily force the insolvency of the other, "and produce a disruption of the system of roads;" that the then financial condition of the two defendant corporations was alarming to the holders of their stocks and bonds; that in the latter part of 1891, the large and increasing floating debts of the several properties in which the Terminal Company was interested and the heavy losses incurred in the operations of some of the roads created much uneasiness among the stockholders and creditors; that, by reason of such condition of things, the management had invited prominent financiers to investigate the several systems and aid in perfecting the best plan for permanently adjusting the affairs of the companies in question and secure them the credit necessary for their successful operation; that two movements to that end had failed, when about the last of May, 1892,

"a large number of security holders joined in a request to an eminent banking firm of New York city that it should investigate the property and its financial condition, and undertake to rescue it from the bankruptcy, shrinkage in value, and disruption with which the system was threatened;"

that such bankers consented to cause an examination

Page 176 U. S. 263

to be made, and the plaintiffs were advised that the same was in progress, but that no conclusion had been reached or report made, and necessarily the creditors and security holders were so numerous, scattered, and unknown, and the classes of liens so varied in character and value, that to perfect any satisfactory plan to reorganize the system and secure the necessary creditors' assent would require considerable time, and that in the meantime the financial embarrassments continued to be urgent and threatening, and the possible consequence thereof might "result in the disruption of the system, and the depreciation of millions of dollars in the value of the securities."

The bill further alleged that the enormous floating debt of the Danville Company was wholly beyond its financial ability to carry out of its ordinary revenues, over $4,500,000 of such debt standing in demand loans subject to summary enforcement; that, by reason of the depreciation in the market value of its securities and the failure of the several efforts to reorganize the property, its credit had been much impaired; it was not able to pay its obligations as they matured, but had been forced to ask renewals; it had no available collaterals to enable it to negotiate such a loan as was necessary to adequately protect it against open default; it had been forced to postpone payment of usual operating expense vouchers for supplies, and was allowing heavy arrears of such debts to accrue; many creditors had brought suits and attached cars and funds forwarded to pay employees; besides its floating debt, mortgage coupons on seventeen sectional mortgages, aggregating $989,000, would fall due on July 1, 1892; it had no available money or assets wherewith to pay the debts which would soon mature and no reasonable hope of financial assistance from any quarter to enable it to do so; its directors had had no meeting for over two months, and had practically abdicated their trust and power of management and confessed their utter inability ability to devise means to divert the insolvency and disruption of the system in their charge.

Plaintiffs charged that the corporation was insolvent and

Page 176 U. S. 264

this vast trust property was substantially derelict; that the unity of the property, as held and operated as an important trunk line, constituted one of the most important ingredients of its value, and that to permit its severance would result in a ruinous sacrifice to every interest in the property; that the owned and operated lines of road lie in six states, and were subject to the jurisdiction of the courts in each of the many counties in which the property was situate; that, unless the court, in view of the impending and inevitable defaults as aforesaid, would deal with the property as a single trust fund, and take it into judicial custody for the protection of every interest therein, individual creditors, immediately upon default, would assert their remedies in different courts in the several states; that a race of diligence would result, and judgments and priorities attempted; that levies and attachments would be laid upon the engines and cars of the company, and upon the fuel, material, and supplies indispensable to the operations of the road, and which would greatly interfere and ultimately prevent the company from properly discharging its duties as a public carrier and seriously diminish the earnings of the road; that lessors of the roads now owned would enforce the reentry covenants of their leases; that the continued default of the mortgaged debts would produce the immediate maturity of the bonds, and that

"a vast and unnecessary multiplicity of suits will result, and a most important and valuable trust property will be dismembered by the clashing decrees of the many courts exercising jurisdiction at the suit of separate creditors, which might be shielded and preserved as a valuable single trust property by adequate judicial protection until such time as a satisfactory financial reorganization could be perfected."

The plaintiffs also averred

"that the Central Trust Company is not only the trust depository in the said pledge of income, but is the trustee in over twelve trust deeds executed by the Danville Company and divers roads in its system, and also trustee for the preferred stockholders and six percent and five percent trust deeds of the Terminal Company. That the trusts and duties in said different deeds as to property, equipment, and income

Page 176 U. S. 265

are variant and in some respect antagonistic. In case of default and judicial enforcement, their reciprocal rights will have to be construed and decreed by the court, and such common trustee cannot properly represent such variant trusts, and the bondholders have the equity to apply in their own names to protect the trust estate."

The relief asked was --

That the court would decree that the plaintiffs as holders of aliquot portions of the emergency loan to the Danville Company, guaranteed by the Terminal Company, had a fixed and specific lien upon all and singular the income, tolls, and revenues of the Danville Company and its leased, operated, and controlled railroads, and each of them, and that the condition of such pledge of income had been broken, entitling the holders of such indebtedness to enforcement thereof;

That the court would also administer the trust fund in which the plaintiffs were interested, constituting the entire railroad and assets of the defendant corporations, and would for that purpose marshal all their assets and ascertain the respective liens and priorities existing upon every part of such system of railways, the amount due upon mortgages and other liens, and enforce and decree the rights, liens, and equities of each and all of the stockholders and creditors of the Danville and Terminal Companies as the same were finally ascertained and decreed, in and to not only those lines of railroads, appurtenances, and equipments, but also to and upon every portion of the assets and property of each of those corporations; and --

That for the purpose of enforcing a lien and equity upon the income of the railroad system aforesaid to which the holders of the emergency loan were by contract entitled, "as well as to preserve the unity of said system" as it had been for years maintained and operated, and preventing the disruption thereof by separate executions, attachments, or sequestrations, the occurrence of which would be inevitable in view of the defaults in interest payments which would presently occur, the court would forthwith appoint one or more receivers of the entire system of railroads and steamers held and operated by the Danville Company, together with all equipment,

Page 176 U. S. 266

material, machinery, supplies, moneys, accounts, choses in action, and assets of every description and wherever situated, together with all leasehold rights and contracts, with authority to manage and operate the same as the officers of and under the direction of the court, and that all the officers, managers, superintendents, and employees of the Danville Company be required to forthwith deliver up the possession of all and singular each and every part of the property over which the receivers were thus appointed, wherever situate, and also all books of accounts, offices, vouchers, and papers in any way relating to the business or operation of such system of railways and steamers, and for injunctions restraining each and every of the officers, directors, managers, superintendents, agents, and employees of the Danville Company from interfering in any way whatever with the possession and control of the receivers over any part of the property.

Upon hearing and considering the bill, with the exhibits and answer in support thereof, and on motion of the complainants, Frederic W. Huidekoper and Reuben Foster were appointed by the court receivers of the property and assets of the Danville Company -- namely, the system of railways then in the possession of and owned and controlled by that corporation, situated in the District of Columbia and in the states of Virginia, North and South Carolina, Georgia, Alabama, and Mississippi, together with all the equipments, shops, appurtenances of every kind, machinery, material, and supplies owned, held, or in the possession and use of such corporation, wherever situate, including all tracks, terminal facilities, real estate, warehouses, offices, stations, and all other buildings of every kind, owned, held, or possessed by the Danville Company, together with all steamers, wharves, and other properties held in connection therewith, and all moneys, choses in action, credit, bonds, stocks, leasehold interests, or operating contracts, and other assets of every kind, and all other property, real, personal, and mixed, owned, held, or possessed by that company.

It was further provided in the order of the court that the receivers

"shall from time to time, out of the funds, coming

Page 176 U. S. 267

into their hands from the operation of the property, pay the expense of operating the same and executing their trusts, and all taxes and assessments upon the said property or any part thereof, and also pay and discharge all such traffic and car mileage balances as may be due to connecting and other railways, and all such loss and damage claims arising from the previous operation of said property as, in their judgment, on examination, are proper to be paid as expenses of operation, and shall also, out of the moneys coming into their hands, pay and discharge all the current unpaid payrolls and vouchers and supply accounts incurred in the operations of said railroad system at any time within six months prior hereto."

The receivers, who are referred to in the record as the insolvency receivers, entered into full and exclusive possession on the 16th day of June, 1892.

On that and the succeeding day, auxiliary suits were instituted by the plaintiffs against the Danville Company in the Circuit Courts of the United States for the Western District of North Carolina, the District of South Carolina, the Northern District of Georgia, the Northern District of Alabama, and the Northern District of Mississippi, and orders were duly entered of record by each of those courts confirming the original appointment of receivers and recognizing the Circuit Court of the Eastern District of Virginia as having primary jurisdiction over all the railroad system and property of the Danville Company, wherever situated.

On the 28th day of June, 1892, the plaintiffs filed a petition in the cause, stating that the Central Trust Company of New York was trustee in five mortgages executed by the Danville Company, resting upon its property, and of the following dates and amounts: October 5, 1874, $5,997,000; February 1, 1882, $3,368,000; October 22, 1886, $4,498,000; September 3, 1889, $1,390,000; May 1, 1891, $883,000. The petitioners prayed that the receivers be authorized to execute and sell receivers' certificates to an amount not exceeding $1,000,000, which should be a first lien on the Richmond and Danville Railroad, its property, leasehold interests, contracts, and income,

"and out of the proceeds, as a special fund, to pay and

Page 176 U. S. 268

discharge all outstanding indebtedness of the Danville Company incurred for material and supplies in the operation of the roads in the receivers' hands, which were purchased within six months prior to June 15, 1892, as the said indebtedness shall be ascertained and reported on by special masters to be appointed for such purpose, and also that out of the funds coming into their hands from the operation of the roads which could be safely used without prejudice to their own current liabilities for operating expenses, the receivers be authorized to pay the installments of rent and coupons of mortgage bonds resting 'upon the several parts of the system, so as to protect and preserve the present unity of the system of roads in their charge.' The petition concluded:"

"The Central Trust Company is the trustee in each and all of the trust deeds and mortgages, and it is made a party hereto so that it can appear to the application and be heard upon the question of using receivers' certificates and authorizing the payment of mortgage, interest, and rental obligations out of the current net income of the receivership."

Of the application for an order in accordance with the petition the defendants and the Central Trust Company had notice. The court, by order, authorized the borrowing of $1,000,000 receivers' certificates to be used for the purposes indicated in the petition. The Trust Company was represented at the hearing of the application, and, so far as the record discloses, made no objection to the order.

On the 13th day of July, 1892, the Central Trust Company presented its petition and prayed that it be allowed to intervene in the suit brought by Clyde and others for the protection of the holders of the six percent bonds of the Danville Company and of the subscribers to the emergency loan made prior to April 1, 1892, and in respect of which that company was the trust depositary of the income of the Danville system pledged to secure such loan, and by order entered August 16, 1892, leave was given for that company to intervene in the cause, "on the condition that it hereby submits to the several orders heretofore entered herein." On the latter day, that company presented its petition, asking that Huidekoper

Page 176 U. S. 269

and Foster be appointed as permanent receivers of the Danville Company if the court should determine to continue its judicial possession of the system. An order to that effect was accordingly made. In presenting the above petition, the Central Trust Company appeared not only as trustee of the Richmond and Danville Railroad Company and the consolidated gold mortgage, to be presently referred to, but as trustee representing other mortgages and railroads, including the Virginia Midland Railroad, the Georgia Pacific Railway, and the North Eastern Railroad of Georgia.

On the 19th day of December, 1892, an intervening petition was presented by parties representing the underlying bondholders interested in any litigation or proceedings for the foreclosure of any of the mortgage or trust deeds of the Danville Company or any of the companies forming a part of the Danville system, and they were permitted to become come parties complainant in the Clyde suit, and to file such petitions and take such proceedings as they deemed necessary or requisite for the protection of the interests they represented.

In the suit instituted by Clyde and others, the Carnegie Steel Company, Limited, filed with the Master Commissioner, October 14, 1892, its claims arising out of certain contracts made between that company and the Danville Railroad Company in 1891 for steel rails delivered to the latter between July 25, 1891, and October 10, 1891. The facts relating to those contracts will be hereafter stated.

On the 13th day of April, 1894, the Central Trust Company of New York instituted a separate suit against the Richmond and Danville Railroad Company for the foreclosure of what is known as the consolidated gold mortgage. Upon the filing of that petition and on the motion of the Trust Company, an order was entered appointing Huidekoper, Foster, and Spencer receivers of the court of all and singular the railroads, property, assets, credits, and effects of the Richmond and Danville Railroad Company,

"the same being the system of railways owned, operated, or controlled by the said corporation, situate in the District of Columbia and in the States of Virginia, North Carolina, South Carolina, Georgia, Alabama, and Mississippi,

Page 176 U. S. 270

together with all the equipment, shops,"


"and other assets of every kind, and all other property, real, personal, and mixed, held or possessed by the said railroad company, the above-mentioned property being now in the possession of said Frederic W. Huidekoper and Reuben Foster, receivers duly appointed by this Court in a certain suit brought in this court and now pending therein, wherein William P. Clyde and others are plaintiffs and the Richmond and Danville Railroad Company and others are defendants."

These receivers are described in the record as the foreclosure receivers.

The order last named contained this clause:

"Nothing in this order contained shall be construed to vacate any of the orders heretofore entered in the case of William P. Clyde and others, but the court reserves full power to act upon the masters' reports filed in the said cause, and in said cause to adjudge and decree upon the rights of creditors ascertaining [asserting] a claim against the property of the said railroad company or income thereof, in preference to the mortgage debt thereof, by orders to be entered in the said suit of William P. Clyde and others, upon notice to parties, with like effect upon the mortgaged property and income as if such orders were entered in this cause."

The Carnegie Company was permitted to intervene in the suit brought by the Central Trust Company, alleging in its petition that the rails sold and delivered by it to the Danville Company were used upon its roadbed for the purpose of maintaining the same in condition to conduct its traffic thereon, and were necessary for that purpose. The claimants referred to the fact that they had previously filed their claim in the Clyde suit,

"which claim is now pending in said cause before the masters, the demand of your petitioner that the same shall be allowed, as a claim entitled to equitable priority of payment over the mortgage debt of the said defendant not having been heard or considered by said masters."

On the 17th day of February, 1894, the suit instituted by the Central Trust Company of New York and the one brought by Clyde and others were consolidated under the name of "The Central Trust Company of New York and others v.

Page 176 U. S. 271

The Richmond and Danville Railroad Company and others, Consolidated Cause." Upon application of the Carnegie Company, it was made a party defendant in the consolidated cause.

A decree of foreclosure and sale in the consolidated cause was entered April 13, 1894, and a sale took place June 15, 1894, the property embraced by the decree being sold as a unit. Charles H. Coster and Anthony J. Thomas, a purchasing committee, as joint tenants, purchased the property for the use, benefit, and behoof of a corporation to be organized pursuant to the terms of an Act of the General Assembly of Virginia approved February 20, 1894, entitled "An Act Authorizing the Purchasers of the Richmond and Danville Railroad, Their Assigns and Successors, to Become and Be a Corporation." The sale was approved by formal order of court and confirmed to the purchasing committee, composed of Coster and Thomas, for the sole use, benefit, and behoof of the Southern Railway Company created under the laws of Virginia.

The decree of confirmation contained the following clauses:

"And the court accepts the said Southern Railway Company as the purchaser of all and singular the railroad, property, and franchises sold under this decree, and holds it as such purchaser obligated to complete and fully to pay the said bid and comply with all the orders of the court already entered, and hereafter, from time to time, to be entered by it obligatory on such purchaser. And the court further reserves full power from time to time to enter orders binding upon the said Southern Railway Company as such purchaser, requiring it to pay into the registry of the court all such sums as have been or may be ordered by the court for the payment of any and all receivers' debts or claims adjudged or to be adjudged as prior in lien or equity to the mortgage herein foreclosed, or entitled to preference in payment out of the proceeds of sale."

That order also contained this clause:

"The court reserves full power, notwithstanding such conveyance and delivery of possession, to retake and resell the property this day confirmed to such purchaser if it fails or neglects fully to complete such

Page 176 U. S. 272

purchase and comply with the orders of court in respect to full compliance therewith, or to pay into court, in accordance with such decree of sale and orders of court, all sums of money hereafter ordered by the court to be paid into its registry to discharge any and all such debts, liens, or claims as it may decree ought to be paid out of the proceeds of sale in preference to the mortgage herein foreclosed."

Subsequently, upon a hearing of the exceptions to the masters' report on the claim of the Carnegie Steel Company, Limited, the circuit court found that that company furnished to the railroad company at the dates and in the quantities named in their petition for claim, steel rails to the aggregate value of $125,067.39, which the company used and agreed to pay for, and that the interest on that amount was $29,828.58 -- in all, $154,895.97. It further found that that sum had never been paid by the railroad company; that

"the earnings of said defendant railroad company, which should have been used for the payment of current expenses, including therein this claim, have been used for the benefit of mortgage creditors in a sum more than sufficient to pay said claim in full,"

and that,

"prior to May 1, 1888, bonds of the Richmond and Danville Railroad Company known as consolidated bonds were issued to the amount of $1,621,000, and that since that date, such bonds have been issued to the amount of $2,906,000."

And it was adjudged that the claim, with interest thereon from the time when the respective items thereof became due and payable by the Danville Company, was entitled to priority of payment out of the funds resulting from the sale of the mortgaged property, over the bonds secured by the mortgage foreclosed by the decree heretofore passed in this cause, and was also entitled, by reason also of the statutes of Virginia,

"to priority of payment out of the fund resulting from the sale of the mortgaged property over such of the bonds secured by the mortgage foreclosed by the decree heretofore passed in this cause as were issued after May 1, 1888, being $2,906,000 in amount."

It was further ordered that

"the purchaser at the sale heretofore made, or his assigns, do forthwith pay to the Carnegie Steel Company, Limited, said sum of $154,895.97 in

Page 176 U. S. 273

compliance with the terms of the decree of sale heretofore passed, whereby the purchaser at such sale or his assigns was required to pay off and satisfy all claims filed in this cause which this Court should adjudge prior to the mortgage by said decree foreclosed."

The Southern Railway Company prosecuted an appeal from that order to the circuit court of appeals, and the action of the circuit court was approved. 76 F.4d 2. The case is in this Court upon certiorari, sued out by the railway company.

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