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Statement of the Case.

nominally under that contract was the lessee of the petitioner's road, yet in fact it was leased and operated for the benefit of the other two companies named, who furnished the money to build the said Indianapolis and St. Louis Railroad, and who entered into a contract with the petitioner, guaranteeing performance of said agreement on the part of the Indianapolis and St. Louis Railroad Company, and who had entered into a contract between themselves for the management and operation of the continuous line of railroad from Indianapolis, in the State of Indiana, to East St. Louis, in the State of Illinois, including the Indianapolis and St. Louis Railroad and the petitioner's road. It was further alleged in the petition that the Pennsylvania Railroad Company, which, together with the Cleveland, Columbus, Cincinnati and Indianapolis Railway Company, were made defendants to the petition, had succeeded to the rights and obligations under these several contracts and arrangements of the Pittsburg, Fort Wayne and Chicago Railway Company; and that the Pennsylvania Railroad Company and the Cleveland, Columbus, Cincinnati and Indianapolis Railway Company were equal owners of the capital stock of the Indianapolis and St. Louis Railroad Company, and that the Cleveland, Columbus, Cincinnati and Indianapolis Railway Company was the holder, substantially, of all the second mortgage bonds of the Indianapolis and St. Louis Railroad Company.

The petition further alleged that the eastern terminus of the St. Louis, Alton and Terre Haute Railroad was the western terminus of the Indianapolis and St. Louis Railroad, the two thus forming a continuous line from Indianapolis to East St. Louis on the Mississippi River, the road of the petitioner being the only outlet for the Indianapolis and St. Louis Railroad west of Terre Haute; that a very large proportion of the earnings of the Indianapolis and St. Louis Railroad Company were derived from business received by it from the petitioner's leased line; and averred that the earnings of the leased road over and above the amount authorized to be retained by the Indianapolis and St. Louis Railroad Company for the purpose of operating the same at all times had been and were the property of the petitioner.

Statement of the Case.

The petitioner further claimed that the rental for the use and occupation of said continuous line constituted a part of the operating expenses of the Indianapolis and St. Louis Railroad Company; that the operating contract was executed before any of the bonds of the Indianapolis and St. Louis Railroad Company were issued and sold; that it was the duty of the Indianapolis and St. Louis Railroad Company to pay all of its operating expenses, including the rental of the petitioner's road, out of its earnings before it paid any interest on said bonds; but that the said Indianapolis and St. Louis Railroad Company, instead of paying its operating expenses as thus defined, diverted and appropriated its earnings to improvements of its property in better equipment and new construction, and to the payment of interest upon its bonds, and neglected and refused to pay the rental accruing to the petitioner for which it had obtained a decree, as above stated. And the petition alleged that during the time the Indianapolis and St. Louis Railroad Company had been in possession of the petitioner's road the amount of such misappropriation and diversion of funds, that should have been applied to the payment of operating expenses, amounted to the sum of $1,000,000. The petition further showed that on May 1, 1878, the Indianapolis and St. Louis Railroad Company made default in the payment to petitioner of the rental then due under the terms of said contract, and so continued to make default from and including April 1, 1878, up to and including October 26, 1878, during which time it was in possession and use of the leased road, receiving the profits and income thereof, and paid over no part of the gross earnings of said road to the petitioner whatever, but appropriated the whole of the same to its own use, thirty per cent whereof during said time amounted to the sum of $164,052.82, which, it was alleged, was appropriated by the Indianapolis and St. Louis Railroad Company to improvements, betterments, and new construction upon its own line of railroad, in the purchase of rolling stock and equipment, and in the payment of interest upon its bonds.

It was further alleged in the petition that when the Indianapolis and St. Louis Railroad Company took possession of the

Argument for Appellant.

leased road in 1867 it received from the petitioner supplies of the value of $91,860.05, which, by the terms of the lease, the lessee contracted and agreed to return or account for to the lessor at the termination of the lease; that said supplies had long since been consumed by the lessee; that by the terms of the decree and sale in the principal cause the lease had been assigned and transferred to the Indianapolis and St. Louis Railroad Company, and it was claimed that said amount was a charge upon the proceeds of the sale of the leased road in the possession of the court for distribution.

The petition therefore prayed for a decree awarding priority in payment in its favor out of the proceeds of the sale of the two sums of $664,874.70 and $91,860.05.

To this petition answers were filed by the Cleveland, Columbus, Cincinnati and Indianapolis Railway Company, and by the Pennsylvania Railroad Company, in which the allegations of the petition in regard to the diversion of the earnings of the St. Louis, Alton, and Terre Haute Railroad Company to the purposes of the Indianapolis and St. Louis Railroad were denied, as well as the general equity set up by the petitioner.

On June 27, 1884, the cause having been fully heard upon the petition, and the answers and proofs, a final decree was rendered awarding to the petitioner an amount found due to it for rental accrued while the road was in the possession of the receiver appointed under the foreclosure proceedings, and directing payment thereof; but so far as the petition sought to establish a claim for rental prior to the date when the receiver took possession of the property, as against the proceeds arising from its sale, and so far as it sought to recover the value of the supplies turned over to the Indianapolis and St. Louis Railroad Company in 1867, at the time of the execution of the lease, the petition was dismissed. It was from that decree that this appeal was prosecuted.

Mr. John M. Butler, with whom was Mr. Joseph E. McDonald on the brief, for appellants.

I. The St. Louis, Alton, and Terre Haute Railroad Company is entitled to payment of the amount equitably due for the use

Argument for Appellant.

of its railroad and franchises by the Indianapolis and St. Louis Railroad Company, as upon quantum meruit, regardless of the lease of September 11, 1867. Thomas v. Brownville &c. Railroad, 109 U. S. 522, 526; Gardner v. Butler, 30 N. J. Eq. (3 Stewart), 702, 724; Wardell v. Union Pacific Railroad, 4 Dillon, 330, 339; S. C. on appeal, 103 U. S. 651, 656; Pennsylvania Co. v. St. Louis, Alton & Terre Haute Railroad, 118 U. S. 290, 309, 318.

II. The amount of compensation for the use of the railroad and franchises of the St. Louis, Alton and Terre Haute Railroad Company by the Indianapolis and St. Louis Railroad Company fixed by the lease of September 11, 1867, to wit: $450,000 per annum, in monthly payments of $37,500, is no more than a just and equitable compensation and should be allowed, as upon quantum meruit, regardless of the lease.

III. The St. Louis, Alton and Terre Haute Railroad Company is entitled to payment, out of the proceeds of the sale of the railroad and franchises of the Indianapolis and St. Louis Railroad Company, of the full amount of the $664,874.70 decreed due to it from the Indianapolis and St. Louis Railroad Company by the decree of July 26, 1882, together with interest thereon from date of said decree, before any distribution of said proceeds of sale is made upon the second and third mortgage bonds, in preference to payment upon said second and third mortgage bonds.

First. Because the amount justly due for the use by the Indianapolis and St. Louis Railroad Company of the railroad and franchises of the St. Louis, Alton and Terre Haute Railroad Company is a part of the operating expenses of the Indianapolis and St. Louis Railroad Company. Fosdick v. Schall, 99 U. S. 235, 252; Union Pacific Railroad v. United States, 99 U. S. 402, 422; Union Trust Co. v. Walker, 107 U. S. 596; Union Trust Co. v. Souther, 107 U. S. 591, 595; Miltenberger v. Logansport Railway, 106 U. S. 286, 313; Sage v. Central Railroad Co., 99 U. S. 334, 336; Burnham v. Bowen, 111 U. S. 776. These authorities clearly decide the following points:

1. That all earnings are applicable, first, to operating ex

Argument for Appellant.

penses until they are fully paid, and that there are no net earnings applicable to bond interest or improvement of the mortgaged estate while operating expenses remain unpaid.

2. That payment for the use of rented track is an operating expense, the same as payment for the use of rented cars, and payment for fuel, supplies and services of operatives.

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3. That operating expenses incurred in keeping a railroad a going concern," or in any other way tending to preserve the value of the mortgaged estate, are entitled to payment out of proceeds of sale in preference to mortgage bonds, even although the gross earnings are insufficient to pay all the operating

expenses.

Second. The amount due to the St. Louis, Alton and Terre Haute Railroad Company for the use of its railroad, equipment and franchises by the Indianapolis and St. Louis Railroad Company should be paid out of the proceeds of sale in preference to the mortgage bonds, because it is a debt due to a connecting line. Miltenberger v. Logansport Railway, above cited; Union Trust Co. v. Souther, above cited; Burnham v. Bowen, above cited; Union Trust Co. v. Illinois Midland Co., 117 U. S. 434, 458.

Third. The amount equitably due to the St. Louis, Alton and Terre Haute Railroad Company for the use of its railroad, equipment and franchises by the Indianapolis and St. Louis Railroad Company ought to be paid out of the proceeds of sale in preference to payment of the mortgage bonds, because gross earnings, out of which this debt ought to have been paid, have been diverted to payment of bond interest, and to payment for new construction and improvements to the railroad of the Indianapolis and St. Louis Railroad Company. Fosdick v. Schall, 99 U. S. 255; Miltenberger v. Logansport Railway, 106 U. S. 311; Union Trust Co. v. Illinois Midland Co., 117 U. S. 457; Burnham v. Bowen, 111 U. S. 780; Pennsylvania Co. v. St. Louis, Alton &c. Railroad, 118 U. S. 290, 317, 318. If the law now firmly established by these decisions is to remain the law, these diverted gross earnings must be restored out of the proceeds of the sale, so far as may be necessary to fully pay the debts that ought to have been paid out

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