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Vol. IV.]

MEYER V. JOHNSTON.

[No. 3.

A claim of very large authority in the courts has been made in argument under this head; and the subject is a very important one, and sufficiently new to require an investigation at some length.

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1. "The object sought by the appointment of a receiver," says Mr. Kerr, in his work on Receivers, "may be generally described to be, to provide for the safety of property, pending the litigation which is to decide the right of litigant parties." P. 3. The duty of the court, upon a motion for a receiver, is merely to protect the property in the mean time for the benefit of those persons to whom the court at the hearing of the cause, when it will have before it all evidence and materials for a determination, shall think it properly belongs." Ib. p. 6. Blakeney v. Dufaur, 15 Beav. 42. In Gardner v. L. G. & D. Railway Co. Law Rep. 2 Ch. App. 201, an appeal was taken to the court of appeal in chancery, from an order of the vice-chancellor, appointing the general manager and the secretary of the company, on the application of a creditor with a lien, managers and receivers of the company's "undertaking" or railroad business. The lords justices discharged the order, saying: "When the court appoints a manager of a business or undertaking, it, in effect, assumes the management into its own hands; for the manager is the servant or officer of the court, and upon any question arising as to the character or details of the management, it is the court that must direct and decide. The circumstance that, in this particular case, the persons appointed were previously the managers employed by the company" (as was one of the persons appointed in the case before us), "is immaterial. When appointed by the court, they are responsible to the court, and no orders of the company, or of the directors, can interfere with this responsibility. Now, I apprehend that nothing is better settled than that this court does not assume the management of a business or undertaking except with a view to the winding up and sale of the business or undertaking. The management is an interim management; its necessity and its justification spring out of the jurisdiction to liquidate and to sell; the business or undertaking is managed and continued in order that it may be sold as a going concern, and with the sale the management ends." P. 212. This is stated by Cairns, Lord Justice, as the rule in such matters. And in addition (pertinently of views hereinafter to be presented), he says: "When parliament, acting for the public interest, authorizes the construction and maintenance of a railway, both as a highway for the public and as a road on which the company may themselves become carriers, it confers powers and imposes duties and responsibilities of the largest and most important kind, upon the company which parliament has before it, and upon no other body of persons. It is impossible to suppose that the court of chancery can make itself, or its officer, without any parliamentary authority, the hand to execute these powers; and all the more impossible when it is obvious there can be no real and correlative responsibility for the consequences of any imperfect management. It is said that the railroad company did not object to a manager. This may well be so. But in the view I take of the case, the order would be improper, even if made on the express agreement and request of the company.'

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A court of equity in this country may, in certain cases, interpose, and appoint a receiver, when a company, receiving tolls and income more than

Vol. IV.]

MEYER V. JOHNSTON.

[No. 3.

sufficient to pay the expenses of an economical administration, refuses to apply the surplus to the payment of a judgment or mortgage creditor. The Covington Drawbridge Co. v. Shepherd, 21 How. 112, presents an instance of the exercise of this power. The receiver in that case was also directed, out of the tolls and income of the bridge, to keep it in repair. In Stevens et al. v. Davison et al. 18 Grattan, 819, a board of directors, some of whom "had been concerned in the fraudulent issue of a very large amount of spurious stock, greatly exceeding in amount the lawful stock of the company," on the very day when their term of office was to expire, and the annual meeting of the stockholders, which the directors failed to call, should have been regularly held, made a lease of the railroad, of which they were directors, for a period of ten years, at an inadequate rent, without authority from the charter to do so, and in violation of a by-law adopted by the stockholders. Some of the lawful stockholders filed a bill to have the lease declared void, and for other relief; and a receiver was appointed to take possession and control of the road and operate it under directions contained in the decree. The court of appeals of Virginia, reviewing the proceedings, said: "While for the reasons assigned in Gardner v. The L. C. & D. Railway Co. Law Rep. 2 Ch. App. 201, a court of chancery will be reluctant to appoint a receiver to take charge of and manage a railroad, it is competent to do so, when such a course is indispensable to secure the rights of the legitimate stockholders, and to prevent a failure of justice. And the court is of opinion that, under the circumstances of this case, it was proper for the court to appoint a receiver to take charge of and manage the railroad until it can be ascertained, by a proper inquiry to be made in this cause, who are the legitimate stockholders of said company, to whom the custody and management of said railroad should be committed."

The foregoing instances have been selected as illustrative of the authority of courts of equity to take charge of the management of property in litigation. Their interference by receivers and managers in such cases, and for such purposes, is easily vindicated. In doing so, they put forth a power merely incidental and subsidiary to their functions of ascertaining and enforcing the rights of the persons concerned in the subject matter in controversy. They take and preserve the property, in order to uphold and maintain the rights of creditors and others therein, and to enforce the obligation of contracts. It is in the exercise of the judicial function only that a court obtains jurisdiction between litigant parties, of the cause in which it is authorized to take such control, for the preservation of the property involved. And we are not aware of any principle of law, or element of wise policy, which would justify such court, after so getting possession, in laying aside its judicial character, and engaging, however hopeful the scheme, in the completion of unfinished undertakings, and in raising money for this purpose, as the parties themselves could not, by setting up liens which shall displace other and older liens, without the consent of the persons to whom they belong. The objections to such transactions are, that they are necessarily, to some extent, speculative; that they arbitrarily unsettle interests founded on the most solemn contracts; and that the court, in conducting them, abdicates its judicial function, and exercises another more akin to that of a bureau of an executive department of the interior.

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Vol. IV.]

MEYER V. JOHNSTON.

[No. 3.

We have been furnished, by the industry of counsel for complainants below, with imperfect manuscript reports of the cases of Southerland, Trustee, &c. v. The Lake Superior Ship Canal Railroad & Iron Co. (before Judge Longyear, United States District Judge for the Eastern District of Michigan, presiding in the circuit court at Detroit), and Hyde v. The Sodus Point, &c. R. R. Co. (before a judge of the supreme court of New York, at Brooklyn). In each of these cases the court seems to have authorized its receiver to raise money by certificates of indebtedness, which should constitute a first lien on the property, and to complete therewith the company's unfinished work. In what manner, in the former case, the court obtained jurisdiction of the cause, by whom, for what purpose, and how it was brought before the court, we are not informed. It only appears, by a copy of Judge Longyear's order, of June, 1872, that "the receiver, Knox, was appointed ... under the first mortgage," and that after notice to the parties, and counsel for them had been heard, "it being made to appear to the court that it is for the best interest of all concerned in said ship canal and said property, real and personal, that said canal should be finished and made ready for use as speedily as practicable, and that it is necessary and expedient that said receiver should issue certificates of indebtedness for the purpose of said speedy construction; therefore he was authorized by the court to issue such certificates, payable July 1st, 1873, and bearing interest at the rate of ten per cent. a year, to the amount of $500,000, which should constitute a first lien on said canal and property, and have priority of payment over any debt previously created, and to execute and deliver a mortgage trust deed thereof, and of the franchises and rights of the company, to a trustee, to secure payment of said certificates accordingly. It was further provided that, in case these should not be paid at maturity, the receiver should, upon application to the court and on its order, deliver over all the property and effects embraced by said deed to the trustee, to be by him sold to pay said certificates. The receiver was also authorized to sell said certificates, at a discount not exceeding twenty-five per cent., or to borrow money by hypothecation of them. The court, by this conveyance to a trustee, put the property even out of its own control, and appears to have disposed of it, as if invested itself with a sort of seigneurial title that enabled it to supersede existing rights of others therein, and to have exercised legislative power in authorizing the borrowing of money without regard to usury laws.

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The only other information which our manuscript of this case contains is, that the first series of these certificates of indebtedness not having been paid, the trustees under the receiver's mortgage trust deed applied to the court, in 1874, for leave to sell, to enable him to pay them; that a contest was thereupon inaugurated with other parties interested, and that the judge declined to grant the leave applied for, until the supreme court of the United States should decide a case pending in it, which seemed to him to involve some of the questions on which his decision would depend. Not having a full report of this case, we do not comment on it further, except to say that, as presented to us, we do not recognize in it any principle which would justify a chancellor of this state in assuming the authority (seemingly absolute) which Judge Longyear exercised in that case; and

Vol. IV.]

MEYER V. JOHNSTON.

[No. 3.

we do not perceive in the result of it any reason for desiring that a court of equity should be clothed with such authority.

In Hyde v. The Sodus Point Railroad Co. et al., a judgment creditor, to an amount between $500 and $600, filed his complaint in the nature of a bill, in December, 1873, against that company and the Union Trust Company, on behalf of himself and such other creditors as should join in the proceedings. He set forth that an execution on his judgment had been returned unsatisfied; that the property of the Railroad Company was of great value; that it was subject to a first mortgage trust deed executed to the Union Trust Company as trustee, to secure the payment of bonds to the amount of $700,000, which had been issued; that the trustee had not taken possession of the property, as it lawfully might have done; that, by reason of disputes among the officers and managers of the company, its property was being wasted, and seized for taxes and various other claims, real or alleged; that bankruptcy proceedings against it were threatened; and that there was great danger, unless the court should take charge of the railroad, that its operations would cease and the property be wasted, and the claims of plaintiff and other bona fide creditors be lost; wherefore, plaintiff prayed that a receiver be appointed; that the company and its officers be enjoined from interfering; that the property, profits, and earnings of the railroad company, properly applicable to payment of plaintiff and other creditors with liens, be so applied, and that the property should be sold as the court should direct; to which last prayer no response was made, or perhaps desired. With the complaint, and in the same cause, were filed affidavits (sworn to before plaintiff's complaint was filed) of several persons, holders and agents of the holders of first mortgage bonds, to the amount of $649,000 of the $700,000 issued; in which affidavits affiants say, "their bonds constitute the first existing lien on the property of the company; that the interest on them is in arrears and unpaid; that proceedings for a foreclosure have been postponed in the hope that some arrangement might be made which would prevent the sacrifice usually incident to such proceedings, and preserve the rights of the subsequent lienors; that in September, 1873, the Union Trust Company suspended payment, and shortly afterwards a receiver of its effects was appointed, whereby a further difficulty existed in the way of a foreclosure; that they are advised that the appointment of a receiver would not prejudice the right of the trustee to commence proceedings hereafter to a foreclosure; and that they believe it would be a benefit to all the creditors of the R. R. Co. to have a receiver appointed for the purposes mentioned in plaintiff's complaint." Thereupon, it seems (though our manuscript does not contain the order), Sylvanus J. Macy, one of the holders of first mortgage bonds, was appointed receiver. On the 15th of January, 1874, he made a very lucid report of the condition of the property, specifying the bridges and other parts of the road that were wretchedly out of order, and insisting on the importance of making repairs, and of constructing, at one terminus, wharves, piers, and other fixtures to facilitate transfers of cargo to and from vessels, and at the other terminus, connections with other railroads; in order to do which work, and other things, he asked for authority to issue certificates of indebtedness to the amount of $125,000, which should constitute a first lien on the property of the company. This au

Vol. IV.]

MEYER V. JOHNSTON.

[No. 4.

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thority was granted on the 16th day of January, 1874, and on the 20th was confirmed, after consideration by the court of an affidavit (of which we have no copy) by the President of the Union Trust Company, and argument by Mr. Peckham, in opposition.

It is obvious that the holders of the first mortgage bonds, in their own right, or as agents, representing nearly all of them, got up this case in conjunction with Hyde, a judgment creditor, as plaintiff. And, since no one opposed the motion, except (apparently) the Union Trust Company (trustee in the mortgage deed made for their benefit), and no appeal was taken, it is probable that the opposition was pro forma rather than real. At any rate, it was obvious to all parties that it would be beneficial to all to have the work completed even on those terms. And, if the holders of the first mortgage bonds were willing that the certificates should create a lien prior to their own, it seemed pretty certain that the other creditors would not consider that they had any cause for opposing them.

We cannot regard this unreported amicable suit as an authority of weight concerning the jurisdiction of a court of equity to take upon itself the completion of unfinished enterprises, and the raising of money for the purpose, by charging the property with liens that shall override other and older ones, against the consent of the persons entitled to them.

Another case to which our attention has been called on this point is that of the Alabama and Chattanooga Railroad. Dilapidated, mismanaged, in litigation in several distinct courts, subject to independent managers, deriving authority from different sources, charged with a first mortgage debt of more than $5,000,000, with interest to a large amount unpaid, which debt the entire property, upon a sale thereof, would not fetch money enough to pay, and daily diminishing in value, while its other large debts were daily growing larger, the trustees under the first mortgage deed filed their bill in the circuit court of the United States, at Mobile, against the company and the trustees in the second mortgage deed, and several other defendants, and prayed that the court would take jurisdiction of, settle, and determine the various matters of dispute and the rights of all persons concerned, and sell the property, or dispose of the same for their benefit, according to their respective rights therein, and, in the mean time, take charge of, preserve, repair, and operate the railroad, with its appurtenances, by receivers, whom it was asked to appoint, "with full power to borrow money, and to render effectual the orders and directions of the court, . [and] to cause the property and effects of said corporation to be properly. protected, improved, and administered . . . and to be put in such condition, as to title and possession, as well as in every other respect, that the said railway, and the property incident thereto, may not be sacrificed," &c. This bill, with its exhibits and many affidavits in support of it, before being filed, was presented to Mr. Justice Bradley, of the supreme court of the United States, on the 26th day of May, 1872, and application made for an injunction and the appointment of receivers, according to the prayer of the bill. But he ordered that the application be heard before the circuit court of the United States, sitting in equity at Mobile (of which he was circuit justice), on the 20th of June following, and "that a copy of the bill and affidavits, and notice of the 10

VOL. IV.

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