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spective interests; and it presented to that court the very question now before us, by the allegation that the entire assets of the Keokuk Company stood pledged for its indebtedness for construction, and for the moneys paid into court by Stone upon the purchase, and that all these must be paid before the bonds and stock could be divided between the owners, and, by the prayer, that the moneys paid as herein before stated upon said purchase be refunded to the purchasers, or be so prorated as that each should bear and pay its ratable proportion thereof. The court decided that question. It decided that the money should not be repaid, and that it should be prorated, and decreed to each purchaser stock of the rail-road company, for the moneys, as well as for the bonds and liens, he furnished for the purchase. The answer and cross bill in that suit nowhere deny the allegation that the mortgage for $600,000 had never been used and had been discharged, nowhere aver that any of the Adrian parties have any lien upon the property superior to that of the bondholders, and nowhere mention the contract of June 8th, with Stone. The cross bill prays for a division of the bonds, stocks, assets, and property of the Keokuk Company in the hands of the railroad company, or of Eells, the trustee, among the parties to the suit, so that the ownership of said property may be found and settled by the decree. The court granted that prayer, determined the liens and interests of all the parties, and divided and distributed the bonds, stock, and assets of the corporation among the parties to that suit, by its final decree, rendered September 8, 1878. The share of the appellants in this property was determined by that decree to be a certain number of shares of the stock of the corporation, and they accepted that stock. They now ask that they may have and enforce a lien upon all the shares of all the other parties to that suit, for the bonds, liens, and moneys for which they received that stock. The answer is that it was adjudged by that decree that they had no such lien; that they were entitled to the stock which they received, and to that stock only. Appellants seek to escape from the legal effect of this adjudication by allegations and proof that the decree of the court in Lee county was procured by fraudulent representations made by Stone and his attorney to them as to the character of their lien, and as to the purpose and effect of the suit in Lee county. No fraud is alleged that deprived the appellants of ample notice of the existence of that suit, and of the time of its trial. A direct suit may undoubtedly be maintained, in a proper case, to set aside and annul a judgment of any court, and all proceedings under such judgment, for fraud in procuring them. Gaines v. Fuentes, 92 U. S. 10, 21; U. S. v. Norsch, 42 Fed. 417; 1 Black, Judgm. § 321, and cases cited. But .until such a suit is brought, and until a decree of avoidance is rendered, the judgment of a state court which had jurisdiction of the subject-matter and of the parties is conclusive upon the merits of the controversies determined by that judgment between the parties and their privies, in every court in the United States, and cannot be collaterally impeached for fraud. Christmas v. Russell, 5 Wall. 290, 305; Maxwell v. Stewart, 22 Wall. 77, 81; Anderson v. Ander
son, 8 Ohio, 108; Mason v. Messenger, 17 Iowa, 261, 272; Smith v. Smith, 22 Iowa, 516, 518; Railway Co. v. Hall, 37 Iowa, 620, 622. This is not a suit to set aside or avoid the decree of the court in Lee county, nor has any such suit been brought. The appellants do not pray here for an avoidance of that decree. The only plea they make with reference to it is that it is not a bar to this suit, because it was procured by the fraud they allege. They have mistaken the law. This is a suit between some of the parties to the suit in the district court of Lee county, and the assigns of other parties to that suit, to retry the very questions there adjudicated 16 years ago; and, so long as that decree stands, it is a complete bar to this proceeding, even if it was procured by the fraud and imposition which the appellants plead. The decree below must be affirmed, with costs, and it is so ordered.
FARMERS' LOAN & TRUST CO. v. NORTHERN PAC. R. CO. et al.
(Circuit Court, E. D. Wisconsin. June 17, 1895.)
RAILROAD COMPANIES-RECEIVERS-PREFERRED CLAIMS-DIVERSION OF FUNDS. A judgment was recovered against a railroad company, which gave bond and appealed. Pending appeal, the road went into the hands of receivers appointed in an action by the trustee for bondholders to foreclose a mortgage executed prior to the recovery of the judgment. The judgment was affirmed, and the receivers petitioned for leave to pay it out of the funds accruing from the operation of the road since the receivership, on the ground that the owner of the judgment was about to sue the sureties on the appeal bond, who had become bound solely for the accommodation of the company, and that, by virtue of such bond, the assets of the road had been preserved and increased by the amount of the judgment. Hela, that the claim of the sureties could not be thus given preference over the mortgage bonds, as the lien of the latter was superior to that of the judgment, and there had been no diversion of funds to the benefit of the bondholders so as to create an equity to a preference. Farmers' Loan & Trust Co. v. Kansas City, W. & N. W. R. Co., 53 Fed. 182, disapproved.
In Equity. Bill by the Farmers' Loan & Trust Company against the Northern Pacific Railroad Company and others to foreclose a mortgage, and for the appointment of receivers. The receivers petitioned for leave to pay a judgment rendered against the road prior to their appointment.
Sullivan & Cromwell and Miller, Noyes, Miller & Wahl, for receivers.
Turner, McClure & Rolston, for complainant.
JENKINS, Circuit Judge. In October, 1887, one O'Brien recov-. ered a judgment against the Northern Pacific Railroad Company in the district court for the Fourth judicial district of the then territory (now state) of Washington, sitting in and for the county of Yakima, for the sum of $6,000, and costs. The company sued out a writ of error in the supreme court of the territory to review such judgment, and thereupon executed a supersedeas bond with sure
ties. The judgment was on the 7th day of March, 1889, affirmed by the supreme court of the territory. Thereupon the defendant company caused a writ of error to be issued out of the supreme court of the United States to review the judgment of the supreme court of Washington Territory, and another supersedeas bond was thereupon given with certain other persons as sureties. This last writ of error was dismissed in November, 1894. Railroad Co. v. O'Brien, 155 U. S. 141, 15 Sup. Ct. 30. The receivers of the railroad company, who were appointed by this court in August, 1893, now petition the court, upon the facts above stated, and upon the further assertion of fact that the owner of the judgment is about to institute suit against the sureties upon the supersedeas bonds to recover the amount due upon the judgment, for authority to pay the judgment out of funds in their hands accruing from the operation of the road since the receivership. The receivers advise the court that the sureties became bound solely as matter of accommodation and convenience to the company, and without pecuniary advantage of any kind to themselves. They also assert that, by virtue of the supersedeas bonds, "the assets of the Northern Pacific Railroad Company which came into the hands of your petitioners as receivers have been preserved, and were increased by the amount of such judgment which would have been collected out of the assets of said company if said supersedeas bonds had not been given." The trust company, complainant, which is the trustee under all of the mortgages here sought to be foreclosed, answers to the petition that in view of the fact that, if the judgment had been paid before writ of error sued out and supersedeas bonds given, the assets of the company coming into the hands of the receivers would have been decreased in amount, and in view of the peculiar hardships of the case, it consents to the granting of the prayer of the petition. The representative of the second mortgage bondholders, who has been made a party to the suit, opposes the granting of the petition, and denies the right of the court by such order to diminish the fund from which their mortgage should be paid.
I had occasion in the case of Farmers' Loan & Trust Co. v. Green Bay, W. & St. P. Ry. Co., 45 Fed. 664, to discuss the principle which underlies the allowance of preferential claims in the case of railroad foreclosures, and found it to be bottomed upon the idea of diversion of funds in equity belonging to the general creditors in preference to bondholders. I there said:
"The gross income arising from the operation of a railway should be first applied to the payment of the expenses of operation, proper equipment, and needful improvements. If the income be diverted to the payment of bonded interest in disregard of the payment of such expenses, there should be restoration to original equitable right. Failing diversion, there can be no restoration. The amount of restoration is dependent upon the amount of diversion."
I also there said that in case of failure by the trustee to take possession upon default, as the road must be kept a going concern, equity would recognize as preferential the expense of operation after default and within a limited time prior to the receivership, because
the expense of operation was indispensable to the preservation of the property. The latter ground is founded sometimes upon an implied assent by the bondholders growing out of their failure to take possession; sometimes upon the ground of laches; sometimes upon the ground of estoppel. In view of the hardship which will result to the sureties if they should be compelled to pay the judgment in question, I have taken occasion to reconsider the subject of preferential claims. A careful review of the whole question leaves no doubt in my mind of the correctness of my former holding. The rule was stated by Chief Justice Waite in Burnham v. Bowen, 111 U. S. 776, 4 Sup. Ct. 675, as follows:
"That, if 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 fund which has thus been improperly applied to their use."
In St. Louis, A. & T. H. R. Co. v. Cleveland, C., C. & I. Ry. Co., 125 U. S. 659, 674, 8 Sup. Ct. 1011, the court again declares the rule, and observes:
"There has been no departure from this rule in any of the cases cited. It has been adhered to and reaffirmed in them all."
In the case of Kneeland v. Trust Co., 136 U. S. 89, 97, 10 Sup. Ct. 950, the supreme court had occasion again to consider the subject, and observes as follows:
"The appointment of a receiver vests in the court no absolute control over the property and no general authority to displace vested contract liens. Because in a few specified and limited cases this court has declared that unsecured claims were entitled to priority over mortgage debts, an idea seems to have obtained that a court appointing a receiver acquires power to give such preference to any general and unsecured claims. It has been assumed that a court appointing a receiver could rightfully burden the mortgaged property for the payment of any unsecured indebtedness. Indeed, we are advised that some courts have made the appointment of a receiver conditional upon the payment of all unsecured indebtedness in preference to the mortgage liens sought to be enforced. Can anything be conceived which more thoroughly destroys the sacredness of contract obligations? One holding a mortgage debt upon a railroad has the same right to demand and expect of the court respect for his vested and contracted priority as the holder of a mortgage on a farm or lot. So, when the court appoints a receiver of railroad property, it has no right to make that receivership conditional on the payment of other than those few unsecured claims which, by the rulings of this court, have been declared to have an equitable priority. No one is bound to sell to a railroad company, or to work for it, and whoever has dealings with a company whose property is mortgaged must be assumed to have dealt with it on the faith of its personal responsibility, and not in expectation of subsequently displacing the priority of the mortgage liens. It is the exception, and not the rule, that such priority of liens can be displaced. We emphasize this fact of the sacredness of contract liens for the reason that there seems to be growing an idea that the chancellor, in the exercise of its equitable powers, has unlimited discretion in this matter of the displacement of vested, liens."
See, also, Penn v. Calhoun, 121 U. S. 251, 7 Sup. Ct. 906.
The law is established upon the authority of the ultimate tribunal, notwithstanding the contrary opinion held by some subordinate courts, that general creditors of a railroad company cannot with respect to the income of the road after receivership be allowed pri
ority to the mortgage where there has been no diversion of funds to the benefit of the mortgage interest, working injury to the general creditor, or where the mortgage bondholders have not unduly delayed the assertion of their rights after default, and have not lain by and permitted an indebtedness to accrue for the operating expenses of the road when possession should have been taken by the trustee, and with which expenses they should therefore be charge able. A court of equity has not the prerogative to thus displace the lien of a mortgage, or to charge the general indebtedness upon the corpus of the estate in priority to the mortgage lien.
Within the rule thus declared, has any equity been shown which would authorize the granting of relief to these sureties? At the date of the judgment there were outstanding mortgages upon the entire or parts of the main line of railway securing bonds now outstanding to the enormous amount of $76,429,000. The sureties dealt with the company with knowledge of this fact, and were chargeable with knowledge of it. They voluntarily assumed the obligation, relying upon the company to protect and indemnify them. They required no security for their assumption of liability. Upon what ground, then, can it be claimed that they should now be allowed priority, not only over general creditors of the company, but that vested mortgage rights existing when they signed these bonds should be subordinated to the payment of the debt which they assumed? It is said that the assets which came into the hands of the receivers have been thereby preserved, and were increased by the amount of the judgment which would have been collected out of the assets of the company if the supersedeas bond had not been given. Does this furnish sufficient reason to postpone the lien of the mortgages to the payment of this debt? The judgment which was stayed was a lien subordinate to that of the mortgages, and could only have been enforced subject to them. It might possibly have been collected out of the current income of the road; but that fact, I think, could not avail to displace the priority of recorded liens without a showing that by reason of nonpayment, property not subject to the mortgages had come to the possession of the receivers, and had been appropriated to the benefit of the bondholders. Possibly, such property might be followed; but in such case could the sureties be preferred to the other general creditors? The argument would give priority to every general creditor of the road, and would render substantially worthless every mortgage lien. This railroad company is bankrupt, with an enormous bonded debt and an immense floating unsecured debt. There is here no claim of diversion of funds. The proposition, stripped of its verbiage, amounts simply to this: That general creditors of
the railroad company are in law and in equity to be preferred to mortgage creditors. I am not aware of any decision going quite so far, although it must be confessed that the case of Farmers' Loan & Trust Co. v. Kansas City, W. & N. W. R. Co., 53 Fed. 182, is a dangerous approximation to such holding. I think that case to be in direct antagonism to the rulings of the supreme court, and I am not able to follow it. The argument that, in analogy to the