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CENTRAL TRUST CO. v. RICHMOND, N., I. & B. R. CO. et al
(Circuit Court of Appeals, Sixth Circuit. May 7, 1895.)
1. MECHANIC'S LIEN-WAIVER-INCONSISTENT SECURITY.
It seems that, while the right to a mechanic's lien may be waived by the acceptance of a contract to pay for the work in securities whose existence is inconsistent with the existence of a lien, such waiver is only conditional upon the actual performance of the contract, and if it is not performed the right to the lien continues.
2. SAME-KENTUCKY STATUTE-WHEN LIEN ARISES.
The Kentucky statute relative to mechanics' liens upon railroads (Barb. & C. Ky. St. 1894, §§ 2492-2495) provides (section 2492) that "all persons who perform labor or who furnish labor, materials or teams * * * by contract *** with the owner ** or by subcontract thereunder, shall have a lien *** which **shall be prior and superior to all other liens theretofore or thereafter created." Section 2493: "The liens *** shall in no case be for a greater amount in the aggregate than the contract price of the original contractor and, should the aggregate *** exceed the price agreed upon, *** there shall be a pro rata distribution. ***" Section 2494: "No lien shall attach unless the person who performs the labor or furnishes the labor, material or teams shall, within 60 days after the last day of the last month in which any labor was performed or material furnished, file *** a statement *** setting forth the amount due," etc. Held that, under this statute, the lien originates with the beginning of the work or delivery of materials, and continues, as an incipient or inchoate lien, until perfected by filing the required notice, etc., or lost by failure to do so within the prescribed time.
8. SAME-NATURE OF SUBCONTRACTOR'S LIEN.
Held, further, that a subcontractor in the first degree is given by said statute a direct lien, independent of the lien of the principal contractor, or of a waiver or loss thereof.
4 SAME-TIME FOR FILING NOTICE.
Held, further, that the statute requires each particular contractor or subcontractor to file notice of his lien within 60 days from the end of the month in which he completes his own work, and not from the end of that in which the work of the last contractor or subcontractor engaged upon the undertaking is completed.
5. SAME-PAYMENT TO PRINCIPAL CONTRACTOR.
The R. Ry. Co. made a contract with the O. Contract Co. to build its road; payment to be made in stock and bonds deliverable from time to time, as the work progressed, upon monthly certificates of the engineer of the railway company, in proportion to the amount of work completed; the monthly estimates being subject to revision on the final settlement, at the completion of the work. This contract contained no provision for securing the railway company against liens of subcontractors, or permitting it to pay them directly. The contract company made subcontracts with various persons to do parts of the work, to be paid for in money. Held, that neither the contract with the principal contractor, nor payment to it in accordance with such contract, could affect the rights of the subcontractors to liens upon the property of the railway company. 6. SAME-APPLICATION OF PAYMENTS TO SUBCONTRACTOR.
The amount of the subcontracts made by the contract company exceeded the amount coming to it by the contract with the railway company. Payments were made from time to time by the contract company to the subcontractors, some receiving a larger proportion than others, and the payments in certain months being nearly equal to the amount due to the subcontractors, according to the engineer's estimates for such months. Held, that such payments were primarily applicable to that part of the subcontractors' claims which could not be secured by liens against the
owner's property, without regard to the proportion of lienable claims in the estimates for the particular months when the payments were made, and that the subcontractors were entitled to the full benefit of their liens until paid the whole amount due them, respectively.
7. SAME-ASCERTAINMENT OF PRO RATA SHARES.
Held, further, that, in ascertaining the amount of the pro rata shares of the contract price to which the several sub-contractors were entitled, such contract price should be apportioned according to the whole amount of their respective lienable claims, whether or not partly paid by the principal contractor, and whether or not actually perfected as liens.
8. SAME-VALUE OF PRICE PAID IN SECURITIES.
The bonds and stock called for by the contract with the O. Contract Co. were delivered to it, in accordance with such contract, and were sold by it, from time to time, some nearly at par value, others at very much less. Held that, for the purpose of determining the money value of the contract price to be paid to the O. Co., by which the liens of the subcontractors were limited, the market value of the stock and bonds at the times when they were actually delivered to the contract company should be ascertained.
The contract company was able, by assigning to another railway company the stock, paid to it by the R. Ry. Co., to procure the indorsement of such other railway company on some of the bonds paid to it by the R. Ry. Co., thereby enhancing their value. The stock had no value, except in the voting power attached to it as an inducement to such an arrangement. Held, that the enhanced value of the bonds, thus secured, might properly be included as part of the money value of the price paid the contract company, though the R. Ry. Co. had nothing to do with the arrangement for the indorsement of its bonds.
Appeal from the Circuit Court of the United States for the District of Kentucky.
This was a suit by the Central Trust Company against the Richmond, Nicholasville, Irvine & Beattyville Railroad Company and others for the foreclosure of a mortgage. Numerous parties intervened, claiming mechanics' liens on the road. Demurrers to some of such petitions were passed upon by the circuit court in a decision reported in 54 Fed. 723. The circuit court entered a final decree settling the priorities among the various claimants. The complainant appeals.
The questions for determination arise between creditors of the defendant railroad company, claiming mechanics' liens for the construction of its road, and the holders of its first mortgage bonds, issued shortly after construction was begun. The Richmond, Nicholasville, Irvine & Beattyville Railroad Company, hereafter designated and described as the "Railroad Company," was chartered by special act of the Kentucky legislature, and authorized to construct and operate a railroad from Versailles, in Woodford county, to Beattyville, in Lea county, Ky. The charter provided that the company might pay for the construction of its railroad with its own capital stock and bonds. On the 1st day of July, 1889, the railroad company executed its first mortgage to the Central Trust Company of New York, as trustee, which mortgage recited that it had executed, and made ready for delivery, 2,375 bonds, of the denomination of $1,000 each, bearing interest at the rate of 6 per cent. per annum, payable semiannually, evidenced by coupons attached, the principal being payable 30 years after date. It was also provided that upon default in the payment of interest for more than six months the principal sum mentioned in each of the said bonds should, at the option of the holders of a majority of the bonds, become due and payable. There was a default in the payment of interest for more than six months, whereupon, at the request of a majority of the holders of the bonds, the trust company declared the maturity of the prin
cipal thereof; and this bill was thereupon filed December 2, 1891, in the circuit court of the United States for the district of Kentucky, for the purpose of obtaining a foreclosure thereof. Various persons and corporations, claiming to be creditors of the said railroad company, and claiming to be entitled to priority over the mortgage aforesaid, were made defendants thereto, and some of them have filed cross bills setting up their several claims. From the final decree of foreclosure, settling the priorities as between the various creditors, appeals have been prosecuted by the Central Trust Company, and by a large number of other creditors, claiming mechanics' liens.
On the 11th day of October, 1888, and prior to the execution of the mortgage aforesaid, the railroad company entered into a contract for the construction of its entire line of railway with the Ohio Valley Improvement & Contract Company. That company was a Kentucky corporation, authorized by its charter to construct railroads, and to receive in payment the stocks and bonds of such railroads. By the contract mentioned, the Ohio Valley Improvement & Contract Company, hereafter designated the "Contract Company," agreed to procure all necessary rights of way, to make all surveys, to furnish all the materials, and to build the entire line of said railroad, from Versailles to a point within one-half of a mile of Beattyville. It also undertook to pay to the railroad company, until the road was completed, such sums as might be necessary to pay the salaries of the railroad company's officers, not exceeding $10,000 per annum. It also agreed to assume and pay the debts of the railroad company, not exceeding $25,000, and to assume and pay the interest coupons on the mortgage bonds of the railroad company during the construction of the road, and two semiannual installments of interest thereafter maturing. In payment for all this the railroad company agreed to assign to the contract company bonds of five counties, amounting to $550,000, to be delivered to the contract company whenever the railroad company was entitled to receive the same from the counties for construction of the road in accordance with their several subscriptions. The counties had subscribed, in all, for $550,000 of stock of the railroad company, payable in bonds of the respective counties, in installments, depending upon the completion of the road to designated points. The railroad company further agreed to assign and deliver to the contract company, for each lineal, mile of road, $25,000 of its own negotiable 6 per cent. coupon bonds, secured by a mortgage constituting a first lien upon the entire line of road and its equipments; also to assign to the contract company the subscriptions made by individuals to the capital stock of the railroad company; also to issue to the contract company, for each lineal mile of road, $25,000 of the paid-up capital stock of the company, after deducting the stock subscribed for by individuals and counties. It was provided in the contract that the aforesaid bonds and shares of stock should be issued in advance, and placed in the custody of the Louisville Trust Company, to be paid over to the contract company as the work progressed. The entire line of road thus contracted for was 97 miles in length. Of this, 62 miles was completed. Considerable proportion of the remainder was graded, but before completion the contract company became insolvent, and abandoned the work, whereupon this litigation began. Of the $550,000 in county bonds mentioned in the contract, only $200,000 were earned. The remainder were lost on account of the failure of the contract company to finish the road to designated points by the times stipulated in the various contracts with the counties. During the time of construction the railroad company delivered to the contract company the $200,000 of county bonds earned as aforesaid, and its first mortgage bonds to the amount of $2,375,000. It also delivered a corresponding amount of its railroad shares to said contract company. The contract company is one of the defendants to this litigation, but it has not appealed from the decree of the circuit court.
All these payments were made to the contract company on monthly estimates by the chief engineer of the railroad company, which estimates included the work done and materials furnished by the contract company, directly or through its various subcontractors; the contract providing for
payment by installments, on estimates thus made, as the work progressed. A large part of the work done and materials furnished was done or furnished directly by the contract company, but a still larger proportion was done or furnished through the medium of subcontractors employed by the principal contractor. These subcontractors were to be paid directly by the contract company in money, on monthly estimates furnished by the railroad company's chief engineer, who was to give vouchers for 90 per cent. of such estimates, to be paid in cash by the contract company. The railroad company seems to have fully complied with the terms of its own agreement, and to have made all payments, as the work progressed, which it was obligated to do. The capital of the contract company was insufficient to carry on and complete its undertaking. It was therefore driven to make ruinous sales of the securities it from time to time received under its contract, at prices affected by the fact that they were the securities of an unfinished railroad,-subordinate, by the express terms of the Kentucky statute giving a lien to contractors and subcontractors constructing a railroad, to the claims of all engaged in the work of construction. The railroad company took no steps to protect itself against the liens of subcontractors, and made no payments directly to them. It seems to have willingly met its obligations to the contract company, and to have trusted to its ability to relieve its road from any liens which might exist in favor of subcontractors. The contract company had an independent capital of about $500,000. It added to this the proceeds arising from the sale of the railroad company's securities, and applied all in the payment of its own obligations. Their resources proved proved insufficient. It was compelled to abandon its contract before completion, leaving several hundred thousand dollars of debts to subcontractors unpaid. The unpaid subcontractors were either made defendants to the foreclosure bill, or they have become parties by intervention, and have asserted liens, under the Kentucky lien law, as against the property of the railroad company. These claims, if successfully asserted, constitute liens prior to that of the bondholders. The property of the railroad is confessedly inadequate to meet both classes of liens. This state of facts has given rise to a much complicated and hotly-contested series of litigations, culminating in 12 distinct appeals from the decree of the circuit court.. Many of the appeals present questions common to all the cases. These appeals were argued together. So many of the questions as are common to all the appeals, and as presented on the appeal of the Central Trust Company, will be disposed of in this opinion, leaving such questions as arise upon cross-appeals of mechanic's lien creditors to be disposed of in another opinion. The existence and priority of the several liens claimed in opposition to the bondholders depend upon a construction of the Kentucky lien act passed in 1888, entitled "An act to create a lien on canals, railroads, and other public improvements, in favor of persons furnishing labor or materials for the construction or improvement thereon"; being sections 2492-2495 of the Kentucky Statutes of 1894, revised by Barbour and Carroll. These sections are as follows: "Section 1. That all persons who perform labor or who furnish labor, materials or teams for the construction or improvement in this commonwealth, by contract express or implied, with the owner or owners thereof, or by sub-contract thereunder, shall have a lien thereon and upon all the property and franchises of the owner or owners thereof for the full contract price of such labor, material and teams so furnished or performed, which said lien shall be prior and superior to all other liens theretofore or thereafter created thereon.
"Sec. 2. The liens provided for in the foregoing section shall in no case be for a greater amount in the aggregate than the contract price of the original contractor, and should the aggregate amount of liens exceed the price agreed upon between the original contractor and the owner or owners of the canal, railroad, turnpike or other improvement, then there shall be a pro rata distribution of the original contract price among said lienholders.
"Sec. 3. No lien provided for in this act shall attach unless the person who performs the labor or furnishes the labor, material or teams, shall within sixty days after the last day in the last month in which any labor was
performed, or materials or teams were furnished, file in the county clerk's office of each county in which the labor was performed or materials or teams were furnished, a statement in writing, verified by affidavit, setting forth the amount due therefor, and for which the lien is claimed, and the name of the canal, railroad or other public improvement upon which it is claimed. Said claim shall be filed and indorsed by the clerk of said court, giving the date of its filing. The clerk shall also make an abstract and entry thereof, as now provided by law in case of mechanic's liens, and in the same books used for that purpose, and shall make proper index thereof. For bis services the clerk shall be paid one dollar by the party filing the claim, which may be recovered by the latter from the owner or owners of the canal, railroad or other improvements as costs.
"Sec. 4. Liens acquired under this act shall be enforced by proper proceedings in equity, to which other lien-holders shall be made parties; but such proceedings must be begun within one year from the filing of the claim in the county clerk's office, as required by the third section of this act."
A. E. Richards and J. B. Baskin, for Central Trust Co.
W. A. Sudduth and H. L. Stone, for Richmond Const. Co.
St. John Boyle, for Louisville Trust Co.
Matthew O'Doherty, for D. Shannahan & Co.
Humphrey & Davie, for D. Shannahan & Co. and J. W. Walker. Pirtle & Trabue, for Dickason & Crawford.
Before TAFT and LURTON, Circuit Judges, and SEVERENS, District Judge.
LURTON, Circuit Judge, after stating the facts as above, delivered the opinion of the court.
The first question presented upon the appeal of the Central Trust Company involves the existence of a mechanic's lien in favor of any of the subcontractors. The contention of the trust company is that the contract company agreed to accept for its work, bonds constituting a first lien upon the same property, and maturing 30 years from their date, and thereby waived any mechanic's lien in its favor, and that subcontractors are bound by the waiver, and cannot assert any lien in consequence. It may be admitted that lien laws do not, in general, create a lien in favor of one who accepts in full a different security at the time the contract or agreement is made, or who has entered into any other agreement which manifestly indicates a clear purpose and intention to waive the benefit of the statutory lien. contract for a security which is inconsistent with the intention that a mechanic's lien should exist will be held, generally, as a waiver of the statutory lien; but it is well settled that though the owner obligate himself to give a security inconsistent with the intention that a mechanic's lien should exist, or where the contract is to pay in land, or other specific article of property, yet if the owner fail to fulfill the agreement for such mode of payment, or for different security, it will not be taken as an agreement to waive the mechanic's lien in case payment is not made in the manner provided for, or the security is not given according to the obligation of the owner. Grant v. Strong, 18 Wall. 623; Reiley v. Ward, 4 G. Greene, 22; McMurray v. Brown, 91 U. S. 257. "If the labor has been performed, or the materials furnished, no matter in what the owner agreed to pay, if he has not paid in any way, the laborer or mechanic