[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] *Page 317
[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] *Page 318
[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] *Page 319 [EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] *Page 321 It is claimed in behalf of the Third National Bank that the money loaned to the Bankers and Merchants' Telegraph Company created a debt which, in *Page 322 equity, was entitled to rank as a charge on the proceeds of the foreclosure sale prior to the claim of the bondholders. It is undisputed that the mortgage to secure the bonds was executed November 23, 1883, and that the loan by the bank was not made until the following May. By the general rule the bondholders who relied upon the mortgage as security for their debts, which was a specific charge upon the property of the Bankers and Merchants' Telegraph Company, are entitled to preference in the distribution of the proceeds. The claims of general creditors of a mortgagor are in general postponed to the mortgage, even when their debts were contracted prior to its execution. The bank seeks to raise an equity to preference in the case, although its debt was subsequent to the mortgage, by invoking the doctrine upon which courts of equity have acted in the administration of the assets of insolvent corporations, that expenses incurred by receivers in the management and preservation of the property which is the subject of the receivership may, by order of the court, be made a primary charge and displace the priority of lien which, in ordinary cases, attaches to a mortgage security existing at the time of the insolvency. The courts have assumed to go still further, and to adjudge priority of payment of debts contracted by a failing corporation within a few months prior to its adjudged insolvency for labor, supplies and necessary current expenses incurred in the struggle to keep itself alive. There is a sound equity which supports the doctrine that when the nature of the property is such that the business to which it has been devoted cannot be discontinued without great probable loss, the court may authorize it to be continued by its officer and receiver, pending the closing up of the affairs of the insolvent corporation. Expenses incurred by a receiver under such circumstances may be justly said to be expenses of preservation for the benefit of bondholders or other persons entitled to share in the final distribution, which ought to be first paid. But it is obvious that with the best intentions attempts by the court to carry on the business of a railroad or of a telegraph company through its receiver are hazardous, and we think *Page 323 courts may well pause before extending the application of the principle to which we have adverted.
The petitioner in this case is a banking institution, and it loaned its money upon what at the time was ample security, and as is to be inferred, in the ordinary course of banking business. It had record notice of the mortgage by the records in this state. Its security as it has turned out was inadequate, but by the payment made on the loan and sale of the bonds taken as security it has realized on its debt nearly as large a percentage as any of the unsecured creditors of the company whose debts were outstanding at the time of the appointment of the receiver who received receivers' certificates. The latter received only sixty-nine per cent of their claims. The bondholders and general creditors received nothing. The bank neither applied for nor received receivers' certificates. But the claim is that when it made the loan the Bankers and Merchants' Telegraph Company was in pressing need of money to meet its current expenses, and that it was used by the company in paying debts of a character for which receivers' certificates were authorized to be issued by the judgment in the De Haven suit of January 6, 1885. It is also suggested that it was deceived by the assurances of the officers of the company when the loan was made. There is no foundation for the charge of fraud, and moreover if any fraud was committed by the company in securing the loan, the bondholders received no benefit and their rights are not affected. The bank is not in the position of a certificate holder, and only the holders of receivers' certificates were under the judgment in the De Haven suit entitled to a preference over the bondholders. The right of a creditor of an insolvent corporation in the hands of a receiver to have a preference over bondholders under a first mortgage isstrictissimi juris.
Assuming that the bank is entitled to be subrogated to the claims of the persons paid out of the loan, such claims are not entitled to preference out of the proceeds over the claims of the bondholders, because they were not represented by receivers' certificates, and it was only claims so represented *Page 324 which, under the judgment in the De Haven suit, were entitled to preference. The bank has no equity to call upon those who held receivers' certificates, and were paid a part of their claims, to contribute to make the bank equal with them. They secured the proper evidence of their right to participate in the distribution, and the bank neglected to do so. The bank is entitled to no dispensation to give it a standing which it has not acquired. But we think the claim of the bank may properly be denied on the broad ground that a party loaning money to an embarrassed corporation, subsequently adjudged to be insolvent, and taking security therefor, is not in a position which entitles him in equity to be adjudged to have a lien on mortgaged property of the corporation or its proceeds in preference to bondholders under a mortgage existing when the loan was made, and that it is immaterial for what purpose the loan was made, or how the money received thereon was applied, provided the bondholders were not parties to the transaction. The recent cases, we think, support this view. (Penn v. Calhoun, 121 U.S. 251; Morgan's Co. v.Texas Central Railway Co., 137 id. 171; Cole v. Cunningham, 133 id. 107; In re R.C.I. Co. (L.R. [3 Ch. Div.] 411.)
The bank presents another and different claim upon which it bases its right to priority of payment out of the fund. It asserts that it acquired a legal lien on the property and lines of the Bankers and Merchants' Telegraph Company in the states of Massachusetts and Rhode Island by the levy of its attachments in those states May 5, 1885, and it claims that these attachments were prior to the mortgage to the Farmers' Loan and Trust Company, by reason of the fact that it was not recorded in either of those states at the time of the levy of the attachments. The further claim is made that under the statutes and decisions in Massachusetts and Rhode Island, attachments levied before the record of a mortgage acquire priority. We are of opinion that the bank can take nothing by its attachments. When they were issued the property levied upon was in the possession of the receivers in the De Haven suit, who were then engaged *Page 325 in operating the entire lines of the company, including the lines in Massachusetts and Rhode Island, and this was known to the bank when it caused its attachments to be issued. The issuing of the attachments was a contempt of the process of the court. The judgment in the De Haven suit, entered January 6, 1885, by its terms vested the whole property of the company, wheresoever situate, in the receivers appointed thereby, and enjoined all persons from interfering with them in the discharge of their duties. It moreover provided for the issuing of receivers' certificates as a first lien on all the property of the company. The bank when it caused the attachments to be levied had full notice of the judgment, having six weeks prior to that time been served with a copy. The bank was a citizen of this state and amenable to the jurisdiction of its courts. The act of the bank was a clear violation of the injunction, and tended moreover to thwart the scheme formulated in the judgment in respect to receivers' certificates. We are of opinion that the bank cannot be heard in a court of equity engaged in the administration of the proceeds of the mortgaged property to assert an alleged lien having its origin in a violation of the injunction and judgment of the court. It is not material to consider whether under the laws of Massachusetts and Rhode Island the attachments created a lien prior to the mortgage. The bank was bound to submit to the injunction, and an attachment which might ripen into a judgment upon which the sale of the property levied upon could be made, was an interference with the receivership, contrary to the spirit and intent of the judgment of January 6, 1885.
Upon the whole case we think the bank failed to show any right to relief, and the orders appealed from should be affirmed.
All concur.
Orders affirmed. *Page 326