Argument for Appellant.

of the gross earnings so diverted. The St. Louis, Alton and Terre Haute Railroad Company asks payment out of proceeds of sale of the debt decreed due it by the decree of July 26, 1882, for the use of its railroad and equipment by the Indianapolis and St. Louis Railroad Company:

1. Because this debt is an operating expense of the Indianapolis and St. Louis Railroad Company, payable out of the gross earnings of the entire line from Indianapolis to St. Louis, -the said gross earnings being sufficient to pay all operating expenses, including this debt as an operating expense.

2. Because this debt is a debt due to a connecting line, and, in common with all other dues to connecting lines, is an operating expense of the Indianapolis and St. Louis Railroad Company.

3. Because gross earnings received by the Indianapolis and St. Louis Railroad Company have been by it diverted to the benefit of its bondholders to such amounts as would have been far more than sufficient to have paid this debt.

IV. The Cleveland, Columbus, Cincinnati & Indianapolis Railway Co., in claiming the application of all the remaining proceeds of sale to the payment of the second and third mortgage bonds in preference to the payment of the debt due to the St. Louis, Alton & Terre Haute Railroad Co. for the use of its railroad and equipment, does not stand before a court of equity in the position of an ordinary bondholder. The peculiar relations existing between the Cleveland, Columbus &c. Railroad Co. and the Indianapolis and St. Louis Railroad Co. greatly strengthened the equity in favor of the St. Louis, Alton & Terre Haute Railroad Co. in its claim for preference in payment over the second and third mortgage bonds. Thomas v. Railroad Co., 101 U. S. 71, 86.

V. The St. Louis, Alton & Terre Haute Railroad Co. is entitled to payment of $164,052.82, together with interest thereon from October 26, 1878,-the same being part of the aggregate amount decreed due by the decree of July 26, 1882, -out of the proceeds of sale of the railroad and property of the Indianapolis and St. Louis Railroad Company, because the said $164,052.82, and interest thereon, is trust fund money

Opinion of the Court.

belonging to the St. Louis, Alton & Terre Haute Railroad Co., collected, withheld and appropriated to its own use and benefit by the Indianapolis and St. Louis Railroad Company.

As against the Indianapolis and St. Louis Railroad Company the decree of July 26, 1882, stands affirmed and remains in full force. As between the St. Louis, Alton & Terre Haute Railroad Company and the Indianapolis and St. Louis Railroad Company the lease of September 11, 1867, stands as a valid contract. Penn. Co. v. St. Louis, Alton &c. Railroad, 118 U. S. 318.

That rents definitely ascertained and specifically reserved by lease never become the property of the lessee, but vest directly in the lessor, and are simply held in trust by the lessee for the lessor, seems to be a well-established principle in law. Moulton v. Robinson, 7 Foster (N. H.) 551; Hatch v. Hart, 40 N. H. 91; Daniels v. Brown, 34 N. H. 454; S. C. 69 Am. Dec. 505; Hart v. Baker, 29 Ind. 200; Lindley v. Kelley, 42 Ind. 294; Parker v. Garrison, 61 Ill. 250, 254.

Mr. Stevenson Burke and Mr. John T. Dye for appellees.

MR. JUSTICE MATTHEWS delivered the opinion of the court.

At the time of the execution of the lease in 1867 of the St. Louis, Alton and Terre Haute Railroad to the Indianapolis and St. Louis Railroad Company, the railroad of the latter company was not in existence. It was subsequently constructed in order to form the connection which would give to the parties in interest the desired through line from Indianapolis to St. Louis. The capital stock of the Indianapolis and St. Louis Railroad Company was owned substantially by the Pennsylvania Railroad Company and the Cleveland, Columbus, Cincinnati and Indianapolis Railway Company in equal parts. A portion of the funds necessary to construct and equip the road was represented by bonds secured by mortgages. Of these there were three; the first mortgage was for $2,000,000, the second for $1,000,000, and the third for $500,000. The first mortgage bonds, prior to the foreclosure and sale, had

Opinion of the Court.

been sold in the market, and were outstanding. The sale was made subject to the continued incumbrance of that mortgage, and of the bonds secured thereby. The holders of these bonds have, therefore, no interest in this controversy.

The second and third mortgage bonds were originally taken to account by the two companies interested in the construction of the road, but, prior to the foreclosure and sale, had become substantially the property of the Cleveland, Columbus, Cincinnati and Indianapolis Railway Company, that company having acquired the entire interest of the Pennsylvania Railroad Company. As the owner of these bonds, the Cleveland, Columbus, Cincinnati and Indianapolis Railway Company claims to be entitled to the whole amount of the proceeds of the sale of the road under the foreclosure, and is the only party in interest adverse to the petitioner.

The default in the payment of interest on the second and third mortgages dates from January 1, 1878. The decree of foreclosure finds the amount of interest in arrears on May 2, 1882, on the second mortgage bonds, to be $291,745.97, and the aggregate sum due on account of said mortgage, principal and interest, to be $1,197,745.97, with interest from May 2, 1882. The amount found due by the same decree, on account of the bonds secured by the third mortgage, including interest from January 1, 1878, is $699,164.76. The whole amount found due by the decree, including both sums, is $1,896,910.73, which is more than the amount of the proceeds of the sale of the road, which were $1,396,000.

Upon the bill of Hinman B. Hurlbut, as trustee, for the foreclosure and sale of the Indianapolis and St. Louis Railroad property, a receiver was appointed, and it was ordered that the St. Louis, Alton and Terre Haute Railroad Company should be entitled to require the payment of thirty per cent of the gross earning of its railroad to said lessor, according to the order of the court theretofore made and still in force in the suit of the St. Louis, Alton and Terre Haute Railroad Company against the Indianapolis and St. Louis Railroad Company, with the terms of which order the receiver was directed to comply. The order appointing the receiver also expressly reserved to

Opinion of the Court.

the court the right and power to make such orders and decrees touching the payment of the debts of the Indianapolis and St. Louis Railroad Company incurred in the management and operation of its railroad prior to the appointment of the receiver, as might be equitable and just. The decree of foreclosure and sale also contained a clause reserving to the court the right, by subsequent order or orders, to distribute the proceeds of the sale of the railroad and property connected therewith, and to make such further order and decree in regard to the distribution of the proceeds of sale as might to the court seem equitable and just; and a reference was made to the master to hear evidence in support of all claims or indebtedness in behalf of any creditor of the defendant company, whether secured or not.

The Indianapolis and St. Louis Railroad Company, from the date of the lease in 1867, continued to pay to the St. Louis, Alton and Terre Haute Railroad Company the rental reserved by the terms of the lease, viz., thirty per cent of the gross earnings of the leased road in each year until April 1, 1878. Prior to that time there had been no default in respect to the payment of the full amount of the rental as it accrued; the lessee ceased paying rent from that date.

On October 25, 1878, the St. Louis, Alton and Terre Haute Railroad Company filed its bill in equity in the Circuit Court of the United States for Indiana against the Indianapolis and St. Louis Railroad Company, to which also the Cleveland, Columbus, Cincinnati and Indianapolis Railway Company and the Pennsylvania Railroad Company were made parties defendant. The object of that bill was specifically to enforce the performance of the covenants contained in the lease on the part of the lessee and of the other defendants as guarantors. It was in that suit that the order was made November 30, 1878, requiring the Indianapolis and St. Louis Railroad Company to pay into court, on account of the rental due the lessor, monthly, on the 15th day of each month, thirty per centum of the gross earnings for the preceding month of the leased road, calculating the gross earnings which had accrued since October 26, 1878.

Opinion of the Court.

The final decree of the Circuit Court in that cause declared that the lease and operating contract of September 11, 1867, was a valid obligation upon all the parties thereto, and established the amount of the indebtedness of the Indianapolis and St. Louis Railroad Company on account of the minimum rent reserved by said lease to July 1, 1882, at the sum of $541,358.23 principal, and $123,516.47 interest, making in all the sum of $664,874.70. It also found that thirty per cent of the gross earnings of the leased line collected and received by the Indianapolis and St. Louis Railroad Company, and withheld by it from April 1, 1878, until October 26, 1878, amounted to $164,052.82, which was part of said aggregate amount found due. The decree further declared the liability of the Pennsylvania Railroad Company and of the Cleveland, Columbus, Cincinnati and Indianapolis Railway Company as guarantors for their proportion of the said sum, and awarded payment accordingly.

From this decree appeals were taken and prosecuted to this court by the Pennsylvania Railroad Company and the Cleveland, Columbus, Cincinnati and Indianapolis Railway Company, the judgment in which was rendered at October Term, 1885, and is reported in 118 U. S. 290. It was there decided that the lease of 1867 was void for want of power on the part of the Indianapolis and St. Louis Railroad Company to enter into it, and that the guaranty of performance executed by the other defendant companies by reason thereof was also void. The decree of the Circuit Court was accordingly reversed, and the cause remanded with directions to dismiss the bill as to the Pennsylvania Railroad Company and the Cleveland, Columbus, Cincinnati and Indianapolis Railway Company; but that part of the decree which required the Indianapolis and St. Louis Railroad Company to pay the amount found due as rent was left standing, as no appeal from it had been prosecuted by the Indianapolis and St. Louis Railroad Company. Pending that litigation, the intervening petition of the St. Louis, Alton and Terre Haute Railroad Company, now under consideration, was filed in the foreclosure suit, in which Hurlbut, as trustee, was complainant.