§ 7206. Payment of Rental under "Car Trust" Leases. What are known as "car trust leases" are a peculiar species of security, by which the manufacturers of railway rolling stock, in substance and effect, sell the cars to railway companies of doubtful solvency, but by a species of conditional sale known as a "car trust," under which they reserve title, and, in form, lease them to the railway company. It is thus a sale and not a sale,—a sale if the company pays, but a lease with the right of re-possession if the company does not pay. It does not seem to differ essentially from many other contracts of conditional sale of personal property, where the vendor seeks to acquire the benefits of a sale, and at the same time not take the risk of it, by holding the property with a string.1 It seems very clear that, when a receiver takes possession of the property of a railroad company, some of which consists of rolling stock held under such a lease, he occupies the position which a receiver occupies in regard to any other leased property held by the debtor: he is not bound to burden the creditors whom he represents with the custody of onerous property; he is not bound by the covenants in any lease made by the debtor whose property has come into his hands; but he has his election to retain or reject the possession of the property under the lease. His position is analogous to that of a principal in regard of the unauthorized acts of his agents. He may elect to affirm or disaffirm, but he cannot affirm in part and disaffirm in part. He cannot keep the property which is the subject of the lease, without performing the covenants of the lessee. He cannot hold on to the property and refuse to pay the rent in full as it accrues, but say to the lessor, "You must file your intervening claim and get your pro rata with other creditors." 1 In a paper read before the American Bar Association by Francis Rawle, Esq., of Philadelphia, there is a very intelligent and detailed statement of this species of security, and of the conflicting and unsatisfactory manner in which the courts have dealt with it. See transactions of the Am. Bar Asso. for the year 1885. Statutes governing this subject have been enacted in many of the States at the instance of Mr. Rawle. 2 "In such cases, the vendor's title or lien is unaffected by the appointment of the receiver, that officer acquiring no better title to the rolling stock than that of the company." High on Receivers (2d ed.), § 394 ƒ. All this seems very clear, both on principle and authority.1 In a leading Federal case on the subject, it was held that the payment by the receiver, out of the earnings of the road, of the rent reserved for the use of the cars under the so-called contract of lease, for the period during which they were used. by him, was a proper payment.' 7207. Applications or Misapplications of This Principle. Such being the governing principle, a decision of Mr. Circuit Judge Gresham relating to the species of lease known as a "car trust lease," does not seem clear. In that case, the property of a railroad company was in the hands of a receiver pending proceedings to foreclose a mortgage thereon. A corporation had furnished rolling stock to the company under such a lease, the lessor reserving to it the right to reclaim the property upon any default in the payment of rent. Upon the appointment of the receiver, the railroad company being in default, the rolling-stock company filed an intervening petition demanding that the receiver be directed to return its cars within thirty days. They were not returned, but were continuously used by the receiver without the objection of the bondholders or trustee in the mortgage, and payments were made on the rental by the application thereto of the freight earned by transportation for the petitioner. After the lapse of three months, the rolling-stock company filed a second intervening petition, stating the facts, and asking that the receiver be directed to pay the rent due under the car-trust contract, and that the same be declared a prior lien upon the earnings as well as upon the property embraced in the mortgages. The learned judge held that the retention and use of the cars by the receiver and the non-action of the bondholders did not amount to a conversion; that the intervening petitioner was not entitled to the payment of rent, according to the terms of the car-trust lease, out of the corpus of the estate, but only to the return of the cars within a reasonable time, if so demanded, and a quantum meruit for the use of them.' So far as related to any claims for rent accruing 1 Kneeland v. American Loan &c. Co., 136 U. S. 89. 'Fosdick v. Schall, 99 U. S. 235. berger Farmers' Loan & Trust Co. v. Chicago &c. R. Co., 42 Fed. Rep. 6; 8. c. 8 Rail. & Corp. L. J. 184; 43 Am. & Eng. Rail. Cas. 436. prior to the time when the receiver took possession, the decision is possibly supportable, though even then it is difficult to see how the court could retain the property while disaffirming the lease in part. But the decision seems to be contrary to the most elementary notions, in so far as it empowers the receiver to retain the property against the will of the lessors, and contrary to the provisions of the lease, without paying rent according to the terms of the lease.. In an unpublished decision cited by Mr. High,' rendered in the United States Circuit Court at Indianapolis, in June, 1885, by Mr. Circuit Judge Gresham, Mr. Circuit Justice Woods concurring, — it was ordered that the rentals of rolling stock held by the railway company under car-trust leases, should, for the period of use by the receiver, be paid as a first lien out of the receiver's income, or out of proceeds of the foreclosure sale, before distribution to the mortgage bondholders; and that rentals for six months prior to the receivership should be paid out of the net income of the receiver.' It is not understood upon what principle the court could cut down the period of rentals prior to the receivership to six months, provided the receiver took possession without a new contract; for, if he took possession without a new contract, his taking possession would clearly be an affirmation of the old contract, and it would have to receive effect as a whole, and could not properly be split into parts. Of course, if a receiver, within a reasonable time after taking possession of the general property, should enter into a new contract with the owners of the rolling stock, for its use pending the receivership, this would not be an election to take possession under the previous contract, but would amount to a disaffirmance of that contract, such as would remit the lessors to the position of general creditors, under the doctrine of Fosdick v. Schall, unless they should be let in as lien creditors in respect of rents accruing for the short period prior to the appointment of the receiver. A decision of Chancellor Runyon, of New Jersey, upon this subject, seems to be clearly destitute of equity. A receiver appointed by him went into possession, and found, in the custody of the railroad company, a mass of rolling stock held by the company under these so-called car-trust leases. He requested the lessors to leave the locomotives and their tenders in his possession for use on the road, and he guaranteed that he would keep them in order, and promised to apply to the Chancellor for authority to pay their claim for rent under the lease. On the faith of this, they permitted the property to remain in his hands. On their subsequent intervening petition, the Chancellor decided that they were not entitled to rent according to the terms of the lease, during the time the property so remained in the hands of the receiver, but that they were entitled to no more than a quantum meruit,—that is to say, that they were entitled to what the Chancellor, upon the evidence before him, might consider the use of the locomotives and tenders to be reasonably worth.' It is perceived that there was no new contract whatever that the rolling stock should remain in the custody of the receiver upon the payment of what the Chancellor might deem a quantum meruit; but the Chancellor put his decision upon the ground that the lessors had a right to resume possession, and that when they failed to exercise it, they submitted to the discretion of the court as to what would be equitable compensation. The decision deserves the animadversion of Mr. District (now Circuit) Judge Caldwell, in a case which has been very much cited. "In its effort to coerce a corporation to pay its debts, a court should not contract obligations of its own and neglect to make provision for their payment. It would be a scandal to do so. Courts should pay their debts, if nobody else does." - § 7208. Character of Such Contracts Determined by the Local Law. The validity and effect of these contracts are to be determined by the law of the State within which the receiver is appointed, and not by the law of the State of the domicile of the vendor or lessor. The governing principle is, that the liability of property to be sold under legal process issuing from the court of the State where it is situated, must be determined by the laws in force therein, rather than by the laws of the jurisdiction where the owner lives. The reason is, that every State has a right to regulate the transfer of property within its own limits, and that whoever sends property within those limits, impliedly submits to the regulations concerning its transfer which are there in force, although a different rule of transfer may prevail in the jurisdiction where he resides. He has no 'Coe v. New Jersey Midland R. Co., 27 N. J. Eq. 37. Dow v. Memphis &c. R. Co., 20 Fed. Rep. 260, 269. absolute right to have a transfer of property, lawful in his own jurisdiction, respected in the courts of the State where the property is found; and it is said to be only on the principle of comity that this is ever allowed. This principle of comity yields when the laws and policy of the State where the property is found conflict with those of the State of the domicile of the vendor or lessor. The taking possession of such property by a receiver is tantamount to a seizure under judicial process; so that, where the property consists of railway rolling stock in the possession of a railway company under these cartrust conditional sales or leases, the validity and effect of the contract are to be determined by the local law of the State within which the court sits which has appointed the receiver.2 § 7209. Vendor or Lessor Desiring to Preserve a Lien must Comply with Local Law. -The leading consequence of this principle, in so far as it applies to these car-trust leases, is, that if a vendor or lessor, by whatever name called, desires to preserve a specific lien upon the property which is the subject of the contract, he can only do it by complying with the local law. If, therefore, the local law treats a conditional sale, by which the vendor undertakes, by a secret contract, to reserve the title to himself until the purchasemoney is paid, while at the same time delivering the chattel to the purchaser and investing him with the ostensible ownership, as constructively fraudulent as against creditors, the contract will be so treated in a court of the United States. "Nor 1 Green v. Van Buskirk, 5 Wall. (U.S.) 307; 7 Wall. (U. S.) 139. Hervey v. Rhode Island Locomotive Works, 93 U. S. 664; Fosdick v. Schall, 99 U. S. 235, 250. That courts generally respect the law of the place of the contract, but only on the principle of comity, -see Taylor v. Boardman, 25 Vt. 581, 589; Milne v. Moreton, 6 Binn. (Pa.) 353, 361; Ward v. Morrison, 25 Vt. 593; Emerson v. Patridge, 27 Vt. 8; Oliver v. Townes, 2 Mart. (La.) (N. B.) 93; Norris v. Mumford, 4 Mart. (La.) (o. 8.) 20. 3 Hervey v. Rhode Island Locomotive Works, 93 U. S. 664. Such is the policy of the law of the State of Illinois. McCormick v. Hadden, 37 Ill. 370; Ketchum v. Watson, 24 Ill. 591; Hervey v. Rhode Island Locomotive Works, supra. |