mortgagees) raised no objection to that decree. Until after the sale of the railroad, and until the trust came to be wound up, the only plea was that the receiver had not realized sufficient funds from the current receipts of the road to enable him to protect the intervenor. This plea, (if a good one,) as we have seen, is not sustained by the facts. He actually expended moneys in the purchase of new property, real estate, and rolling stock, and paid over to the purchasers everything that came into his hands before and after the sale, not used for expenses. It is not shown what these purchases and payments amounted to; but they were probably considerable, and the complainants and receiver could easily have shown that they were insufficient for the indemnification of the intervenor, if such had been the fact. The proof was in their hands, and not in his. It is further to be borne in mind that the purchasers of the railroad accepted a deed therefor from the commisioner under an order of the court expressly declaring that they should hold the property subject to all taxes legally due, to the lien of all unpaid receiver's certificates; and also subject to the lien of any and all claims against the railroad property then before the court by intervening petitions, which should be, upon final determination and adjudication, decreed to be paid as liens paramount to the indebtedness secured by the mortgage. The intervenor's claim is precisely in that category. The case is a special one; and in view of the discretion which the court of first instance is obliged to exercise in matters of this character, taking all the circumstances into consideration, we cannot say that equitable relief was unduly extended in allowing the intervenor's claim. An examination of the cases bearing upon the subject do not lead to a contrary conclusion. See Fosdick v. Schall, 99 U. S. 235; Miltenberger v. Railway Co., 106 U. S. 286, 1 Sup. Ct. Rep. 140; Trust Co. v. Souther, 107 U. S. 591, 2 Sup. Ct. Rep. 295; Burnham v. Bowen, 111 U. S. 776, 4 Sup. Ct. Rep. 675; Trust Co. v. Railway Co., 117 U. S. 434, 6 Sup. Ct. Rep. 809; Dow v. Railroad Co., 124 U. S. 652, ante, 673; Sage v. Railroad Co., ante, 887. The appellants place much reliance on the case of Burnham v. Bowen, where it was held that debts for operating expenses are privileged debts, entitled to be paid out of current income; and that if such income is diverted by the mortgage trustees or the receiver for the improvement of the property, such debts will be decreed to be paid out of the mortgage fund. But it was added by way of caution: "We do not now hold, any more than we did in Fosdick v. Schall, or Huidekoper v. Locomotive Works, that the income of a railroad in the hands of a receiver, for the benefit of mortgage creditors who have a lien upon it under their mortgage, can be taken away from them and used to pay the general creditors of the road. All we then decided, and all we now decide is, 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 been thus improperly applied to their

It is this remark on which the appellants rely. It is not our intention, however, to decide anything in the present case in conflict with it. The claim in that case was for operating expenses only, and the rule laid down had special reference to them. The present claim is of a different character, based upon a bona fide effort made by the intervenor to preserve the fund itself from waste and spoliation after the mortgage was in arrears and the right to reduce it to possession had accrued. But even here, as we have seen, if the claimant could pursue only the earnings, it is shown that they have been appropriated to the purchase of property which has been added to the fund. Much of the argument of the appellants is based on the hypothesis that the claim of the intervenor was a claim to be subrogated to the lien of the Holbrook judgment; and it is argued that this lien was subordinate to that of the mortgage held by the complainants. We do not understand that the claim was presented in any such view. The Holbrook judgment and execution could have greatly deranged the business of the company

as a going concern. The rolling stock could have been seized and removed. Whether such seizure could, or could not, have been prevented by the mortgagees is a different question. It would, at all events, have required legal proceedings, and probably serious litigation; and this the mortgagees did not see fit to undertake. To save the property from being taken, to prevent the catastrophe which its taking would have caused, and the serious questions which would have arisen had it actually been sold, the intervenor gave his bond to obtain an injunction. It was not done for the purpose of being subrogated to the questionable rights of Holbrook under his judgment; but to prevent the certain injury to the property itself, which the attempted enforcement of those rights would have involved. It is unnecessary, therefore, to discuss the rights of an execution creditor, levying on the personal property of a railroad company in Illinois, as against those of a mortgagee. We express no opinion upon that subject. The claim was presented upon the equities arising in favor of the intervenor for taking the action he did, and thus securing the results which followed, and upon the other circumstances of the entire case taken together; and it was upon these grounds that the claim was allowed by the court below. The decree of the circuit court is affirmed.

ST. LOUIS, A. & T. H. R. Co. v. CLEVELAND, C., C. & I. Ry. Co. et al. (April 16, 1888.)

1. RAILROAD COMPANIES-BONDS AND MORTGAGES-FORECLOSURE-PRIORITY OF CLAIMS -RENT.

Where one railroad leases its line to another, which is owned and operated by a third, but the lease has been adjudged void, and the lessee road issues bonds of which the third road becomes the holder, and the bonds are foreclosed and the proceeds held for distribution, the lessor road has not an equity entitling it to be paid its rental out of such proceeds in precedence over the third road as a bondholder, on the ground that the third road, as the owner of the lessor road, is really the debtor for arrearages of rent. Railroad Co. v. Railroad Co., 6 Sup. Ct. Rep. 1094, finding the lease void, followed.

2. SAME-OPERATING EXPENSES.

While current earnings of a railroad are first applicable to the payment of operating expenses, and mortgage bondholders are chargeable with such earnings misapplied by payment to them, where no such diversion of the earnings is shown, the operating expenses are not entitled to be paid out of the proceeds of the foreclosure sale in preference to the claims of the bondholders.

3. SAME DIVERSION OF EARNINGS.

Diversion of the earnings of a railroad from payment of the operating expenses to payment of the interest on bonds is not shown by the fact that through an extended period the gross receipts would have been sufficient to meet all operating expenses if no interest had been paid, since at the times when there was no default in the payment of operating expenses, the earnings were rightfully appropriated to pay the interest.

4. SAME.

The equitable right of one claiming payment for operating expenses of a railroad to hold the bondholders for current earnings misapplied by payment to them, does not exist against holders of second mortgage bonds for earnings misapplied by payment of interest on first mortgage bonds.

5. SAME-EQUITABLE PREFERENCE.

Rent due for a leased line as a part of the operating expenses, is not entitled to be paid out of the proceeds of a foreclosure sale in preference to the claims of the mortgage bondholders, in the absence of a showing that the bondholders have been benefited by the default in the payment of the rent.

Appeal from the Circuit Court of the United States for the District of Indiana.

In equity. Petition of appellant, the St. Louis, Alton & Terre Haute Railroad Company against the Cleveland, Columbus, Cincinnati & Indianapolis Railway Company, John H. Devereux, receiver of the Indianapolis and St. Louis Railroad Company, and the Pennsylvania Railroad Company.

The decree appealed from in this case was rendered upon an intervening petition of the St. Louis, Alton & Terre Haute Railroad Company, filed Oc

tober 30, 1882, in a suit then pending in the circuit court of the United States for the district of Indiana, wherein Hinman B. Hurlbut was complainant, and the Indianapolis & St. Louis Railroad Company defendant, the object of which suit was to foreclose the second and third mortgages, in which Hurlbut was the surviving trustee, upon the railroad and other property of the defendant. A decree of foreclosure and sale had been rendered therein on May 22, 1882, in pursuance of which the mortgaged premises were sold on July 28, 1882, for the sum of $1,396,000, subject to the outstanding first mortgage; and, at the date of the filing of the intervening petition of the present appellant, they had become by purchase the property of the Indianapolis & St. Louis. Railway Company. The proceeds of the sale were under the control of the court for purposes of distribution; and the matter had been referred to a master in chancery to hear evidence in support of the claims of any creditor claiming the right to share in that distribution, and to make report thereon. The petition alleges, and it so appears, that by a decree of the circuit court of the United States for the district of Indiana, rendered July 26, 1882, in a certain suit in equity, in which said petitioner was complainant and the said Indianapolis & St. Louis Railroad Company and others were defendants, he obtained a decree against said Indianapolis & St. Louis Railroad Company for the payment of the sum of $664,874.70, besides costs, which decree remains unsatisfied and unreversed. This amount, it is claimed by the petitioner, is a lien upon the proceeds of the sale of the Indianapolis & St. Louis Railroad, prior in equity to that of the bondholders secured by the second and third mortgages. The indebtedness for which this decree was rendered arose under an agreement entered into between the petitioner and the Indianapolis & St. Louis Railroad Company on September 11, 1867, whereby it was provided that the Indianapolis & St. Louis Railroad Company should manage, operate, and carry on the business of that portion of petitioner's road known as its principal or main line, extending from Terre Haute, in the state of Indiana, to East St. Louis, in the state of Illinois, a distance of 189 miles, and of the Alton branch thereof, extending from Alton junction, in the state of Illinois, to Alton, in said state, a distance of 4 miles, for the period of 99 years from the 1st day of June, 1867; that said Indianapolis & St. Louis Railroad Company should pay annually during said term to the petitioner 30 per cent. of the gross earnings of the said main line and Alton branch until such gross earnings for the year should amount to $2,000,000, and 25 per cent. of any excess over $2,000,000, until the whole earnings for the year should amount to $3,000,000, and 20 per cent. of any excess over $3,000,000 of gross earnings for such year; and, further, that the said payment should amount in each and every year to at least the sum of $450,000, which amount was agreed upon as a minimum rental, to be paid absolutely without reference to the percentage which it formed of the gross earnings of any year, and without leaving or creating any claim or charge upon the earnings of any future year. The petition further shows that at the time of the execution of the said operating contract, the Indianapolis & St. Louis Railroad was not built, and that the Indianapolis & St. Louis Railroad Company was organized and created for the express purpose of furnishing to the Cleveland, Columbus, Cincinnati & Indianapolis Railroad Company and the Pittsburg, Fort Wayne & Chicago Railway Company a through line to the Mississippi river by means of its connection with the petitioner's road, the St. Louis, Alton & Terre Haute Railroad, under the foregoing contract; and that while the Indianapolis & St. Louis Railroad Company nominally under that contract was the lessee of the petitioner's road, yet in fact it was leased and operated for the benefit of the other two companies named, who furnished the money to build the said Indianapolis & St. Louis Railroad, and who entered into a contract with the petitioner, guarantying performance of said agreement on the part of the Indianapolis & St. Louis Railroad Company, and who had entered into a contract between themselves for the man

agement and operation of the continuous line of railroad from Indianapolis, in the state of Indiana, to East St. Louis, in the state of Illinois, including the Indianapolis & St. Louis Railroad and the petitioner's road. It was further alleged in the petition that the Pennsylvania Railroad Company, which, together with the Cleveland, Columbus, Cincinnati & Indianapolis Railway Company, are made defendants to the petition, had succeeded to the rights and obligations under these several contracts and arrangements of the Pittsburg, Fort Wayne & Chicago Railway Company; and that the Pennsylvania Railroad Company and the Cleveland, Columbus, Cincinnati & Indianapolis Railway Company were equal owners of the capital stock of the Indianapolis & St. Louis Railroad Company, and that the Cleveland, Columbus, Cincinnati & Indianapolis Railway Company is the holder, substantially, of all the second mortgage bonds of the Indianapolis & St. Louis Railroad Company. The petition further alleges that the eastern terminus of the St. Louis, Alton & Terre Haute Railroad is the western terminus of the Indianapolis & St. Louis Railroad, the two thus forming a continuous line from Indianapolis to East St. Louis on the Mississippi river, the road of the petitioner being the only outlet for the Indianapolis & St. Louis Railroad west of Terre Haute; that a very large proportion of the earnings of the Indianapolis & St. Louis Railroad Company are derived from business received by it from the petitioner's leased line; and avers that the earnings of the leased road over and above the amount authorized to be retained by the Indianapolis & St. Louis Railroad Company for the purpose of operating the same at all times have been and are the property of the petitioner. The petitioner further claims that the rental for the use and occupation of said continuous line constituted a part of the operating expenses of the Indianapolis & St. Louis Railroad Company; that the operating contract was executed before any of the bonds of the Indianapolis & St. Louis Railroad Company were issued and sold; that it was the duty of the Indianapolis & St. Louis Railroad Company to pay all of its operating expenses, including the rental of the petitioner's road, out of its earnings before it paid any interest on said bonds; but that the said Indianapolis & St. Louis Railroad Company, instead of paying its operating expenses as thus defined, diverted and appropriated its earnings to improvements of its property in better equipment and new construction, and to the payment of interest upon its bonds, and neglected and refused to pay the rental accruing to the petitioner for which it had obtained a decree, as above stated. And the petition alleges that during the time the Indianapolis & St. Louis Railroad Company has been in possession of the petitioner's road the amount of such misappropriation and diversion of funds, that should have been applied to the payment of operating expenses, amounts to the sum of $1,000,000. The petition further shows that on May 1, 1878, the Indianapolis & St. Louis Railroad Company made default in the payment to petitioner of the rental then due under the terms of said contract, and so continued to make default from and including April 1, 1878, up to and including October 26, 1878, during which time it was in possession and use of the leased road, receiving the profits and income thereof, and paid over no part of the gross earnings of said road to the petitioner whatever, but appropriated the whole of the same to its own use, 30 per cent. whereof during said time amounted to the sum of $164,052.82, which, it is alleged, was appropriated by the Indianapolis & St. Louis Railroad Company to improvements, betterments, and new construction upon its own line of railroad, in the purchase of rolling stock and equipment, and in the payment of interest upon its bonds. It is further alleged in the petition that when the Indianapolis & St. Louis Railroad Company took possession of the leased road in 1867 it received from the petitioner supplies of the value of $91,860.05, which, by the terms of the lease, the lessee contracted and agreed to return or account for to the lessor at the termination of the lease; that said supplies have long since been consumed by the lessee; that by the terms of the decree

and sale in the principal cause the lease has been assigned and transferred to the Indianapolis & St. Louis Railroad Company, and it is claimed that said amount is a charge upon the proceeds of the sale of the leased road in the possession of the court for distribution. The petition therefore prays for a decree awarding priority in payment in its favor out of the proceeds of the sale of the two sums of $664,874.70 and $91,860.05. To this petition answers were filed by the Cleveland, Columbus, Cincinnati & Indianapolis Railway Company, and by the Pennsylvania Railroad Company, in which the allegations of the petition in regard to the diversion of the earnings of the St. Louis, Alton & Terre Haute Railroad Company to the purposes of the Indianapolis & St. Louis Railroad are denied, as well as the general equity set up by the petitioner. On June 27, 1884, the cause having been fully heard upon the petition, and the answers and proofs, a final decree was rendered awarding to the petitioner an amount found due to it for rental accrued while the road was in the possession of the receiver appointed under the foreclosure proceedings, and directing payment thereof; but so far as the petition sought to establish a claim for rental prior to the date when the receiver took possession of the property, as against the proceeds arising from its sale, and so far as it sought to recover the value of the supplies turned over to the Indianapolis & St. Louis Railroad Company in 1867, at the time of the execution of the lease, the petition was dismissed. It is from that decree that this appeal is prosecuted.

J. E. McDonald and John M. Butler, for appellant. S. Burke and John T. Dye, for appellees.

Mr. Justice MATTHEWS, after stating the facts as above, delivered the opinion of the court.

At the time of the execution of the lease in 1867 of the St. Louis, Alton & Terre Haute Railroad to the Indianapolis & 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 & St. Louis Railroad Company was owned substantially by the Pennsylvania Railroad Company and the Cleveland, Columbus, Cincinnati & Indianapolis Railroad 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 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 & 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 & 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 sumn 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,