HURLEY v. ATCHISON, T. & S. F. RY. CO.

There is practically no controversy in respect to the facts in this case. We take the following statement from the opinion of the circuit court of appeals: In 1896 the Osage Carbon Company and the Cherokee & Pittsburg Coal & Mining Company, as parties of the first part, and Charles J. Devlin, as party of the second part, and the railway company as party of the third part, entered into an agreement whereby the parties of the first part leased to Devlin, for a term of three years, certain coal lands located in the state of Kansas, with the right to mine coal therefrom, and Devlin, the party of the second part, agreed [213 U.S. 126, 127]   to sell and deliver to the railway company, and the latter to buy from him daily, all the coal required by it in the operation of certain of its lines of railroad in the state of Kansas at prices stated in the lease, payment to be made by the railway company on the 15th day of each month for all coal delivered to it during the preceding calendar month. Power was conferred upon the railway company to terminate the lease for failure by Devlin to perform any of his undertakings, and the right to assign the lease was made subject to the consent of the railway company. Subsequently, Devlin duly assigned to the Mount Carmel Coal Company all his right under the lease. By two successive agreements this contract was extended until June, 1906. All the parties continued in the performance of their respective obligations until July, 1905, when the Mount Carmel Company was adjudicated a bankrupt. Receivers were appointed and authorized to conduct the business of the bankrupt in the usual course until trustees should be chosen. The receivers and the subsequently-appointed trustees successively continued to operate the mines under the orders of the court, and to deliver the coal as required by the contract. While the receivers were in charge, the railway company and the two coal companies, the original lessors, filed their joint intervening petition, setting forth their relations to the bankrupt under the contract, their rights thereunder, as already stated, and, in substance, that, by an agreement between them and the bankrupt, the contract had been modified to the extent that the railway company had agreed that, without waiting until the 15th day of the month to make its payment for coal theretofore purchased, it would, in order to accommodate the Mount Carmel Coal Company, and enable it to pay off laborers and keep the mines going, make advance payments from time to time when necessary for those purposes. In pursuance of that agreement, and for the purposes stated, it had advanced $57,304.16, with the understanding that it should be repaid by the subsequent delivery of coal; that the intervening bankruptcy proceedings of July 7 and the appointment of receivers by the [213 U.S. 126, 128]   court alone prevented the bankrupt from carrying out its agreement and delivering the coal as required by the contract. The petitioners prayed that the lease be declared forfeited and void and the mines delivered back to them, or that the receivers be directed to deliver to the railway company the amount of coal so paid for in advance. A referee, to whom the intervening petition was referred, reported unfavorably to the granting of any relief. His report was afterwards confirmed by the district court and the petition dismissed. The referee found and reported that the amount claimed by the railway company was as stated in the intervening petition, and was advanced to enable the bankrupt to meet its pay rolls, but found that there was no testimony indicating an intention to modify the written lease. The district court, in reviewing the action of the referee, said: 'True, at the time the sums of money were advanced it was no doubt contemplated and agreed by the parties that the bankrupt would repay the money by furnishing the coal at the price of the coal, measured in money by the terms of the contract, and would furnish such coal in July and August, as claimed; but, at the time of the failure of the bankrupt, the coal remained in the ground, unmined.' Both the referee and the district court found that the agreement for the advance of the money was a separate, independent, parol contract, and had nothing to do with the original written contract, as shown by the lease, and that, being such an independent parol contract, there was no lien upon any of the property for its payment. The circuit court of appeals (82 C. C. A. 453, 153 Fed. 503) reversed the judgment of the district court, and held that that court should have directed a surrender of the leased premises, or required the trustees, upon assumption of the lease, to mine and deliver to the railway company sufficient coal to cover its advances; and it further held that, the lease having expired, the assets of the estate, consisting in part of the money received for coal delivered to the railway company, should be subject to the payment of such debt as a preferential claim. [213 U.S. 126, 129]   Messrs. Frank Hagerman and John S. Dean for appellants.

[213 U.S. 126, 130]   Messrs. Robert Dunlap, William R. Smith, and Gardiner Lathrop for appellees.

[213 U.S. 126, 131]  

Statement by Mr. Justice Brewer:

Mr. Justice Brewer delivered the opinion of the court:

We shall not stop to discuss the question of jurisdiction. That whole subject has been so fully considered in the case just decided of Coder v. Arts [ 213 U.S. 223 , 53 L. ed. --, 29 Sup. Ct. Rep. 436], that any further discussion of the subject would be superfluous. We pass directly to the merits, and, in order to a clear understanding of them, the facts of the dealings between the coal company and the railway company must be borne in mind. The railway company entered into its original contract for the sake of securing the constant supply of coal necessary for the operation of part of its railway. It was to take from the coal company daily all the coal required therefor at prices fixed in the contract, and to make payment therefor on the 15th day of each month for all coal delivered to it during the preceding calendar month. It was not engaged in the business of money [213 U.S. 126, 132]   lending. Its entire arrangement was for the purpose of securing daily its needed coal, and that was fully understood by all the parties. After a while the coal company became embarrassed, found difficulty in securing money for the payment of its employees, whereupon, and in order to prevent any delay on the part of the coal company, or any embarrassment which it, the railway company, might suffer from failing to receive from the coal company the needed amount of coal, it advanced money to the coal company to enable it to pay its employees, and thus to continue the performance of its obligation to mine and deliver the coal. The railway company was simply paying in advance instead of waiting until the 15th day of the succeeding month, and the money by it loaned was not loaned as an independent pendent transaction,-such as would be made by an ordinary money lender,-but an advancement made in anticipation of the delivery of the coal. To ignore this element and make the bankruptcy proceedings operate to discharge this obligation of the coal company, and leave the transaction as one of an independent loan of money to the coal company, would result in destroying the full, equitable obligations of the coal company, and place the parties in their relations to each other on an entirely different basis from what had been contemplated by them when they entered into this original arrangement. While decisions directly in point may not be found, yet, see Ketchum v. St. Louis, 101 U.S. 306 -317, 25 L. ed. 999-1003; Hauselt v. Harrison, 105 U.S. 401 , 26 L. ed. 1075; Carr v. Hamilton, 129 U.S. 252 , 32 L. ed. 669, 9 Sup. Ct. Rep. 295; Rourth Street Nat. Bank v. Yardley, 165 U.S. 634 , 41 L. ed. 855, 17 Sup. Ct. Rep. 439. In Re Chase, 59 C. C. A. 629, 631, 124 Fed. 753, 755, Circuit Judge Putnam, delivering the opinion of the circuit court of appeals of the first circuit, says:

'It is settled that a trustee in bankruptcy has no equities greater than those of the bankrupt, and that he will be ordered to do full justice, even in some cases where the circumstances would give rise to no legal right, and, perhaps, not even to a right which could be enforced in a court of equity as against an ordinary litigant. Williams, Bankr. 7th ed. 191. Indeed, bankruptcy proceeds on equitable principles so [213 U.S. 126, 133]   broad that it will order a repayment when such principles require it, notwithstanding the court or the trustee may have received the fund without such compulsion or protest as is ordinarily required for recovery in the courts either of common law or chancery.'

In Thompson v. Fairbanks, 196 U.S. 516, 526 , 49 S. L. ed. 577, 586, 25 Sup. Ct. Rep. 306, this court said:

'Under the present bankrupt act, the trustee takes the property of the bankrupt, in cases unaffected by fraud, in the same plight and condition that the bankrupt himself held it, and subject to all the equities impressed upon it in the hands of the bankrupt, except in cases where there has been a conveyance or encumbrance of the property which is voad as against the trustee by some positive provision of the act.'

The purpose of the parties is very clearly expressed in the following quotation from the opinion of the court of appeals:

'It appears that the coal company, while the contract was still in force and being executed, became embarrassed and unable to meet its payrolls; as a result, it might not be able to mine or deliver the coal which it had agreed to mine and deliver to the railway company, and which the latter imperatively required for its daily consumption. In this state of things the railway company agreed to waive its right to withhold payment for fifteen days after coal was delivered to it, and pay for some of it before it was delivered; and the coal company agreed, as found by the trial court, to repay such advances, not in money, but by furnishing coal in the months of July and August following, at the price fixed by the original contract. This arrangement, made when the coal company was in embarrassed circumstances, and obviously inspired by the necessity of meeting the pay rolls, and for the ultimate purpose of securing performance of the only part of the original contract in which the railway company was interested, namely, securing its supply of coal, is so intimately and vitally related to the original contract that we are unable to agree with the trial court that it was intended to be independent and separate from it. It was not, in our opinion, a modification of any of the substantive [213 U.S. 126, 134]   provisions of the contract, but was a change rendered necessary by subsequent events in the method of its execution only. It was an arrangement in no manner inconsistent with any of the provisions of the original contract, but only in aid of its execution.

'The contract, after the new arrangement, remained as before. The coal company still had a right to mine coal on the same terms and conditions as before, and was bound to supply the daily needs of the railway company as before. The money paid in advance entitled the railway company to an amount of coal which the money so advanced would pay for according to the terms of the original contract. We think the inevitable meaning of the new arrangement, interpreted in the light of the conditions surrounding the parties, and as necessarily intended by them, was to set apart a sufficient amount of coal after it should be mined as security for the payment of advances made. This result is not expressed in the conventional form of a mortgage or pledge, but the method of producing it was devised for the purpose of acquiring the needed money by the coal company, and of furnishing security for its repayment. If the parties intended the arrangement to be one for borrowing and securing the repayment of money, we ought, as between them, to so regard it, and to treat it as creating an equitable charge or lien, however inartificially it may have been expressed.'

We fully approve of this interpretation of the transaction. Equity looks at the substance, and not at the form. That the coal for which this money was advanced was not yet mined, but remained in the ground to be mined and delivered from day to day, as required, does not change the transaction into one of an ordinary independent loan on the credit of the coal company or upon express mortgage security. It implies a purpose that the coal, as mined, should be delivered, and is, from an equitable standpoint, to be considered as a pledge of the unmined coal to the extent of the advancement. The equitable rights of the parties were not changed by the commencement of bankruptcy proceedings. All obligations of a legal and equitable nature [213 U.S. 126, 135]   remained undisturbed thereby. If there had been no bankruptcy proceedings, the coal as mined was, according to the understanding of the parties, to be delivered as already paid for by the advancement.

We think the conclusions of the Circuit Court of Appeals are right, and its judgment is affirmed.

Mr. Justice Holmes concurs in the judgment.