American Iron Steel Manufacturing Company v. Seaboard Air Line Railway/Opinion of the Court
The statement of facts made by the circuit court of appeals of the fourth circuit shows that supplies were sold to a railway company on thirty days' credit. Before the credit period expired the road, alleged to be insolvent, was, on its own application, placed in the hands of receivers, their appointment being subsequently continued under a bill for foreclosure filed by mortgage trustees. The railway company succeeded in making a readjustment of its bonded indebtedness and the property was returned to the owners. The court, however, retained jurisdiction for the purpose of passing upon the claims of creditors aggrieved by the company's default in paying its obligations. Among those presented was the American Iron & Steel Manufacturing Company's claim for supplies secured by a lien which by statute took priority over mortgages. The matter was referred to a master on pleadings not before us. He made a report (not in the record) and on exceptions thereto the circuit court refused to allow interest. From that statement, in connection with the briefs and arguments of both counsel, we infer that the railway was directed to pay the principal of the claim. The case was then taken to the circuit court of appeals for the fourth circuit which certifies to this court the question, 'is interest recoverable on such a claim for the period of receivership?'

Both parties agree that the matter is controlled by the law in Virginia, but no light is thrown on the subject by the statute of the state, which merely declares that legal interest shall continue to be at the rate of 6 per cent. Pollard's Code, § 2817. No Virginia case directly in point is cited in either of the briefs, and there is a complete disagreement between counsel as to the bearing of the state decisions on the question here involved.

On the part of the railway company it is contended that interest could not have been recovered on this claim even in an action at law. On the authority of Calton v. Bragg, 15 East, 223, 13 Revised Rep. 451, 14 Eng. Rul. Cas. 541; Newton v. Wilson, 3 Hen. & M. 470; Quincy, M. & P. R. Co. v. Humphreys, 145 U.S. 82, 36 L. ed. 632, 12 Sup. Ct. Rep. 787, and other like cases, it is argued that the right to interest is a matter of agreement, and can be recovered as a part of the debt only where it has been reserved in the contract, or where a promise is implied from the character of the note or instrument evidencing the debt. The railway therefore insists that as the intervener sold the supplies, without taking a note and without securing a promise to pay interest, there was no right to recover interest as an incident of the debt, although a jury, as a matter of discretion, might have allowed it by way of damages for unreasonable delay in making payment.

On the other hand, counsel for the Iron & Steel Company contend that as these supplies were sold on a credit of thirty days, a promise was implied to pay interest after that date as an incident of the debt itself. From Chapman v. Shepherd, 24 Gratt. 383; Craufurd v. Smith, 93 Va. 623(2), 23 S. E. 235, 25 S. E. 657; Tidball v. Shenandoah Nat. Bank, 100 Va. 741, 42 S. E. 867; Butler Bros.-Huff Co. v. Virginian R. Co. 113 Va. 28(7), 73 S. E. 441; Roberts v. Cocke, 28 Gratt. 207, and Cooper v. Coates, 21 Wall. 111, 22 L. ed. 482, we reach the conclusion that whatever may have been the English and early American rule, the tendency in Virginia, as elsewhere in this country, is to allow interest on contracts to pay money from the date that the debt becomes due. 2 Minor's Inst. 381. The sale here of supplies on thirty days' credit was not, as argued, a mere agreement for the denefit of the buyer that it should not be sued before the expiration of that time, but was the fixing of a definite date for payment of the purchase money. The acceptance of the supplies, sold on those terms, was equivalent to a promise to pay the money on that day. Atlantic Phosphate Co. v. Grafflin, 114 U.S. 500, 29 L. ed. 224, 5 Sup. Ct. Rep. 967. As payment was not then made, the railway company was in default, and interest began to accrue as an incident of the debt, recoverable as such, and not merely as damages to be allowed in the discretion of court or jury. This appears to have been the view of the circuit court of appeals, since the interest-bearing quality of the debt seems to be assumed in the question-'Is interest recoverable on such a claim for the period of receivership?'

In the discussion as to the answer which should be given that question, the railway company insists that, whether treated as part of the debt or allowed as damages, interest can only be charged against the railway because of delay due to its own fault, while here the failure to pay was due to the act of the law in taking its property into custody and operating the same by receivers in order to prevent the disruption of a great public utility. And it is true, as held in Tredegar Co. v. Seaboard Air Line R. Co. 105 C. C. A. 501, 183 Fed. 290, that as a general rule, after property of an insolvent is in custodia legis interest thereafter accruing is not allowed on debts payable out of the fund realized by a sale of the property. But that is not because the claims had lost their interest-bearing quality during that period, but is a necessary and enforced rule of distribution, due to the fact that in case of receiverships the assets are generally insufficient to pay debts in full. If all claims were of equal dignity and all bore the same rate of interest, from the date of the receivership to the date of final distribution, it would be immaterial whether the dividend was calculated on the basis of the principal alone or of principal and interest combined. But some of the debts might carry a high rate and some a low rate, and hence inequality would result in the payment of interest which accrued during the delay incident to collecting and distributing the funds. As this delay was the act of the law, no one should thereby gain an advantage of suffer a loss. For that and like reasons, in case funds are not sufficient to pay claims of equal dignity, the distribution is made only on the basis of the principal of the debt. But that rule did not prevent the running of interest during the receivership; and if, as a result of good fortune or good management, the estate proved sufficient to discharge the claims in full, interest as well as principal should be paid. Even in bankruptcy, and in the face of the argument that the debtor's liability on the debt and its incidents terminated at the date of adjudication, and as a fixed liability was transferred to the fund, it has been held, in the rare instances where the assets ultimately proved sufficient for the purpose, that creditors were entitled to interest accruing after adjudication. 2 Bl. Com. 488; Cf. Johnson v. Norris, L.R.A.(N.S.) --, 111 C. C. A. 291, 190 Fed. 460(5).

The principle is not limited to cases of technical bankruptcy, where the assets ultimately prove sufficient to pay all debts in full, but principal as well as interest, accruing during a receivership, is paid on debts of the highest dignity, even though what remains is not sufficient to pay claims of a lower rank in full. Central Trust Co. v. Condon, 14 C. C. A. 314, 31 U.S. App. 387, 67 Fed. 84; Richmond & I. Constr. Co. v. Richmond, N. I. & B. R. Co. 34 L.R.A. 625, 15 C. C. A. 289, 31 U.S. App. 704, 68 Fed. 116; First Nat. Bank v. Ewing, 43 C. C. A. 150, 103 Fed. 190.

The railway company relies on the statement in Thomas v. Western Car Co. 149 U.S. 96, 116, 37 L. ed. 663, 670, 13 Sup. Ct. Rep. 824, that 'as a general rule after property of an insolvent passes into the hands of a receiver, interest is not allowed on claims against the fund.' The court there refused to allow interest on car rentals, accruing during the receivership, under an old contract, because the funds were not sufficient to pay the bonds, saying (117): 'We see no reason in departing from that [general] rule in a case like the present where the claim [for car rentals] would be paid out of the moneys that fall far short of paying the mortgage debt.' But here, interest was paid on mortgage bonds and should therefore have been paid on a claim which by statute was given priority over the bonds. This was specially true where the property was in the hands of a receiver on the application of the debtor and of the mortgage trustees. For, manifestly, the law does not contemplate that either the debtor or the trustees can, by securing the appointment of receiver, stop the running of interest on claims of the highest dignity.

In the brief for the railway company attention is called to the fact that the road was not in custodia legis under a creditors' suit, but in a proceeding to foreclose the equity of redemption. In view of that fact it is argued that the Iron & Steel Company should be remitted to its action at law against the company which is now in possession of the property. But this seems to involve matters not within the question certified by the circuit court of appeals. The property was returned to the railway company on condition that any creditor aggrieved by the failure to pay his claim might present his petition to the court and have it enforced 'to the same extent as though the receivership had continued.' As a fact interest was paid on the floating indebtedness, out of earnings made by the receivers appointed first under a bill which asked that the property be taken in charge by the court so that ultimately all creditors would be paid in full. We must assume that the court had the right to make these payments, and if so it had a like right in the case of the claim for railway supplies. No question is raised as to the power of the court to require payment of the principal of appellant's debt, and if the court could require a payment of the principal, it could also enforce the payment of the interest, which was but an incident of that debt. If the property had remained in the hands of the receiver, the lienor might have been permitted to intervene and share in the fund realized by the sale of property in the hands of receivers appointed, first, on the application of the railway, in the interest of all creditors, and continued by an order entered in the bill to foreclose the mortgage.

It is, however, not necessary to discuss that matter further than to say that on the facts stated, interest was recoverable on the American Iron & Steel Company's claim for the period of receivership. The question certified by the Circuit Court of Appeals is answered in the affirmative. 

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