Page:Harvard Law Review Volume 32.djvu/461

NOTES 425 obligations entitled to priority over these bonds). Pursuant to a plan of reorganization, a new railway company and a new coal company were created, to which were transferred the properties of the old companies. The new railway company received all the stock of the new coal com- pany, and the bondholders in the old coal company received bonds ex- ecuted by the new coal company and secured (subject to prior obliga- tions) by a mortgage upon its property. Pursuant to the plan of reorganization, two contracts were made. A mining company (which was not controlled by the railway company) contracted with the coal company to pay for ten years a royalty on pro- duction, with an annual minimum; and the railway company contracted with a trustee for the bondholders of the coal company to pay a certain amount for each ton of coal mined and shipped over its lines. It was expected that the funds so paid would keep down annual charges, discharge the prior obligations, and provide some sinking-fund for the' bonds. The only outlet for the coal mined by the mining company was over the lines of the railway company, and the railway company failed to furnish cars sufficient to haul away the coal which the mining company was able to produce. Upon failure of the railway company to supply cars, the mining company mined less than the agreed minimum, and re- fused to pay to the coal company the agreed royalties. Thereupon there were negotiations between the mining company and the railway com- pany, as a result of which it was agreed that the mining contract should be modified, and a modifying contract was made between the mining company and the coal company, — the coal company acting " by direc- tion" of the railway company. Later the new railway company and the new coal company passed into the hands of receivers. On litigation instituted for the protection of the bondholders of the coal company, it was first held ^ that the railway company was under an obligation, implied from the plan of reorganization and the circumstances of the case, to furnish sufficient cars to haul away at least the minimum amount which the mining com- pany had agreed to mine by its original contract, and that for its failure so to do, it was liable in damages (which would go to the bondholders), these damages to be computed upon the basis of the sums which would have been paid by the mining company and the railway company under the two reorganization contracts, if a due number of cars had been sup- plied by the railway company. In other words, the railway company was declared to be liable both on the contract expressly made by it at the time of the reorganization, and also upon a contract impliedly made by it at that time. Pending the ascertainment of these damages, the mortgage upon the property of the coal company was foreclosed. It brought only enough to satisfy the prior obligations. There was a deficiency judgment for the full amount of the bonds, with interest. The question was then pre- sented whether this deficiency judgment was provable as a claim against the new railway company. The District Court held that it was; the Circuit Court of Appeals held that it was not. The District Court found that the coal company was organized and at all times managed and 2 Wheeling, etc. R. Co. :;. Carpenter, 218 Fed. 273 (C. C. A., 6th Circ.) (1914).