If a state court appoints a receiver, the receiver can take only the property in the jurisdiction of the court. The court has no jurisdiction outside of its own State and for property of the corporation in another State another appointment of a receiver will have to be made. Even if no quarrel arises among different sets of creditors and even if the courts of other States would appoint the same man appointed by the court of first jurisdiction, the delay in the appointment and his responsibility to the several courts would cause expensive and otherwise serious difficulties and delays.
The mere fact of a default in the payment of interest will not in itself give the court a sufficient ground for the appointment. The court must be shown that a receivership is necessary to prevent loss or injury to those financially interested. If there is a default, however, sufficient other grounds can usually be found to justify the appointment.
When the receiver is appointed, the man agement of the property owned by the cor poration is taken out of the hands of the offi cers of the corporation and vested in the court appointing the receiver. He is simply the officer or agent of the court. On all large matters of policy and on any question out side of the ordinary matters of operation he must go back to the court for authority.
The appointment of a receiver does not change the nature of the legal rights of the security-holders. He acts, however, as an agent of the court exercising its equity juris diction. While the property is in the posses sion of the court acting as a court of equity, legal rights may not be enforced except with the permission of the court. The principle underlying this suspension of the legal rights of the security-holders is that the prompt en forcement of the legal rights of any one set of security-holders or other creditors might work such an injury to other people who have a financial interest in the property as to amount to an essential injustice. The law says in sub stance to the defaulted bondholder that the damage he may do another by a prompt en forcement of his right will be so much greater than the damage he will suffer by delay that the real justice of the situation demands that he suffer the delay.
It is the duty of the receiver immediately on his appointment to take possession of all the property covered by the mortgage secur ing the bondholders, or subject to the satis faction of the demands of the creditors, who made the application for his appointment.
The corporation no longer has any voice in the management of the property. The re ceiver operates the road with essentially all the powers that the corporation had before his appointment. The directors of the corpo ration, however, necessarily looked at every question from the viewpoint of the interest of the stockholders. The receiver must pur sue such a course as will best conserve the property for the benefit of all people finan cially interested. Whenever extraordinary matters come up, or he is in doubt about what course he ought to pursue, he should consult the court.
The receiver may do some things which have an important bearing on the financial position of the business. If any part of the property which comes into his possession consists of leased property and he considers the terms of the lease not advantageous to the business, he may elect to disaffirm the lease: that is, he may discontinue operating the leased property and turn it back to the les sors. He is not obliged to do this at once, but may take possession of the leased property and operate it long enough to learn whether it is profitable or not.
He may find, among other property that has come into his possession, certain cars and lo comotives which the corporation had bought under the terms of an equipment trust agree ment. Just as in the case of the leased line the receiver may elect to disregard this agree ment. He may then turn the equipment back to the equipment bondholders. If the receiver finds the equipment necessary to run the business properly, he may retain it for his use, and he will, in that event, be obliged to pay whatever the use is reasonably worth. The retention of the equipment, though the receiver may refuse to recognize the terms on which it was bought, is justified on the ground that the railroad is a public service corporation, — that is, a business affected with a special public interest, — and the im portance of continuing to render the service to the public overrides other considerations. This general principle pervades the manage ment of a railroad property in the hands of a receiver.