The dominant feature of the doctrine, as applied in Burnham v. Bowen, 111 U. S. 776, 4 Sup. Ct. 675, 28 L. Ed. 596, is said to be that where expenditures were made which were essentially necessa.ry to enable the road to be operated as a continuing business, and it was the expectation of the creditors that the indebtedness would be paid out of cur rent earnings, a superior equity arises in favor of the materialman as against• the mortgage bonds as to the income arising both before and after the appointment of a re ceiver ; Virginia & A. Coal Co. v. R. & B. Co., 170 U. -S. 355, 18 Sup. Ct. 657, 42 L. Ed. 1068. This equity arises upon the tacit or express understanding that the current earnings would be appropriated for the payment of the debt. Even though the mortgage pro vides for a sequestration of income for the benefit of the bondholders, that income, until strict foreclosure or a sale of the road, is charged With the prior equity of unpaid sup ply claims;' id. • Equity will confine itself within very restricted limits in the applica tion of this doctrine ; Kneeland v. Loan & T. Co., 136 U. S. 89, 950, 34 L. Ed. 379 ; Thomas v. Car Co., 149 U. S. 95, 13 Sup. Ct. 824, 37'L. Ed. 663 ; in both of which cases it was not, under special circuttstances, applied to car trust rentals prior to the suit for foreclosure.
The doctrine has in some courts been ex tended with great freedom, and the granting of preferences and the issue of receiver's cer tificates carried to such an extent as to give rise in the public mind to an view of the powers of courts of equity in this re gard. In Central Trust Co,. v. R. Co.,' 80 Fed. 624, 26 C. C. A. 30, the circuit court of appeals remarks that "the liberality with which this equity was extended by some of the circuit courts in favor of general cred itors, induced the supreme court in Kneeland v. Trust Co., 136 U. S. 89, 10 Sup. Ct. 950, 34 L. Ed. 379, to call attention to the necessity of preserving the general priority of con tract liens over all but a, limited class of claims. Through Mr. Justice Brewer, the court said: 'The appointment of a receiver vests in the court no absolute control over the property, and no general authority to displace vested contract liens. Because, in a few specified and limited cases, this court has declared that unsecured claims were en titled to priority over mortgage debts, an idea seems to have obtained that a court ap pointing a receiver acquires power to give such preference to any general and unsecur ed claims. It has been assumed that a court appointing a receiver could rightfully burden the mortgaged property for the payment of any unsecured indebtedness. .. . It is the exception, and not the rule, that such priority of liens can be displaced. We em phasize this fact of the sacredness of con tract liens, for the reason that there seems to be growing an idea that the chancellor, in the exercise of his equitable power, has un limited discretion in this matter of the dis placement of vested liens.' " While the court
appointing an ancillary receiver will protect local creditors having prior rights or liens, it will recognize no distinction between for eign and domestic creditors whose claims stand on equal footing, and it rests in the court's discretion whether it will distribute the assets or transmit them to a primary re ceiver ; Sands v. Greeley & Co., 88 Fed. 130, 31 C. C. A. 424.
Orders appointing a receiver usually di rect the payment of such preferred claims of this class as the master shall find to be equi tably entitled ; Blair v. R. Co., 22 Fed. 471; and it is the better practice to make the or der then ; Central Trust Co. v. R. Co., 41 Fed. 551; they will be paid even if not pro vided for in the original decree; Miltenberg er v. R. Co., 106 U. S. 286, 1 Sup. Ct. 140, 27 L. Ed. 117 ; the order can be made after wards ; Central Trust Co. v. R. Co., 41 Fed. 551. It has been held that there can be no preference as to the corpus of the property where payment was not provided for in the original decree ; Cutting v. R. Co., 61 Fed. 150, 9 C. C. A. 401; nor any preference what ever ; Central Trust Co. v. R. Co., 69 Fed. 295 ; but it is also held that where the earn ings have been diverted to the payment of interest or permanent improvements, prefer red debts will be charged on the corpus if the current income is not sufficient to pay them ; Burnham v. Bowen, 111 U. S. 776, 4 Sup. Ct. 675, 28 L. Ed. 596; St. Louis, A. & T. H. R. Co. v. R. Co., 125 U. S. 658, 8 Sup. Ct. 1011, 31 L. Ed. 832 ; and sometimes even without showing a diversion of earnings; Miltenberger v. R. Co., 106 U. S. 286, 1 Sup. Ct. 140, 27 L. Ed. 117.
A receiver of a railroad on coming into possession of earnings should pay out of the same all debts for supplies contracted within a reasonable time before the receivership, be fore making any expenditure for betterments or interest an •mortgages ; Southern R. Co. v. Brake Co., 76 Fed. 502, 22 C. C. A. 298.
The court may authorize receivers, in their discretion, to pay the current payrolls and supply accounts incurred in the operation of the road within four months before their ap pointment ; New England R. Co. v. Steel Co., 75 Fed. 54, 21 C. C. A. 219. Current operat ing expenses for a limited time before the appointment of a receiver under a foreclo sure bill may be charged on the income earn ed during the receivership or upon the cor pus of the property, in preference to the lien of the mortgage ; Ames v. R. Co., 74 Fed. 335. A receiver of a railroad is properly au thorized to pay all balances due to other car riers and connecting lines, and should be al lowed to pay, from the proceeds of the sale of receiver's certificates, charges for freight on cars, coal, oil, etc., consigned to the in solvent company and due before the appoint ment of a temporary receiver; Finance Co. of Pa. v. R. Co., 62 Fed. 205, 10 C. C. A. 323.