E. P. Axtell, for appellants.

W. L. Palmer and J. Parker, for appellees.

Before PARDEE, MCCORMICK, and SHELBY, Circuit Judges.

PARDEE, Circuit Judge. This is a bill to remove clouds from and to quiet title to certain real estate in Volusia county, state of Florida, and was filed in the circuit court May 4, 1893. It was sworn to by John M. Bradshaw, who made oath that he was the agent of the complainants, and that the defendant E. S. Ellsworth was a nonresident of the state of Florida, residing in Hardin county, state of Iowa; that his business address was "521 Chamber of Commerce, Chicago, Illinois," and that the Ellsworth Trust Company was a corporation organized and existing under the laws of the state of Iowa; that it was a nonresident of the state of Florida, and that its place of business and post-office address were Iowa Falls, Iowa. On the 3d day of June, a subpoena was issued, directed to the said Ellsworth Trust Company and E. S. Ellsworth, commanding them to appear before the court on the next rule day, and was directed to the marshal of the United States to execute and return. On this subpoena a return was entered the same day, as follows: "Received this within subpoena on the 2d day of June, 1893, at Jacksonville, Florida, and failed to find the within-named defendants in this district,"-signed by the marshal; and again, this further return:

"Northern District of Illinois. I have served the within writ upon the Ellsworth Trust Company, therein named, by delivering a true copy thereof to E. S. Ellsworth, president of said company, on the 5th day of June, A. D. 1893. And also on the same day I served said writ upon E. S. Ellsworth personally by delivering to him a true copy thereof.

"Frank Hitchcock, Marshal, by Geo. N. Jones, Deputy."

On the 3d day of July the following motion was entered: "And now, on this rule day, in July, A. D. 1893, come the defendants herein, appearing by their solicitor, Arthur F. Oldin, specially, only, and for the sole purpose of presenting this motion, and move the court to grant an order dismissing the bill herein filed for want of jurisdiction apparent upon the face of the record herein; and for ground of said motion said defendants say: First. It appears from the bill herein filed that one of the complainants herein, to wit, Lucy C. Finegan, is, and was at the time of the filing of said bill, a resident and citizen of the state of Tennessee, and the defendant E. S. Ellsworth was a resident and citizen of the state of Iowa, and the defendant the Ellsworth Trust Company was a corporation created under the laws of the state of Iowa, and this suit was not brought in the district of the residence of either the complainant Finegan or of these defendants. Second. It appears from the bill herein that one of the defendants, to wit, the Ellsworth Trust Company, is a corporation created under the laws of the state of Iowa, and that, therefore, it is liable to be sued in a federal court in the state of Iowa only. Third. And for other good and sufficient grounds apparent upon the face of the record herein. Wherefore these defendants pray that the said bill may be dismissed for want of jurisdiction. "Arthur F. Oldin,

"Solicitor for Defendants, Appearing Specially for the Sole Purpose of This Motion."

The next entry appears to be nearly five years later,-on June 8, 1898,-to wit:

"This cause came on to be heard upon motion by defendant to dismiss bill for want of jurisdiction, and upon due consideration thereof it is ordered that said motion be dismissed upon the strength of Greely v. Lowe, 155 U. S. 58, 15 Sup. Ct. 24, 39 L. Ed. 69, and defendants allowed until the rule day of July in which to plead, answer, or demur. James W. Locke, Judge. "June 8th, 1898."

On February 6th a decree pro confesso was entered in the chancery order book, and on the 3d of March following the court made the following:

"A decree pro confesso having been entered in the above-entitled cause, it is ordered that the same be referred to J. N. Bradshaw as special master to take the testimony in said case, and he is ordered to report the proceedings with all convenient speed to this court.

"Ordered in Jacksonville, Fla., this 3rd day of March, A. D. 1899. "James W. Locke, Judge."

On June 2, 1899, the special master, John N. Bradshaw, filed a report. This was followed on November 1, 1899, by a final decree granting all the relief prayed for in the bill. From this decree this appeal is sued out, and numerous errors assigned.

There is much discussion in the briefs as to the effect to be given to the appointment of the complainant's agent as special master to take testimony, and on several assignments of error as to whether the relief granted goes beyond the scope of the bill and the testimony adduced in support thereof. The view we take of the preliminary proceedings in 1893 renders it unnecessary for us to consider these matters. The service made upon the defendants E. S. Ellsworth and the Ellsworth Trust Company was void (see Pacific R. Co. v. Missouri Pac. R. Co., 3 Fed. 772), particularly upon the Ellsworth Trust Company, which was shown by the bill and the affidavit attached thereto to be a corporation of the state of Iowa, and its place of business at Iowa Falls, in said state of Iowa, and yet was returned as served in the state of Illinois. See Goldey v. Morning News, 156 U. S. 518, 522, 15 Sup. Ct. 559, 39 L. Ed. 517. We think that the authorities on this point are undisputed. The appearance made on the rule day in June, 1893, was a special appearance for the sole purpose of presenting an objection to the jurisdiction of the court over the persons of the defendants. The first ground of the motion under this limited appearance was that the suit was not brought within the district of the residence of the complainants nor of the defendants (see Smith v. Lyon, 133 U. S. 315, 10 Sup. Ct. 303, 33 L. Ed. 635), and the second was that the Ellsworth Trust Company, a corporation of the state of Iowa, could only be sued in the federal courts of that state. Both of these grounds refer to personal jurisdiction, and the limited appearance thus made cannot be held to be a waiver of legal service. See Construction Co. v. Fitzgerald, 137 U. S. 98, 11 Sup. Ct. 36, 34 L. Ed. 608. The record shows no attempt to secure service under the eighth section of the act of March 3, 1875, which provides for substituted service in suits commenced in a circuit court of the United States to enforce legal or equitable liens upon or remove any incumbrance or lien or cloud upon the title to real or personal property within the district where such suit is brought. As the defendants to the

bill were not properly served, and entered no general appearance, nor in any way pleaded to the merits of the case, the decree pro confesso and the final decree rendered were improperly entered, and the same should be reversed. The decree appealed from is reversed, and the cause is remanded to the circuit court, with directions to set aside the same and the decree pro confesso, and thereafter proceed as equity may require.

(108 Fed. 913.)

METROPOLITAN TRUST CO. et al. v. RAILROAD EQUIPMENT CO. et al. RAILROAD EQUIPMENT CO. v. MERCANTILE TRUST CO. et al.

(Circuit Court of Appeals, Sixth Circuit. May 7, 1901.)

Nos. 870 and 886.

1. RAILROADS-CONTRACT FOR EQUIPMENT-CONDITIONAL SALES.

A contract, purporting to be a lease of equipment to a railroad company, which executes so-called "lease warrants," payable monthly during a specified time, and on payment of the last of such warrants is to become the owner of the equipment, is in legal effect a sale; the seller retaining title to the property sold as security for the payment of the price.

2. SAME-NOTES FOR EQUIPMENT-OHIO USURY STATUTES.

The effect of Rev. St. Ohio, § 3287, authorizing railroad companies to borrow money at a rate of interest not exceeding 7 per cent., and to issue bonds or notes for the same, and of section 3290, which provides that the directors may sell or negotiate such bonds or notes at not less than 75 per cent. of par, is to exempt railroad companies from the operation of the general usury statute; and notes or lease warrants issued by a railroad company for deferred payments on equipment bought are valid, although their amount is greater than the sum due on the price of such equipment with the legal rate of interest, but not greater than would have been required if they had borne interest at 7 per cent. and been discounted at 75 per cent. of par.

3. SAME-AUTHORITY TO ISSUE NOTES-OHIO STATUTES.

Under Rev. St. Ohio, § 3287, which authorizes railroad companies to issue bonds or notes and secure the same by a pledge of their property or income, a railroad company has power to issue so-called "lease warrants" for deferred payments on equipment, the title to which remains in the seller until all such warrants are paid, and then passes to the company.

4. SAME-CONDITIONAL PURCHASE OF EQUIPMENT-Rights of Seller.

The Ohio act of May 4, 1885 (82 Ohio Laws, p. 238), relating generally to conditional sales of personal property, and requiring the seller, before taking possession on condition broken, under penalty of criminal prosecution, to tender to the purchaser repayment of at least 50 per cent. of the amount paid thereon, does not apply to conditional sales of equipment to railroad companies, which were specially provided for by Act March 16, 1882 (79 Ohio Laws, p. 45), recognized as remaining in force after the passage of the general act of 1885 by its amendment by Act April 12, 1889 (86 Ohio Laws, p. 255).

5. SAME

FORECLOSURE OF GENERAL MORTGAGE.

A corporation making a conditional sale of equipment to a railroad company, retaining title until the full payment of notes given for the price, on the foreclosing of mortgages covering all the property of the company before full payment, is entitled to take back the equipment, or,

in case the mortgagees elect to retain it, to a first lien thereon for the amount still due, without any deduction on account of expenditures made by the railroad company or its receiver for the preservation or improvement of such property.

Appeal and Cross Appeal from the Circuit Court of the United States for the Southern Division of the Eastern District of Ohio.

This appeal and cross appeal are from so much of a general decree in a consolidated railroad-mortgage foreclosure case as awarded to the Railroad Equipment Company a decree for $51,400.65 as the aggregate sum due, with interest upon 20 so-called "lease warrants" issued upon renewals and extensions of several equipment contracts entered into with the predecessors of the Columbus, Sandusky & Hocking Railroad Company, the mortgagor railroad company defendant in said consolidated cause. The complainant in the principal of the consolidated causes, the Metropolitan Trust Company of New York, for the purpose of selling the mortgaged railroad free from all liens or charges, brought in various persons and corporations claiming liens upon said railroad or its equipment. Among those thus brought in was the Railroad Equipment Company. Priority in the proceeds of sale over the mortgagees and over the holders of receiver's certificates issued in said cause was accorded to the claim of the equipment company, except in so far as the proceeds of such certificates had been “expended in preserving or improving the said equipment," conditionally sold to the railroad by the equip ment company or its assignors. The mortgagees in the case docketed here as No. 870 appealed from so much of said decree as found any sum to be due to the equipment company, and the equipment company has, in cause No. 886, appealed from so much of the decree as awarded to the receiver's certificates priority over its claim and lien. The "lease wariants" held by the equipment company purport to have issued for rentals for equipment furnished to one or other of the railroad companies to which the present company has succeeded by the equipment company or some company to whose rights it has succeeded. The original and renewal contracts are very lengthy. They are well summarized by the court below as follows:

"In each of the equipment contracts under which these lease warrants were issued the company furnishing the equipment agreed to lease it to the railway company for the period of 60 months from a certain date. The value of the equipment was stated. A cash payment of 25 per cent. or 30 per cent. was to be made upon delivery, and the balance was to be provided for in 60 consecutive monthly payments of a certain amount, each making the total agreed to be paid, a sum exceeding the stated value of the equipment and 8 per cent. interest thereon. The deferred payments were to be represented by so-called 'lease warrants,' dated in Ohio (with two exceptions, where they were dated New York), made by the railway company to the order of the equipment company, and all payable at the city of New York (with one exception), and referring to a contract of lease of even date therewith. In case of default in payment of any of the lease warrants, the lessor was to have the right to take immediate and exclusive possession, and to sell the same at public or private sale, and apply the proceeds to the payment of any and all installments of rent for the whole of said term of 60 months, whether the installments had fallen due or not, less interest at 5 per cent. per annum. If the proceeds were more than sufficient to pay the unpaid installments of rent, with interest and expenses, then the surplus was to go to the railway company; but, if there was a deficit, the railway company was liable therefor. If the installments were all paid, then the equipment, without further conveyance or transfer, was to become the absolute property of the railway company. The company defaulted on a number of the lease warrants, and in December, 1893, an extension agreement in regard to them was made. This agreement recites the failure of the railroad company to pay the lease warrants under the contracts, the forbearance of the equipment company to take possession, and its willingness to accede to the request of the lessee, and to grant, upon certain terms and conditions hereinafter set forth, an extension of time for the payment of all the said lease warrants outstanding and unpaid under said contracts, including those

past due and in default. The agreement provided that the equipment company would take up the outstanding lease warrants amounting to $116,338.39, and that the railway company would pay the equipment company, at its office in the city of New York, as rentals or otherwise, for the equipment, a cash payment of $5.857, and, in addition thereto, 60 consecutive monthly payments of $2,347.52 each, beginning February 20, 1894, and ending January 20, 1899, making in all, for the deferred payments, $104,851.20. The new lease warrants were dated Columbus, Ohio, and referred to the contract. The lease warrants under the earlier contracts were to be taken up and acquired by the equipment company, and held as security for the payment of the new one, and were to continue in existence, with all the rights under them, until the new contract was completed."

R. R. Rogers, for Mercantile Trust Co. and Metropolitan Trust Co. Judson Harmon, for Railroad Equipment Co.

Before LURTON, DAY, and SEVERENS, Circuit Judges.

LURTON, Circuit Judge, having made the foregoing statement of the case, delivered the opinion of the court.

The principal defense urged against these claims is, that they include interest in excess of the interest allowed by the law of Ohio, and that the railroad companies entering into said contracts were corporations created under the law of Ohio, and had no power to agree to pay more than 7 per cent. interest. The transactions evidenced by the several equipment contracts are nothing more than contracts for the sale of the equipment, the title being retained as security for the purchase money. The immense verbiage employed to give these schemes the semblance of a leasing and rental is in vain. Their true character cannot be disguised. Contracting Building Co. v. Continental Trust Co. (decided by this court November, 1900) 108 Fed. 1.1 The notes called "lease warrants" do not bear interest before maturity. If the "value" stated in the original contracts be regarded as the "price" for which the property was sold, these notes include interest in excess of 9 per centum per annum, and in the case of two of the contracts the interest exceeds 12 per cent. per annum. Is such a rate of interest permissible under the law of Ohio?

It is difficult to add anything to the opinion of Judge Taft construing the statutes of Ohio in respect to the powers of Ohio railroad companies to borrow money. The opinion of that very able judge is contained in the record and is reported in 93 Fed. 702, 704. Upon this matter Judge Taft said:

"By section 3287, Rev. St. Ohio, the defendant company was permitted to borrow money at a rate not exceeding 7 per cent., and to issue bonds or notes for the same, and to secure them by a pledge of its property or income. By section 3290 it is provided that the directors may sell or negotiate such bonds or notes at not less than 75 per cent. of par. It has been held by the supreme court, in the case of Junction R. Co. v. Bank of Ashland, 12 Wall. 226, 20 L. Ed. 385, that section 3290 (which was the first section of the act of the legislature of Ohio passed December 15, 1852 [51 Ohio Laws, p. 286]), was tantamount to a repeal of the usury laws as to such companies. It is said that this statement by Mr. Justice Bradley, in delivering the opinion of the supreme court in that case, was merely obiter dictum, and ignored the effect of section 3287. It is true that the question of usury was eliminated from the case by the holding that the contract was a New York contract, 147 C. C. A. 143.