BARRY v. M1ssoUR1, K. & rr. RY. co. 5
the company, and to pay off certain other mortgage bonds and the
creditors at large of the company. The holders of the first mort-
gage bonds, the holders of junior mortgage bonds, and the creditors
at large, together with the railway company, were parties tothe agree-
ment. By the terms of the agreement the holders of the first mort-
gage bonds were to accept the income bonds which were to be created
at 80 cents of their face value, in payment of their unpaid interest;
and agreed to reduce their interest for the ensuing six years to 4 per
cent. per annum for the nrst three years, and to 5 per cent. for the
last three years, and to accept the income bonds in payment of the
difference between the original and reduced rate of interest. The
agreement also provided that if at any time the surplus earnings of
the railway company should be more than sufficient to pay the in- `
terest on the first mortgage bonds at the reduced rate for the six
years, and in addition thereto the interest upon the income bonds, the
excess of the net earnings should be applied to increase the payment
of interest on the first mortgage bonds up to the full amount origi-
nally payable thereon.
Unquestionably the bondholders are entitled to an account of the
earnings, and the sums charged against the earnings, for each six
months from the date of the mortgage, if the proofs justify the con-
clusion that surplus income has been earned after deducting all pay-
ments or liabilities which were legitimately charged against the income
during the period of the earnings. The inquiry is whether there is
any remainder of earnings after the payment of operating expenses,
repairs, prior interest, taxes, etc. It is not essential that the com-
pany shall have actually paid the disbursements which arise from
these sources during the period of the earnings; it suffices if the com-
pany has become liable to pay them, although the time of payment
may have been deferred. The expenses and liabilities _incurred for
the maintenance and operation of the road, and for interest on prior
liens during each interest period, are to be charged against the in-
come for that period. The term "net earnings" is defined in the
opinion of the court in the case of Union Pac. R. Co. v. U. S., 99 U.
S. 420, as follows: "As a general proposition, net earnings are the
excess of the gross earnings over the expenditures defrayed in pro-
ducing them, aside from, and exclusive of, the expenditure of capital
laid out in constructing and equipping the works themselves." The
expenses defrayed or incurred in producing the earnings for a given
interest period are the only charges which can enter into the income
account for that period, except the payment of interest on prior in- _
cumbrances, as stipulated by the terms of the mortgage. Applying
this rule, it is preposterous to assert that the company could properly
charge against income for any period during the life of the mortgage
a payment or a liability incurred on account of old indebtedness exist-
ing before the mortgage was created, or arising from a loss incurred
by the sale of bonds issued to pay off old indebtedness. It might,