Raht v. Attrill — 4 N.Y. St. Rep. 854

Majority

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Charles Raht, as Ex’r of Julius E. Raht, deceased, Pl’ff, v. Henry Y. Attrill et al., Deft’s.

(Supreme Court, General Term, Second Department,

Filed December 14, 1886.)

Headnote

1. Mortgage—Receiver of corporation—Power of court to direct him to issue certificates to pay wages due employees.

A receiver appointed in an action to foreclose a mortgage on the property of a certain improvement company, is not authorized to issue certificates to. pay claims of employees of said company for labor performed before his appointment.

2. Same—Expenses must be paid out of income.

It is only the income of the property which courts apply to the payment of current expenses before the mortgage debt is paid, and where there are no earnings there are no receiver’s certificates which have a right to payment before the mortgage.

8. Same—Deed of trust—Power of trustee to consent.

Where the trustee in a deed of trust, who was at the same time a stockholder and director in the company, was not a party to the action when the receiver’s certificates were ordered to be issued, he Will not be held to have consented to violate his duty to the bondholders, even if the trustee could represent the bondholders for such a purpose.

Appeal by certain claimants upon the surplus money in the above entitled action from so much of the order made at a special term held in Kings county, and entered and filed in Queens county, confirming the report of the referee as to said surplus moneys, and directing the distribution thereof, etc.:

In February 1880, The Rockaway Beach Improvement Company, limited, was organized under the business corporations’ act, chapter 611, Laws 1875. It bought over one hundred acres of land at Rockaway Beach, subject to a purchase-money mortgage for $72,000, made by Henry Y. Attrill to one Littlejohn. Littlejohn assigned to one Raht, whose executor brought this action of foreclosure. On April 1, 1880, The Rockaway Beach improvement Company, limited, executed a mortgage on the same property to William K. Soutter, trustee, to secure the payment of seven hundred bonds of $1,000 each. Twenty-six of these bonds were disposed of for value, the balance pledged at about fifty cents on the dollar, as collateral for loans to the company. The company became embarrassed, and on August'

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•2, 1880, Henry T. Attrill, a large stockholder, began an action against the company on behalf of himself and ah other stockholders who should unite with him, praying for the appointment of a receiver and the dissolution of the company.

The complaint alleged the organization of the company February 16, 1880, capital stock §700,000; the pledging of $700,000, first mortgage bonds, at fifty cents on the dollar, to secure loans to the company; that there was due for materials $100,000; on contracts for furniture, $130,000; for wages, $60,000; that the men had refused to work; that one-half had left, the others Avere working on promise of payment; that large sums will be necessary to complete the work; that no provision has been made therefor, nor to meet maturing loans on bonds, which will be sacrificed; that delay ensues, depreciating the value of the property; that plaintiff has been unable to get a statement of the affairs of the company, though willing to assist it by large advances; fears that a continuance of the then improvident management will result in serious loss to plaintiff and the company; that the hotel and land are the only resources for the payment of the company’s debts; that in its present condition it is wholly unproductive; that the company is insolvent, or nearly so; that this can only be prevented by intervention of the court and appointment of a receiver; and prays for dissolution of company and appointment of a receiver. Upon this complaint alone Mr. Justice Donohue made an order, August 2, 1880, appointing John A. Bice receiver of all the property and effects of the Bockaway Beach Improvement Company, limited, to take possession of and administer the same for the benefit of all concerned.

On the 3d of August, 1880, the same judge made an ex parte order on the affidavit of Benjamin E. Smith, the general manager of the company, authorizing the receiver to borrow $100,000 to pay wages due the workmen and issue certificates therefor, and also to borrow $10,000 to purchase materials necessary to complete the hotel

The affidavit of Mr. Smith was the basis of all the orders for the issuing of receiver’s certificates. It is dated August 3, 1880, and is in substance as follows: The company is in process of building a hotel, having nearly two thousand men employed. Owing to delay in paying, they all, a short time ago, refused to'work, one-half left; about eight hundred were then working under promise of payment; that no provision has been, or can be made, for payment by the company; that if not paid the men will stop work, and this deponent fears a serious disturbance; that it is imperative that the receiver in this cause be authorized to borrow $100,000 to pay the workmen, which can be raised on

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receiver’s certificates. On the 11th of August, 1880, an ex parte order was made by the same judge, authorizing the issue of receiver’s certificates to the amount of $110,000 to be paid to the employees of the company, said certificates to be a first lien upon all the property of the company, and prior to the mortgage to William K. Soutter, trustee. A similar order was made August 11, 1880, limiting -the amount of certificates at $130,000. Under this Older Dresell, Morgan & Co., Morton, Bliss & Co., and Hatch & Peters took $110,000 receiver’s certificate at par for cash, and they have been awarded the surplus moneys arising out of the sale of the mortgaged premises in preference to the holders of bonds secured by the prior mortgage to W. K. Soutter, trustee. The legality of this decision is the question brought up for review. In addition to the papers before the court, and on which alone it acted, the holders of the receiver’s certificates sought to sustain their claim by introducing extraneous evidence, to the effect that alter the appointment of the receiver and the making of the affidavit of August 3d by Mr. Smith, the workmen were in a state of riot, threatening to fire and destroy the hotel. They refused to take the receiver’s certificates, and mobbed three or four men who had done so. That from this cause the property was in great peril. At a mass meeting of the workingmen they consented that a Mr. McDonald should negotiate $110,000 of receiver’s certificates, which he subsequently did, to Drexel, Morgan & Co. and the others, as above stated. There is no evidence- that this state of facts was brought to the attention of the court so that it could exercise its discretion in the matter. This evidence was admitted over appellant’s objection, and forms the basis of a finding in favor of the receiver’s certificate as an equitable lien.

Clarence D. Ashley, for app’lts Attrill and Marache; Thomas M. Wheeler, for app’lts Taylor and Hatch; Leivis Sanders, Att’y, in person; Herman Aaron, for app’t West-house; Work & McNamee, for app’lt Daley; Roswell W. Keene, for app’lt Barberie; Edward S. Clinch, for app’lts Browne et at. and De Grauw, receiver; Vanderpoel, Oreen & Cuming, for app’lt Soutter, as trustee; Strong & Cadwalader, for resp’ts Morton, Bliss & Co. et al.

One of the principal points involved in this appeal, has since the argument been decided by the court of appeals in the case of Metropolitan Trust Co. v. Tonawanda R.R Co., 2 N. Y. State Rep., 69. In that case as in this the special term made an order that certain receiver’s certificates given for labor performed before the appointment of the receiver, should be preferred to a mort

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gage lien which existed upon the property. The court of appeals held that there was no principle upon which the claim of employees for labor performed before the receiver was appointed, could be so extended as to impair or postpone the lien of the mortgage. The court of appeals in its opinion calls this class of creditors “mere general creditors with no special equities,” as against prior hens.

The present case differs only in this, that instead of an appeal being taken from the order authorizing the certificates the question is first raised upon the reference as to the distribution of the surplus moneys under the purchase money mortgage. The appellant claims that the certificates awarded preference on claims “with special equities.”

The property was in danger from the passions of unpaid workmen and these certificates were used to prevent its destruction. The court of appeals decision seems to have been made upon a different théory.

In that case the claim was made that the property had been enhanced by the labor of the workmen which was included in the mortgage. The court says in reply to this “it is easy to see that under such a plea the lienor might be entirely defeated and the foreclosure of his mortgage rendered inoperative and useless. Such a result except upon his consent the court have no power to sanction.”

The next question is whether the order was consented to in such a way as to be a formal estoppel against the mortgage lien. The difficulty here principally arises from the fact that Soutter is at once stockholder and director in the company and trustee for the bondholders. As one of the directors he consented to the action to dissolve the corporation, to the appointment of a receiver and he approved of the orders authorizing the certificates in question. This is fairly inferable although he denies in his testimony that he knew of the proceedings except from the publication of the proceedings from time to time in the newspapers. No decree was entered and as he was trustee there is no consent. When the certificates were authorized the trustee was not a party to the action. To hold under this inconclusive proof that the trustee as trustee consented to violate his duty to the stockholders under the mortgage would not be warranted even if the trustees could represent the bondholders for such a purpose. After a careful examination of the case we think that the weight of authority is not for an order which sets aside liens to the advantage of a general creditor. That it is only the income of the property which courts apply to the payment of current expenses before the mortgage debt is paid. That it is not right to entirely displace the lien. Burnham v. Rose, 111 U. S., 782 .

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There were no earnings and there are no receiver’s certificates which have a right of payment before the Soutter mortgage including the Daily certificates.

The order confirming the report should be reversed and the report set aside and order of reference vacated, costs to the trustee appellant out of the fund and the respondent on his appeal as to the Daily claim, out of the fund.

Dykman, J., -concurs; Pratt, J., nut sitting.