Wesson v. Chapman — 58 N.Y. St. Rep. 252

Majority

p. 252

Daniel B. Wesson, Suing for the Benefit of Himself and Other Creditors, similarly situated, of George D. Chapman, as Receiver, etc., Resp’t, v. George D. Chapman, as Receiver of the Lackawanna & Pittsburgh Railway Company et al. In the Matter of the Claim of R. Floyd Clarke, as Assignee for the Benefit of Creditors of, etc., et al., App lt, v. Same.

(Supreme Court, General Term, Fifth Department,

Filed April, 1894.)

Headnote

1. Mortsaee—Foreclosure—Resale.

On a motion for a resale in foreclosure proceedings, mere inadequacy of price is not a ground for such relief, unless it is so great as to shock the conscience of the court and raise the inference of unfairness or fraud, or unless there are circumstances of mistake or surprise.

2. Same.

The general rule is that such a resale will not be ordered upon an offer to increase the price without the support of some special circumstances in aid of it.

3. Same.

Where but little benefit will result to the applicant from a resale, and the prejudice to the present purchaser as well as to the public may be considerable, a resale will not be directed.

Appeal by R. Floyd Clarke from orders of the Erie special term denying motion to vacate or modify judgment, denying motion to set aside the sale made pursuant to it and confirming the sale.

The history of the railroad company in question has not been financially fortunate.

In December, 1884, the Lackawanna and Pittsburgh R. R. Co. was operating a narrow gauge road from Clean to Angelica and a standard gauge R. R. from Belfast Junction to Perkinsville. It was formed by the consolidation of the Alleghany Central R. R„ Co. and the Lackawanna and Pittsburgh R. R. Co.

Prior to that consolidation the A. C. R. R. Co. issued its mortgage bonds amounting to $600,000, which were then outstanding. And the Lackawanna and Pittsburgh R. R. Co. had issued its mortgage bonds to the amount of $1,600,000. After the consolidation by supplemental mortgage secured the bonds. This was the situation when in Dec. 1884 the People commenced suit against the company to dissolve the corporation, and Chapman was appointed receiver. By order of the court made in January 1885 the receiver was authorized to issue his certificates to the amount of $100,000, to become the first lien upon the L. & P. R. R. Co. property and franchises. He issued certificates and sold

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ten of them of $1000, each—$10,000, to the plaintiff Wesson. Afterwards in February, 1886, the receiver was authorized to issue his notes to the amount of $50,000, also to be a lien prior to the mortgage bonds on the R. E. property. He did issue $45,000, of notes. He ran the E. R. until September, 1888. In the meantime Barse the holder of some of the mortgage bonds of the Alleghany Central R. R. Co. commenced an action to foreclose the mortgage on refusal of the mortgagee to bring it. And the Mercantile Trust Company the trustee to which the mortgage was made commenced an action to foreclose the mortgage of the Lackawanna and Pittsburgh R. R. Co. Chapman was appointed receiver. Decrees were entered in those actions and sales in execution of them were afterwards and in April, 1889, made of the property and franchises of the original companies and were purchased by a committee for reorganization. And it was perfected and the property conveyed to the Lackawanna and South Western R R, Co. This also embraced the Rochester, Hornellsville and Pittsburg E. R The L. & S. W. R, R Co. issued $600,000 bonds secured by its mortgage, of which $540,000 went to the Central Construction Company for certain specified purposes. The Construction Company operated the R. R. from August, 1889, to April, 1890, and the L. & S. W. R. R. Co. thereafter until in June following. The receiver’s certificates and notes outstanding remained a prior lien upon what was the property of the L. & P. R. R. Co. And the Wesson action was brought to foreclose such prior lien and for judgment directing sale of the property to pay with the proceeds the certificates and notes or so much of them pro rata as such proceeds would satisfy. He recovered judgment accordingly and on September 24, 1892, sale pursuant to it was made to John Byrne for $15,000.

Clarice and Culver, for app’lt; William, L. Many, for resp’t.

The motion to vacate or modify the judgment is founded upon the charge that it, as entered, did not afford to the holders of the receiver’s certificates and notes the benefit to which they were entitled. As has been observed the orders pursuant to which they were issued,gave them priority over the mortgage bonds previously issued, and that priority continued. This is not questioned. The certificates contained a provision that in case of a sale of the property and franchises of the R R. Go. by judicial proceedings or otherwise and it should not realize sufficient to pay the full amount of the certificates then outstanding the purchaser should assume such certificates, in each of the receiver’s notes was a similar provision. Hq provision to that effect Avas in the judgment pursuant to which the sale in question was made. The decree directed that out of the proceeds of the sale the referee pay first the costs, fees and expenses of the suit, and next the receiver’s certificates and notes or so much of them as the residue of the proceeds would pay.

The orders authorizing the issue of the certificates and notes so far as appears did not contain any such direction and whatever force it had was given by the certificates and notes themselves.

It probably was not contemplated when they were made that

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any judicial proceeding for the sale of the property would be founded upon them, but that it might be taken for that purpose upon the mortgages and such provision may have been put into the certificates and notes to emphasize their priority and to protect them from sacrifice in such a proceeding. In other words, that they should remain a charge upon the property against any purchaser at a j udicial sale founded upon any junior lien. They were so recognized in the decrees in foreclosure, upon which sales had been made. And in the reorganization, provision was made for their payment.

This action was brought by thé plaintiff not only for the benefit of himself, but of all other creditors of the receiver to enforce the lien of the certificates and notes, and for the purpose of realizing for their payment such proceeds as the sale would produce. It is difficult to see that the provision for assumption of them by the purchaser is applicable to an action and sale for such purpose.

The object of the proceeding was to vest a title in the purchaser free from the lien of those instruments. It would certainly be remarkable to suppose that it was within their contemplation that a purchaser at a judicial sale to foreclose the lien of the notes and the certificates would take the property subject to or assume them in case there was a deficiency of proceeds 1o pay those allegations.

¡Nor is it reasonably supposable that the foreclosure of such lien could effectually be had if the property failed to produce sufficient proceeds to pay them in full. And it would not be practicable to bid in the property for all the holders of the certificates and notes, as some might not assent to take such relation to it, and if they should it might embarrass the future use of the R. R. property and franchise for the most desirable purposes or for such as the public interest might require. Those are some of the reasons why the assumption provisions of those instruments do not seem applicable to a judgment in an action to foreclose the lien of them. And further it is represented by affidavit in opposition to the motion that the appellant Clarke appeared before the referee, was advised of the complaint, the proceedings and judgment, and no question was raised in respect to the judgment. It is also quite evident from what appears in the papers that the property could not have been sold for an amount equal to that of the certificates and notes "outstanding.

In the view taken the order denying motion to set aside or modify the judgment should be affirmed. In support of the motion to set aside the sale and for a resale the appellant alleges that it was made for' a price grossly inadequate and attended with circumstances of surprise. Mere inadequacy of price is not a ground for such relief unless it be so great as to shock the conscience of the court, and raise the inference of unfairness or fraud or unless there are circumstances of mistake or surprise. O'Donnell v. Lindsay, 7 J. & S. 523 ; Kellogg v. Howell, 62 Barb. 280 ; Gould v. Gager, 18 Abb. 32 ; Tripp v. Cook, 26 Wend. 143 ; American Ins. Co. v. Oakley, 9 Paige 259 .

The amount for which the sale was made appears quite small for a railroad, but it appears that most of the time of its operation

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it had been run at a loss and the affidavits in opposition to the motion tend to show that its value was in the old iron and steel to be taken and sold as such.

The only "offer in the moving papers to pay a larger price on resale is made in the affidavit of Mr. Post who says he will bid and give for the property if the same be sold by judicial sale free and clear of all incumbrance the sum of thirty thousand dollars.” This may therefore be deemed the price for which it would sell on a resale.

The general rule is such that a resale will not be ordered upon " an offer to increase the price without the support of some special circumstances, in aid of it. Lefevre v. Laraway, 22 Barb., 167 — 173.

The sale was advertised for September 23, 1892, at 10 A. M. Shortly before that time an order, made by Mr. Justice Beach,was served upon the referee in terms staying the sale until a future day when the plaintiff was required to show cause why it should not be further stayed during the pendency of the appeal from the judgment.

The sale was held open until 12.30 p. M. the next day. In the meantime, the order was vacated by the justice who made it, for irregularity in that it was obtained without the notice reqired by rule 67. And the sale was then made. The order seems to have been obtained upon application in behalf of the Central Trust Company of New York. The appellant Clarke was absent on vacation, and it does not appear that he knew anything of the order at the time it was obtained or vacated, nor does it appear that any person was deterred from being present at the sale by reason of the order, although Mr. Clarke in his petition states his belief that persons neglected to attend the sale to bid by reason of the order and its vacation.

The offer made to bid double the amount for which the property was sold, in view of the other circumstances, before referred to, has some force upon the application for a resale, and if it could, be granted without prejudice would be entitled to grave consideration upon the question. It may be observed that the certificates and notes outstanding with interest at the time of the sale amounted to $151,241.49, of which the purchaser held $185,-562.63, leaving only $15,678.86 held by others.

The claim of the appellant Clarke in them then amounted to $1,699.60. The costs and expenses of the action which the referee was by the decree directed to pay from the proceeds amounted to $7,485.43. If there should be a resale of the property for $30,000, the appellant would receive only about $160 more than he is entitled to from the proceeds of the sale already had. And it appears that the expense of a resale would exceed that sum. In view of the fact but little benefit would result to him from it, and the prejudice to the present purchaser, as well as to the public, might be considerable, as he stated a purpose to have the road equipped and extended at considerable expense, and that a resale would have the effect to delay the work, and as stated by him, he apprehends would render it difficult or practically impossible to

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raise the funds upon the plan already devised to rebuild, equip and extend the railroad as is contemplated. Many of the business men on the line of the road, by affidavit, express their confidence in the persons interested in the purchase and in their purpose to put the road in operation; and that the people there will assist them in accomplishing it. There seems, therefore, a public interest which may not be entirely overlooked in view of the fact that no substantial or inconsiderable benefit only would likely result to the appellant from a resale of the property. Then he is not free from the imputation of laches. He knowing that the property was to be sold by virtue of the judgment took no action - whatever, so far as appears, to seek to have it bring any larger sum than it was sold for, and. in fact gave no attention to the matter. There were several persons present at the sale and eight different bids made when the highest one was reached. The sale seems to have been fairly conducted by the referee, and it is stated in the affidavits that the purchase was made in the name of the jiurchaser in good faith and for the purpose on his part and that of his associates, of putting the railroad in operation. Upon all the facts as represented in the papers, on which the motion was heard and to which it is deemed unnecessary to further refer, we think the disposition of it as made at special term was fairly justified.

The orders appealed from should be affirmed, without costs.

All concur.

Cases cited

Kellogg v. Howell 62 Barb. 280 N.Y. Sup. Ct. 1872-03-19 p. 254
Tripp v. Cook 26 Wend. 143 N.Y. Sup. Ct. p. 254