Central Trust Co. v. Mehring Co. , 154 Md. 477 ( 1928 )

It would seem that the reasons for the writer's only difference with the conclusions expressed in the opinion of Judge Offutt, in which Judge Sloan concurred, should be stated.

The receiver in the instant case was appointed with authority to continue the operation of the business of a failing corporation, which was not engaged in any public service. On the day of the decree the receiver was empowered by an order of the chancellor to borrow the sum of five thousand dollars, and to issue therefor five receiver certificates, bearing interest and payable at a fixed maturity. The order specifically provided that the "certificates are hereby created a first lien on all and singular the funds coming into the hands of said receiver from the operation of said plant and said business of the American Foundry and Manufacturing Company, and on all other assets of said company, not subject to existing liens." In every one of the four orders of court passed successively on December 16th, 1925, January 7th, July 3rd, and July 30th, 1926, the identical provision cited is found.

The affairs and property of the involved corporation were in the custody of the law, and the faith of the court was pledged to those who became the holders of these certificates according to their plain import. Every one dealt with the receiver charged with the knowledge that the receiver was but the arm of the court, subject to its direction and control, and without power to act except upon its authorization. Any one so dealing did so at his own risk with respect to the power of the court to create priority among those furnishing money, material, or labor during the administration. Consequently, no injustice is done him if the exigencies of a receivership required the issuance of certificates with a lien upon receipts or property in the custody of the court. And, in the language of the Supreme Court of the United States in Kneeland v. Luce, 141 U.S. 508, "Where such certificates are issued, and the court, as in this case, impresses upon them a preferential lien, good faith requires that its promise should be redeemed, unless, perhaps, it is shown that the issue of the certificates was actually fraudulent." So, where such certificates are issued successively, but in pursuance of a common purpose, and with a like provision with respect to priority, and every one for a valuable consideration, they are all to be treated as being of equal dignity and none to have any preference over another, but every certificate of any issue to have priority according to its terms over the claims of those who have dealt with the receiver as general creditors. In short, the creditors holding the certificates giving a preferential lien would constitute one class, and the general creditors of the receivers not holding such certificates would form a second class; and the claims of every member of each class would share equally in the fund available for such class. This method of distribution assures to the member of each class the application of the doctrine that equality is equity, and prevents any possible repudiation of the court's express promise of a preferential lien.

If, during the receivership, A advanced money to meet the pay roll, B supplied coal, and C raw material, every one would share equally according to his claim, because there would be no priority among them, but if X, Y and Z held receivership certificates which the court had declared to be a prior lien on the receipts of the receivership, then X, Y, and Z would be paid in full, if the receipts were sufficient, and the claims of A, B and C would be paid pari passu out of the residue of the receipts, if those were insufficient to pay in full. By this method equality is assured among the members, respectively, of each of the two classes of creditors, and the promise of priority by the court is fulfilled. But if the receipts were not enough to pay both classes in full, and the two classes shared in the whole fund proportionately to their respective claims, then the promise by the court of a preferential lien to X, Y, and Z would be repudiated and the difference between preferred and unpreferred creditors would arbitrarily be ignored. Again, still assuming a deficit, if X and Y held receivership certificates issued on December 16th, 1925, and Z one issued on January 7th, 1926, and B had furnished coal after December 16th but before January 7th, and, afterwards B supplied another lot of coal and C a quantity of iron, then, if B's claim for coal, which he had sold between the dates of the issue of the two certificates, be subordinate to the first certificate, but either preferred to or equal with the second certificate, it would follow that the claim for the second lot of coal delivered by B and the iron purchased of C would be postponed not only to both issues of certificates, but also to the demand of B for his first delivery of coal. Thus it would happen (a) that the pledge given by the chancellor that the certificates would be prior liens would be violated either by deferring the second certificate to the claim of B for his first delivery of coal or placing this claim on an equality with the second certificate for the purpose of participation pari passu with it in the distribution; and (b) that equality among the creditors of the same rank would be destroyed, since B's debt for the first load of coal would take precedence in distribution over B's item for the second load of coal and C's demand for the iron.

It is unnecessary to multiply these illustrations, which demonstrate that to give priority when it is promised within the power of chancery is the only method which at once maintains the integrity of the court's agreement and assures to those holding business transactions with the receiver the greatest measure of equality among receivership creditors, accordingly as they are of one class or fall into classes of preferred and unpreferred creditors. This view is in harmony with York Mfg. Co. v.Hoblitzell Nat. Bank, 118 Md. 505, 509, 511, and is supported byLewis v. Linden Steel Co., 183 Pa. 248; 2 Tardy's Smith onReceivers (2nd Ed.), secs. 569, 575, 577, 578, p. 1640, n. 1;Lockport Felt Co. v. United Box etc. Co., 74 N.J. Eq. 686, 694, 696; Porch v. Agnew Co., 66 N.J. Eq. 232.

Nor is Homer v. Balto. Refrigerating etc. Co., 117 Md. 411, in any way opposed to the position taken in this opinion. This case did not involve the preferential lien created by receiver's certificates, but the question whether, under the circumstances that after default but prior to a receivership of a mortgaged property and while the financial affairs of its corporate owner were in charge of representatives of the bondholders and the continuance of the operation of the corporation was for the benefit of the holders of the bonds which were secured by a mortgage or deed of trust on the real and leasehold property of the corporation and their rents, issues and profits, the income arising from this operation should, when collected after the receivership, be appropriated to the payment of the mortgage indebtedness or to general creditors of the corporation rather than to one supplying coal to enable the business to be carried on for the benefit of the bondholders during the one month immediately preceding the receivership. The mortgage indebtedness was a lien upon both the corporate real and leasehold property and the rents, issues, and profits therefrom, and the mortgage deed conferred, after default, the right upon the trustee to enter upon and operate the plant "receiving all income and revenue and, after deducting the expenses of use and operation * * * apply the remaining net income and revenue, without preference, priority or distinction to one bond or another, to the payment of the bonds secured by the mortgage in the method and order prescribed therein." The mortgage trustee had not entered into actual possession of the property nor had a demand been made for the rents, issues, and profits until the receivership, so the court, distinguishing between rents and income or profits, held that the gross income earned before the receivership, but later collected through the receivership, would not be impressed with the mortgage lien and that, while as against unsecured creditors the bondholders would be entitled to the extent of their deficiency to share pari passu with the unsecured creditors in the distribution of the profits or earnings made before the intervention of the mortgagee, the rule did not apply as against the coal dealer, as he was not an unsecured creditor, the court saying:

"He is taken out of that class of creditors (to which for example Mr. Tome belongs as respects his note for money loaned) by the rule giving a current supply creditor an equitable lien for coal furnished to keep the company a going concern, upon his application for that relief, and his equitable lien upon the earnings before intervention by the mortgagee, is as effective against ordinary unsecured creditors as it is against the mortgagee."

This broad statement is not of general application, but is limited by its context and the subject matter of the opinion to a special class of creditors of a particular kind of corporate or individual enterprise, and, unless both the creditor and the enterprise possess the elements prescribed, the rule announced has no application. The case of Homer v. Balto. Refrigeratingetc. Co., supra, was an application of a doctrine which, in general terms and without all its qualifications, may be stated to be that, in the case of a public or quasi public service corporation or enterprise, the current expenses, which are incurred in the ordinary course of its business, and are necessary for its maintenance, and arise within a reasonable time before a receivership, are given preference over recorded liens and general unsecured creditors in the distribution of income which was earned, but not paid, before the receivership. Without reference to other conditions for the application of this rule, it is necessary that the claim of the creditor be for current expenses and against a public or quasi public service corporation. The doctrine is an exception to the general rule of the common law that all unsecured creditors are entitled to have the fund applied pro rata to the satisfaction of their several claims without preference or priority. As was said in Warburtonv. Perkins, 150 Md. 304, 310, "The severity and rigidity of that rule has been modified, however, in cases where the court has been called upon to deal with the claims of creditors who have furnished current supplies to a corporation dedicated to a public service, to the extent that it has given such claims a preference over other unsecured claims in the distribution of funds arising from the collection of service charges during the receivership." And, according to this decision, Homer v. Balto. Refrigeratingetc. Co., supra, extended the rule "to all quasi public service corporations." Page 311. The tendency of the courts has been to qualify rather than to enlarge the scope of this principle, and no case in Maryland supports its application to a corporate or private enterprise which is not affected by a public service or use. In Homer v. Balto. Refrigerating etc.Co., supra, the corporation was a heating and refrigerating company which used the beds of the streets of Baltimore under a franchise therefrom for distributing through mains and pipes laid under the street the heat it generated to supply the public, and so it was held engaged in a public service, and the creditor, having supplied it with fuel for one month prior to the receivership in order to enable it to carry on its business, was a current supply creditor, and therefore all the essentials were present for the application of the exception to the general rule. As the corporation in the instant case was one of a wholly private nature, the language quoted from Homer v. Balto.Refrigerating etc. Co., supra, has no application.

The certificates in the instant case were authorized by the chancellor for the purpose of preserving the property and good will of the involved corporation for the general benefit of all parties in interest, but all the facts upon which he acted do not appear from the record so as to bring them before us for consideration; and, manifestly, what we are about to say is not in any sense a comment upon what was done in the cause before the lower court, but is simply a repetition of certain principles for guidance in future litigation.

In the case of corporations or industrial enterprises which are engaged in private business, receivership certificates, especially those which give a preference, should rarely be resorted to, and then only after careful consideration and a reasonable assurance of their payment; and, if issued, the chancellor, through reports from the receiver and other available sources, should keep in close contact with the affairs of the receivership, in order that the certificates or their proceeds be properly applied, and that the receiver assume no obligations beyond available present or prospective resources when reasonably assured. The outcome of a venture in the operation of a private business through a receiver is so precarious that great caution in its authorization, and unremitting vigilance in its supervision, should characterize the action of the court. It should be added that the propriety of the issuance of receivership certificates is a matter for review, and must depend upon the facts and circumstances of each particular case. 2 Tardy's Smith on Receivers (2nd ed.), sec. 561.