Deford v. MacWatty

33 A. 488, 82 Md. 168, 1895 Md. LEXIS 112

• Court: Court of Appeals of Maryland
• Decided: December 11, 1895
• Status: Published

Opinion

Robinson, C. J.,

delivered the opinion of the Court. 0

The Court below was perfectly right, we think, in refusing to ratify the sale made by the Receiver in this case. Courts, for obvious reasons, always interfere reluctantly with sales of this kind or with judicial sales of any kind. And a sale made in strict conformity with the terms prescribed by the order or decree of the Court, will not as a general rule be set aside unless it plainly appears that the property was sold for an inadequate price, or unless there has been a mistake or surprise of some kind, or an omission of duty or misconduct on the part of the Receiver, or fraud on the part of the purchaser. The mistake or surprise, or omission of duty, or misconduct or fraud, such as will justify the interference of the Court in the rejection of the sale, will depend upon the facts and circumstances of each particular case. In dealing with all such questions, it must be borne in mind that sales of this kind are made by the Court through the Receiver as its agent, and made in behalf of the interests of all parties concerned. And in some cases it is out of the question, in the very nature of things, for the Court itself to know in advance the terms and conditions best calculated to put the property most advantageously before the public to the end that it may sell for its fair market value, and in such cases the Court must rely in a measure upon its officer, the Receiver having charge of the property, for advice and information. And if the Court shall be fully satisfied that the terms of sale prescribed by the order or decree are of such-a character as not to put the property fairly on the market, and in consequence thereof it has sold for a depreciated price, thereby affecting injuriously the interests of all parties concerned, the Court should not hesitate to set aside the sale and order a resale on better and more favorable terms. The purchaser in such a case has no just ground of complaint, because he knows that he acquires no title in the property until the sale has been ratified, and it is better, far better, that he should lose the benefits of a good bargain than that the parties in interest should suffer loss by reason of the improvident, and it may be unfair terms on which the preperty was sold. Objections to the terms of sale, it may be said, ought to be made by the parties in interest before the property is sold, but in some cases it may not be an easy matter to determine in advance how far and to what extent the terms prescribed may affect the sale of the property. The mere failure to make such objections would not in itself be a sufficient reason why the Court should ratify the sale, when it plainly appears that the sale was not fairly and properly made.

With these general principles to guide us, we come to the facts and circumstances. under which this sale was made. Maurice Gandy, a subject of Great Britain, was the patentee of a process for manufacturing a machine belting made of cotton duck, for which he claimed merits superior to leather, rubber and other belting used for mechanical purposes. In 1883 he formed a partnership with John MacWatty and John H. Phillips for the purpose of manufacturing this belting according to his patented process in the city of Baltimore. This partnership having dissolved, Gandy and MacWatty, on the 18th of May, 1885, formed a new partnership for the manufacture of the same belting under the name of the Gandy Belting Company. The articles of co-partnership provided for the payment to Gandy of a royalty of five per cent, on the gross sales of each year, and in consideration of that royalty the Gandy Belting Company was to have the sole right to the use of the Gandy patents in the manufacture of the belting. In less than a year after the articles were signed, upon a bill filed for the dissolution and winding up of the affairs of the partnership, Mr. Richard Cromwell was appointed Receiver of the assets and property ■of the Gandy Belting Company. He was at the time of his appointment and is now the president of the Mount Vernon Manufacturing Company, to which company the Gandy Cotnpany was indebted in a sum exceeding fifty thousand ■dollars for cotton duck supplied to it, and which was used in the manufacture of the patent belting. The business of the Gandy Company was carried on, and the belting manufactured and sold by .the Receiver from the time of his appointment in February, 1886, till July, 1894, a period of more than eight years, when he reported to the Court that the business since his appointment had been re-established •and put on a good basis, and that the property was then in as favorable condition for sale as it could be expected to be while in the hands of a Receiver, and suggested that it be sold as an entirety. Thereupon on the same day the report was filed, an order was passed by the Court adopting the precise terms suggested by the Receiver, directing him to sell at public auction all the assets of the Gandy Belting 'Company (exclusive of cash on hand), including the good will of the company, all machines, machinery, chattels belonging to the partnership, together with all manufactured goods in the hands of the Receiver or agents, and all raw materials and all debts payable to the company or to the Receiver, and all other property as the same shall exist at 'the time of the ratification of the sale.

In pursuance of this order, the Receiver sold the assets and property of the Gandy Belting Company as an entirety at public auction, the advertisement following the terms of the order, to Benjamin Deford, for fifty thousand dollars. To the ratification of the sale thus made a number of exceptions have been filed by parties in interest, some of which it is quite unnecessary to consider. One of the main and, in our judgment, fatal objections to the ratification of the sale is the fact that neither in the order prescribing the terms of sale nor in the advertisement or in any other way was any information given to the public as to the right of the purchaser to use the Gandy patents in the manufacture of the belting, upon the use of which the successful manufacture of the belt absolutely depended. To no one was this better known than to the Receiver himself. He had during the entire eight years of his receivership used the Gandy patents in the manufacture of the machine belting, and while so using them a bill was filed in the United States Circuit Court in Maryland by the Gandy Belting .Company, Limited, of England, the then owner of the patents, against him as Receiver, to recover royalty claimed to be due by him for the use of the patents, and to prevent the further use by him of said patents. Pending this suit the Mount Vernon Company purchased the Gandy patents of the English Company, paying therefor fifteen thousand dollars, and the Receiver still continued to use them in the manufacture of the belting. They were purchased by the Mount Vernon Company, he says in his testimony, in order that he might as Receiver “ continue the business” and which “otherwise might have been closed zip at any moment.” He knew then, it is clear, that the use of these patents by the purchaser was essential to the successful manufacture of the belting. In his answer to the bill filed by the Gandy Belting Company of England against him as Receiver, he claimed that the right to use the Gandy patents was part of the assets of the Gandy Company and subject to the claims of creditors, and would be a subject of sale in connection with the good will of said business, and that it was out of the power of Gandy or his assignees to deprive said creditors of their equity. And further, he says he is advised that the right to use said patents will also accompany the factory and good will of the Gandy Company into the hands of any purchaser to whom they may be sold for the payment of the debts of said partnership. And even if the said patent rights should not wholly and exclusively enure to the benefit of such purchaser, the right at least to use the very patented machines put into the partnership by Gandy and thus constituting part of its assets, must go with said machines, whenever sold and .disposed of in the winding up of the partnership.

And then in his answer to the exception filed by MacWatty to the ratification of the sale on the ground of inadequacy of-price, because no information was - given to the public as to the right of the purchaser to use the patents, he says “ with regard to the patents, it would seem sufficient to say, that the Court in disposing of the partnership assets can only dispose of what is contained in those assets. But the facts and circumstances of the case made it wholly unnecessary to make any provisions as to the patent rights.” * * * “ The principles of equity applicable under such circumstances show, as the Receiver is advised that the order of sale not only went to the utmost extent of the jurisdiction of the Court, but provided for an advantageous disposition of the partnership property.” Whát were the facts and circumstances that made it wholly unnecessary to make any provision in the order of sale as to the right of the purchaser to use the patents ? He knew the good will and business of the Gandy Company was utterly valueless, unless the patents could be used in the manufacture of the belting, for he says they were purchased by the Mount Vernon Company to enable him as Receiver to continue the business, and that without their use the business might be closed at any moment. And it is equally clear from the answers filed by him as Receiver, that he was uncertain what rights would pass to a purchaser of the good will of the business, and what would pass with the factory and machines. In one answer he says the right to use the patents will go with the good will of the business, whether carried on at the old factory or not, and then he says the only right which the purchaser would get, would be the right to use the very machines now in the factory. Under these circumstances we entirely agree with the counsel for the appellee, that it was vitally necessary for a purchaser to know whether he would be entitled to the use of the patents, and if so, on what terms, and whether this right was to be exclusive of a similar right in any one else. And we agree, too, that it was the clear duty of the Receiver, in view of the uncertainty which he knew existed in regard to this right to use the patents as shown by his testimony and answers, to have applied to the Court by which he was appointed for an order ascertaining definitely just what rights the purchaser would acquire to the use of the Gandy patents. And we cannot believe that the Court, if this matter had been properly brought to its attention, would have passed an order of sale without making a provision of some kind in regard to the rights of a purchaser under the decree. We agree, too, that the proper time at which this matter should have been settled was before the order of sale was passed, but the failure to have these rights ascertained at that time, is no reason why a party in interest may not avail himself of the objection when the sale comes before the Court for ratification.

The failure to have the rights of the purchaser thus definitely ascertained, affected most injuriously, as- the proof shows, the sale of the plant and good will of the business. As offered for sale by the Receiver, without any guarantee that the purchaser would have the right to use the patents, Mr. Phillips, who was himself a manufacturer of machine belting, says the plant and machinery was worth nothing more than so much old iron, and that he would not himself, nor would he have advised anyone else to have bid any more for it. And yet neither in the report of the Receiver suggesting the terms on which the entire assets and property of the Gandy Company should be sold, nor in the order of sale prescribing the terms and conditions of the sale, nor in the advertisement, nor in any other manner was anything said about the rights of a purchaser to the use of the patents, and without which the Receiver in his testimony says the business could not be carried on for a day.

But this is not the only objection on which the exceptants rely against the confirmation of the sale. Here was a sale of the plant and good will of a business paying annually a net profit of over ten thousand dollars, the cost value of the plant amounting to $36,458.48, together with the stock of merchandise in the possession of the Receiver and in the hands of agents, of the value of over $50,000, and of bills receivable and debts due the company aggregating nearly $35,000. And the proof shows that besides paying commissions of over five thousand dollars annually to the Receiver, and twenty-five hundred dollars a year to a manager, and all other expenses, there had accumulated in the hands of the Receiver, during the eight years of his management, a cash surplus of $50,000. And yet neither in the advertisement nor otherwise, was any information given by the Receiver as to the character and value of the property to be sold, nor of the extent of the business, the good will of which was part of the assets of the company. If competition was to be invited and the property brought to the hammer under the most favorable terms, then such information was absolutely necessary to enable bidders to form some judgment as to the value of the entire property. And accordingly the Providence Belting Company, in its first letter, dated 29th August, 1894, requests the Receiver to furnish particulars as to the estimated value of the property, and debts on same, if any, and then asks the pertinent question, “ What does the property for sale consist of?” And in reply, instead of furnishing the information and answering directly the inquiry, the Receiver contents himself with saying, “ that the particulars of the sale of this business are really contained in the advertisement,” and then says “ the entire property of this company as it may stand on date as advertised, with the exception of cash on hand, will be offered for sale; just what this will aggregate in amount it is at the moment impossible for us to say, as our books will not be closed officially until about the time of sale.” And in a second letter by the same company, it asks the Receiver as to the amount of sales, expenses and net profits for the past year. Now what was the reply ? The Receiver says he has never been required by the Court to make a statement showing the profit and loss of the business, and he is “ not in a position at the moment to render officially a public statement such as you request.”

Then again, Mr. Walker, who came all the way from Chicago for the purpose of getting information as to the assets and property of the Gandy Company, writes on his return home, October ist, saying, “what we desire to know is the exact amount of the assets, including plant, machinery, outstanding accounts, and all other assets that will be sold at the Receiver’s sale, as ■ also the amount of net sales per annum for the last two'years, and the amount of profit from the business during that time.”

Now the proof shows that the Receiver had at his command all the information necessary to have answered these inquiries satisfactorily. While withholding the information from the Providence Belting Company and Mr. Walker, he furnishes by his letter of Sept. 13 this information to the Gandy Belting Company, Limited, of England. To this Company, he says, the profits for the past six years have averaged $10,000 per annum, “the books will show more profit;” with this knowledge on his part as to the annual profits, he declines to give this information in response to direct inquiry from the Providence Belting Company, and also fi;om Mr. Walker.

Now, what was the result of this failure on the part of the Receiver to furnish the information thus requested as to the character and value of the property which he had advertised for sale, information which any prudent owner would have been only too glad to have given in regard to his own property. The proof shows that the only two bidders for this valuable property, paying more than ten thousand dollars a year clear profits, were the Mount Vernon Company and Benjamin Deford, the latter becoming the purchasers. And it further appears that besides Mr. Deford, the ostensible purchaser, the other parties interested in the purchase were Mr. Kennedy Cromwell, a son of the Receiver, and the manager of the Mount Vernon Company, of which his father was the president, and the Boone heirs, nephews and nieces by marriage of the Receiver, all of whom are stockholders in the Mount Vernon Company, and one of them, Mr. Kennedy Boone, being also a director.

But it is unnecessary to further consider the exceptions relied on against the ratification of this sale. The counsel for the exceptants has made out quite an elaborate statement for the purpose of showing that the property sold for an inadequate price. That it sold far below its market value, and that this depreciated price was caused by the failure on the part of the Receiver to put it fairly and advantageously on the market, there cannot be any question. We do not, however, rest our judgment on mere inadequacy of price, but on the ground that there has been a plain omission, misconception or neglect of duty, call it what you please, on the part of the Receiver, in the sale of this property, and in consequence of which it sold far below its fair value.

We deem it proper to add, that we cannot approve of so much of the order of the Court below as directed the Receiver to sell' at public auction the bills payable and all other debts due the company. This indebtedness amounted to over thirty-five thousand dollars, scattered all over the country, and no bidder could form even a probable estimate as to the value of these debts. And besides, the purchaser was to get only such debts as remained uncollected by the Receiver at the time of the ratification of the sale. How was it possible for anyone to tell what amount would remain uncollected at some uncertain time in the future. The better course was to have directed the Receiver to collect the outstanding indebtedness and to account for the same as part of the assets of the company.

(Decided December 11th, 1895.)

Order affirmed with costs.