First National Bank of Laramie v. Cook

76 P. 674, 12 Wyo. 492, 1904 Wyo. LEXIS 16

• Court: Wyoming Supreme Court
• Decided: April 25, 1904
• Status: Published

Opinions

Corn, Chief Justice.

M. E. Stowers, one of the defendants in error, obtained a judgment, in the District Court of Albany County, against the firm of Bird Bros, for the sum of $1,186 and $9.50 costs. An execution was returned wholly unsatisfied and, upon the motion of the judgment creditor, Thomas Bird, the managing partner was ordered to appear and answer concerning the property of the firm, as provided by the statute in regard to proceedings in aid of execution. Upon his answer, the court appointed the defendant in error, Alfred Cook, who was then and is now Sheriff of the county, a receiver of the property of the judgment debtor, and he proceeded to take into his possession and control some fifty thousand dollars’ worth of property, consisting of 4,437 acres of land, 341 tons of hay, 31 head of horses, 669 head of cattle and a large amount of ranch machinery and implements. It is alleged that all the property is covered by mortgages and other liens to its full value and is insufficient to pay the indebtedness secured upon it. And this seems to be conceded by the judgment creditor, but he insists that the liens, or some part of them, are fraudulent. The receiver reported that he was without funds and, upon his application, the court made an order authorizing him to sell fifty head of fat cattle at private sale, in order, as stated in his application, “to create a fund for the maintenance and care of the said property, the marshaling of assets and liabilities thereof, for the payment of services of custodians and conservators employed by him wherever necessary, to secure abstracts of title and report on all existing liens on the same.”

The lienors, the plaintiffs in error here, were not made parties to this action and, so far as we can discover from the record, received no notice from the judgment creditor, or the receiver, of these proceedings. The)'-, however, intervened by petitions setting up their claims, alleging that the property was insufficient to pay them, and praying for leave to enforce their liens and that the receiver be ordered to turn over possession of the property to them for that purpose. These applications were denied by the court and the matter of their liens referred to the receiver with directions to examine into them and report his recommendations to the court. The lienors filed their petitions in error in this court, asking at the same time for a stay of execution, which was granted, an undertaking for the purpose being filed as required. They also made application for a writ of prohibition restraining the District Court from further proceedings with reference to the encumbered property. An alternative writ was also allowed, and the matter was submitted and is now pending before this court upon a demurrer to the petition. In the meantime, the receiver had disposed of the fifty head of cattle at private sale for the agreed price of $1,125, the real value as alleged being not less than $1,750.

It is apparent that the proceedings in this case were instituted under the provisions of Chapter 2, Division 3, of Title 7, of our statutes, entitled, “Proceedings in Aid of Execution.” And the substantial question presented upon this record is whether it is competent for the court to take under its control the property and business of the partnership of Bird Bros, and administer and conduct the same by its receiver, as has been attempted in this case.

In the case of railroads, and like properties, courts of chancery exercise jurisdiction to continue the operation of the business, and mortgage and other liens are often subordinated to the charges and expenses of the receivership. But this is upon the specific ground that the public interest and convenience require that the business should be continued, and the reason does not apply to the property of individuals and to merely private enterprises, charged with no such duty to the public. In High on Receivers, Section 480 (3d Ed.), the author says: “It is important to bear in mind, in considering the subject of receivers in partnership cases, that it is not the province of a court of equity to conduct the business of a co-partnership, and while a receiver may be directed to continue the business a sufficient length of time to enable the court to determine the rights of the parties litigant, it is not the province of the court to become the superintendent and manager of the private business of parties.” And in Allen v. Hawley, 6 Fla., 164, in which the authorities upon the subject were considered in some detail, the court say: “As it is not the province of the court to create a partnership, so it is equally foreign from its functions to conduct its business. It never could have been contemplated that a court of chancery should become the superintendent of the private affairs of individuals. Its legitimate province is to adjust the rights and settle the disagreements of parties growing out of such transactions.” Cases have arisen where the business of a partnership has been continued temporarily pending litigation with reference to the rights of the parties, but only for special reasons such as the preservation of the good will, so that its full value may be realized by the partners at a final sale and to prevent great loss to the parties. (High Receivers, Sec. 481.)

It is equally well settled that, except in the special cases and for the special reasons above referred to, mortgage, and other liens, cannot be subordinated to the charges and expenses of the receivership. Generally the receiver takes the property of the debtor subject to all liens attaching thereto at the time of the appointment. (Smith Receiv., Sec. 68.) As stated in the case of Hotchkiss v. Makeel, 87 Ill. App., 628: “The power to subordinate the lien of a mortgage to the charges of a receiver has been frequently-exercised by equity courts in recent years, in the case of mortgages of railroads, and other properties impressed with a public duty, and in one case (Beckwith v. Carroll, 56 Ala., 12), and probably in other analogous cases where growing crops were involved, the receiver was considered to have created the very property over which the receivership extended.

“But, wherever exercised, it has been because of the peculiar character of the property. A mortgage is a contract obligation, and is as sacred as any other contract; and anything that destroys or impairs its lien destroys or impairs a contract.

“The reason that supports the excepted cases of railroads and some other business properties is that, they being charged with a duty to the public that is superior to any private obligations, the mortgage owner has knowledge when he invests that his security is liable to be displaced in favor of that first obligation. In no well considered case that we know of has the power been exercised to the subversion of the right of a prior mortgagee of purely private property, unless for very peculiar reasons.”

Even in the case of railroads, the power is exceptional, and the Supreme Court of the United States say upon the subject: “Upon these facts we remark, first, that the appointment of a receiver vests in the court no absolute control over the property, and no general authority to displace vested contract liens. Because in a few specified and limited cases this court has declared that unsecured claims were entitled to priority over mortgage debts, an idea seems to have obtained that a court appointing a receiver acquires power to give such preference to any general and unsecured claims.” And they add: “It is the exception and not the rule that such priority of liens can be displaced. We emphasize this fact of the sacredness of contract liens, for the reason that there seems to be growing an idea that the chancellor, in the exercise of his equitable powers, has unlimited discretion in this matter of the displacement of vested liens.” (Kneeland v. American Loan Co., 136 U. S., 97; International Trust Co. v. United Coal Co., 60 Pac. (Colo.), 621; Merriam v. Victor Min. Co., 60 Pac. (Ore.), 997.)

These principles, applied to receiverships generally, are specially applicable to receiverships under our statute with reference to proceedings in aid of execution. From the very nature of the proceedings, the scope of the receivership is very narrow. In this case the suit in which the appointment is made was brought for the recovery of money due from the defendant to the plaintiff upon a promissory note and for ,no other purpose whatever. None of the grounds upon which the. interference of courts of equity by the appointment of a receiver is based are stated, or attempted to be stated, and the mortgagees and other lienors are not made parties. The statute, under and by virtue of which the appointment is made, provides a summary method of discovering property subject to the plaintiff’s execution and applying it to that purpose when discovered. No other purpose or object is discoverable in its terms, and the taking over and conducting of the defendant’s business, the marshaling of liens and the settlement of disputed titles are foreign to the proceedings. As said by the Supreme Court of Ohio, from which state our statute is taken: “In this summary proceeding, disputes between the debtor and third persons cannot be settled, nor can the collection of claims be enforced by an order of payment and attachment. When there are such claims to be collected, the appointment of a receiver is the proper course, who, if payment be not made, will resort to the proper remedies.” (Edgarton v. Hanna, 11 O. St., 324.)

While the statutes of the various states providing for such proceedings differ in their details, certain general principles applying to the appointment and powers of receivers, in such cases, are well settled. As already mentioned, existing liens are not displaced or affected by the appointment. And when property of the judgment debtor is in the hands of a third person, under a valid transfer, or where the debtor has placed on such property a bona fide lien or incumbrance, the receiver’s possession is subject thereto, or in other words, as to such property the receiver succeeds to such rights only in such property as the judgment debtor had at the time of his appointment. (Smith Receivers, 154.') It is a summary proceeding and disputes between the debtor and third persons cannot be settled, nor can the collection of claims be enforced by an order of payment and attachment. The receiver must resort to his appropriate action for the purpose. (Schloredt v. Boyden, 9 Wyo., 392; Edgarton v. Hanna, 11 O. St., 323; High Rec. (3d Ed.), 457.) Of similar provisions in Indiana that court say: “They institute a summary mode of ascertaining what property a judgment defendant may have in his possession, or under hi's control, or in the possession of others, subject to execution, and also the debts, if any, that may be owing to him. These are the only subjects of inquiry. No authority is given for making third persons defendants for any other purpose than to answer as to any property held by them belonging to the judgment defendant, or as to their indebtedness to him. The court or Judge has no power, in this form of procedure, to adjudicate and settle controverted questions of right between the judgment debtors and third parties, nor to set aside a sale or conveyance of property by the debtor on the alleged ground of fraud. Such questions must be tried in another form of action.” (Burt v. Hoetinger, 28 Ind., 218.) In so far as an order seeks to determine conflicting claims of title, or to require the delivery of property adversely held, or to authorize the receiver or other officer to take possession of it, it is beyond the jurisdiction of the court and void, and a writ of prohibition may issue to prevent action being taken under it. (Freeman Ex., Sec. 418; McDowell v. Bell., 86 Cal., 615.)

In view of these principles, we think it is clear that the court has in some of its orders exceeded its authority. But the plaintiffs in error, while not formally assigning it as error, make some slight contention that the appointment of the receiver in the first place was improper and erroneous. We think, however, that so far as the appointment is concerned, the plaintiffs in error are not in position to complain. The statute authorizes the appointment, they were not parties to the suit or to the supplemental proceedings, and it is a matter in which they have no interest or concern. For the same reason the suggestion of defendant in error that Crumrine, one of the plaintiffs in error, is estopped from objecting to the possession and control of the property by the receiver from the fact that he consented to the appointment, is without force. He testifies that while he consented to the appointment he did not understand that the receiver was to take his property. And we think it was a matter which concerned only the parties to the original action and with which the plaintiffs in error had nothing whatever to do. (Tyler v. Willis, 33 Barb., 331; Underwood v. Sutcliffe, 10 Hun., 456; 24 A. & E. Ency., 689.) But in so far as the court has undertaken to conduct the business of the defendant partnership, as in the case of a railroad or other business charged with a public duty, its action was erroneous. The powers and functions of the receiver are limited by the purposes of the statute under which he was appointed; that is, to demand and sue for, under the order of the court, and to take into his possession money, property and interests of the judgment debtor and apply them to the satisfaction of the judgment.

The receiver, by his appointment, succeeded only to the title of the judgment debtor and as to property encumbered by liens he has only such rights as the judgment debtor had at the time of the appointment. (Smith Rec’vrs., 267; Voorhees v. Seymour, 26 Barb., 583; Gardiner v. Smith, 29 Barb., 74.) In this proceeding the court has no authority to order property to be applied to the satisfaction of the judgment unless the title of the defendant thereto is clear and undisputed. The question has generally arisen upon the answer of a garnishee who claimed to be the owner of, or to have some interest in, the property sought to be applied, and it has, we think, been uniformly held under statutes like ours that the disputed claims cannot be adjudicated in this summary proceeding. (41 N. J. L., 269; Bostwick v. Monck, 40 N. Y., 383; Rice v. Whitney, 12 O. St., 360; 21 Ency. Pl. & Pr., 139.) The person claiming an interest has the right to have the issue tried in the regular, ordinary way, rather than by a summary proceeding, and to have the protection of a trial by jury in cases where the right to a jury trial is secured. Doubtless, as said in Freeman on Executions, “It is competent for the Legislature to provide for all this in the original action, and to authorize issues to be formed therein and submitted on allegations, express or implied, to the jury, and a final judgment to be entered on their verdict.” (Freeman Ex., p. 2230.) But our statute makes no such provision, and that it confers no such jurisdiction has been uniformly held by the courts of Ohio, where it originated. In some of the states the powers and duties of the receiver are pointed out somewhat in detail. But the provision in this State is limited to the bare statement that “the Judge may, by order, appoint the Sheriff of the proper county, or other suitable person, a receiver of the property of the judgment debtor” and directions as to his oath and bond. Doubtless the receiver, under the general statute regulating the subject of receivers, has power to do whatever the court or Judge has authority, in this proceeding, to direct'. But the authority of the court or Judge is very limited, being confined to carrying out the purposes of the statute by the methods which it provides.

These conclusions are emphasized by the fact that every step in the proceedings may be taken before a Judge and the action of the court is not necessary with perhaps a single exception. Where real estate of the judgment debtor, or his interest therein, is sold b}' the receiver, the approval of the proceedings of sale must be b}'- the court m which the judgment was rendered. And even this is only an apparent exception, as the approval is not one of the steps in the special proceeding.

We are further of the opinion that the order of the court directing the sale of cattle, or other property, covered by the liens of the plaintiffs in error, for the purpose of appropriating the proceeds to the payment of the costs of the proceedings, the conservation of the property in the hands of the receiver and other expenses of the receivership and the compensation of the receiver, cannot be sustained. It may be fully conceded that where it becomes necessary to appoint a receiver to preserve property from being wasted, or in any way lost or destroyed, that such receivership being for the benefit of all persons having- an interest in such property, they ought all to contribute to the expenses of the receivership and, as a consequence, that the property itself will be made to pay such expenses. But we think it is not the law nor the practice of the courts that merely because property happens to pass into the hands of a receiver it therefore becomes liable for the expenses of the receivership, in all cases and without regard to the ownership. “If for any reason the order of the appointment is improperly made and is accordingly set aside, it seems unfair to charge the property with the receiver’s fees, and, according to the better opinion, the plaintiff himself will be required to pay them.” (20 A. & E. Ency., 181.) In French v. Gifford, 31 Ia., 431, the court say: “We think it would be an unjust and inequitable rule if in all cases the receiver should be entitled to his compensation from the fund in his hands without reference to the legality of his appointment. Under the operation of such a rule innocent persons might be made to suffer great loss.” And under the circumstances of that case the court charged one-third of the compensation of. the receiver to the fund in his hands and two-thirds against the plaintiff in the action. In Highley v. Deane, 168 Ill., 272, the court say: “Where the receivership is procured under the assertion of an unjust and wrongful claim, as finally found by the court, and the receiver is authorized to take possession of the property of another on such wrongful assertion, the court can protect the injured party by returning the property of which he was divested without its being diminished to pay receiver's charges.” In a New York case the order appointing the receiver was reversed on appeal and he was directed to turn over to the defendant all the copartnership property which he held and the plaintiffs were ordered to pay the receiver’s compensation. The receiver claimed to have incurred liabilities in the discharge of his trust greater than the amount he had received and urged that he ought not to be compelled to turn his receipts over to the successful party to the litigation and look to the other (who might be irresponsible) for his fees and expenses.

But the court held that so far as the defendant was concerned the appointment was an unauthorized one and not made for his benefit in any manner; it was an invasion of his rights, for which there was no law requiring him or his property to pay the expense; that the same principle would charge property with the fees of officers where it may have been replevied or taken under attachment, and that the same rule would restrain the discharge of a person in custody under an order of arrest until the fees of the officer should be paid. And the court say the law cannot sanction the taking of one man’s property in this manner and subjecting it to the expenses or obligations of another. (Weston v. Watts, 45 Hun, 219.) And the courts almost uniformly hold in the case of intervenors that, where the receivership is not requested by them and they obtain no benefit from it, they or their property are not liable for any of the costs or expenses. (Howe v. Jones, 66 Ia., 162; High Rec’vrs., 796, 809; City of St. Louis v. St. Louis Gas Light Co., 11 Mo. App., 241; Matter of Atlas Iron Co., 19 App. Div. (N. Y.), 417; Lammon v. Giles, 3 Wash. Ty., 123.)

The decisions of the courts upon the question have usually been in cases where it has been subsequently determined that the receiver ought not to have been appointed. But where the court ordered certain property to be turned over to the receiver and it was subsequently decided that the receiver had no right to its possession, the New York Court of Appeals say that it was the same in regard to that property as if the receiver ought not to have been appointed and that the fund must be returned undiminished by the receiver’s charges. (P. N. Bank v. Bayne, 140 N. Y., 321.)

These principles apply with even greater force to the case under consideration. The plaintiffs in error were not parties to the action; they have never in any way consented to the custody of the receiver, but have protested against it at all times; there was no order of the court directing the receiver to take charge of this particular property, but the only order made, and the only one authorized by the statute, was one appointing him receiver of the property of the defendants in the action. And, furthermore, it is claimed that the entire beneficial interest in the property is in the plaintiffs in error, and this is apparently conceded unless it can be established that the claims, or some part thereof, are fraudulent. The burden of showing such fraud is upon the creditor, the plaintiff in the action, and any steps to establish it should be taken by the receiver appointed at his instance. No such steps have been taken, but instead the claims were referred by the court to the receiver to examine and report his recommendations, it being, as it seems, the purpose of the court to adjudicate the validity of the liens in this proceeding.

As already seen, the court has no jurisdiction in this proceeding to adjudicate these matters. And, as it is the province of the receiver to institute any actions or proceedings, which may be appropriate or desired by -the creditor, to test the validity of the liens, it is clear that he, a necessary party to such proceedings, was not a proper person to be appointed referee, even if it had been competent for the court to make any reference of them in this proceeding.

Furthermore, it appears from the record that suit had been instituted and a decree entered foreclosing the real estate mortgage, though there had- been no sale under such decree; that the indebtedness secured by the chattel mortgages was over due and the conditions were forfeited by non-payment. Under these circumstances, there was nothing- to vest in the receiver but the bare possession and a right of redemption. He succeeded only to such rights as the debtor had at the time of the appointment. (Voorhees v. Seymour, 26 Barb., 583; Gardiner v. Smith, 29 Barb., 74.) As the chattel mortgages contained the customary provision authorizing the mortgagees to take possession whenever they deemed the security unsafe, it is doubtful if the mortgagor had any such right of possession as authorized the receiver to take the personal propeidy at all. (Griswold v. Tompkins, 7 Daly (N. Y.), 215; Gardiner v. Smith, supra.)

But however this may be, the appointment of the receiver did not affect the liens and the holders have the same right to pursue any method of realizing- their claims out of the property upon which they are secured as if no receiver had been appointed, and the court should have required him to turn over the property to the lien creditors for that purpose. Whatever right of possession the receiver may have had at the time of his appointment, it was subordinate to the right of the lienors to take possession whenever the provisions in their conveyances, conferring- the right, became operative. (Bowling v. Garrett, 49 Kan., 504; Righton v. Pruden, 73 N. C., 61; M. & M. Bank v. Kent, 43 Mich., 297.) There could be no possible reason for the court to hold this property in its custody and suspend the right of the lienors to foreclose in the ordinary way except to enable •satisfaction of these with other demands to be made in then-proper order, through the receivership. (Wheaton v. Spooner, 52 Minn., 423.) But, as already pointed out, the -court had no jurisdiction to control or enforce or pass upon the liens in this proceeding. Though we have no doubt of the power and authority of the court to enjoin the defendant and the lienors from disposing of the property in any way to the detriment of the judgment creditor except by the enforcement of their liens and to require the lienors to pay into court or to the receiver, to be applied upon the execution of the plaintiff, or to the payment of costs and the expenses of the receivership, any residue of the proceeds after the satisfaction.of the liens.

The judgment and orders of the court in so far as they have denied to plaintiffs in error the right to enforce their liens in the ordinary way, and the possession of the property for the purpose, and have directed the sale of portions of the encumbered property for the purpose of' obtaining funds to carry on the business of Bird Bros, and to pay the expenses of the receivership, or other costs in the case, must be reversed. Portions of the property have been sold by consent of the parties in interest pending the litigation, such propertjr being in its nature perishable, and the sale being deemed necessary to the conservation of the estate and the proceeds are, as we understand, in the custody of the court. Such sales must be approved and the proceeds disposed of in conformity with the views expressed in this opinion, subject to any stipulations of the parties in interest under which such sales may have been made. Certain expenses have also been incurred by the receiver, under the orders of this court, for cutting and putting up hay on the ranches, and the like, and such necessary expenses are to be paid out of the property and taxed against the parties or persons benefited thereby.

It will be necessary for the District Court to settle the accounts of the receiver, and if, in such settlement, it appears generally that expenses have been incurred or services performed by the receiver in the care or disposition of the encumbered property, and that such expenses 01-services have been to the benefit of the lienors and the amount does not exceed what it would have been necessary for them, or the mortgagor, to pay for the like purposes, the encumbered property ought to pay, or contribute its just share to, such amount.

The judgment is reversed and the case remanded for further proceedings not in conflict with this opinion.

Reversed and remanded.

Knight, J., and Potter, J., concur.