Am. Sav. Bk. Co. v. Trust Co.

Full title: THE AMERICAN SAVINGS BANK CO. v. THE UNION TRUST CO

Court: Supreme Court of Ohio

Date published: Jun 17, 1931

177 N.E. 199 (Ohio 1931)

177 N.E. 199

Opinion

No. 22790

Decided June 17, 1931.

Receivers — Repairs necessary for proper maintenance of property, authorized — Any and all repairs not justified, without application to court — Application for immediate minor repairs, not necessary, when — Application and notice necessary for unusual or substantial repairs.

A receiver was appointed for an apartment house, with authority "to make such repairs as are necessary for the proper maintenance of the property in his charge." Such an order does not justify the receiver to make any or all repairs at his discretion without advance application to the court. He may make immediate minor repairs upon rented property, without such application, if the existing or probable income therefrom justifies it, or if such minor expenditures are necessary to conserve the property; but if the expenditures for the proposed repairs are unusual or substantial, the receiver should apply to the court for authority to make them, and notice should be given to interested parties, thus giving them an opportunity to be heard.

ERROR to the Court of Appeals of Cuyahoga county.

Only the salient facts pertaining to this litigation need be referred to. The Union Trust Company will. be referred to as the trust company, and the American Savings Bank Company, the plaintiff in error, will be referred to as the savings bank. The subject-matter of the litigation consisted of the foreclosure of mortgages and the marshaling of priorities. The action was one in foreclosure brought by the trust company, who held the first mortgage upon the premises, against other lienholders and parties. The savings bank held a second mortgage upon the premises, and one M.C. Barkin held a third mortgage thereon. Other than these three mortgagees, the parties do not enter into the picture.

The action was instituted by the trust company on October 29, 1929, and it did not ask for the appointment of a receiver. On November 29, 1929, the savings bank filed its cross-petition seeking a foreclosure. On October 31, 1929, the third mortgagee, Barkin, applied to the court for the appointment of a receiver; on November 4th a receiver was appointed; and it is upon his authority and right to make repairs that this case hinges.

A decree of sale of the premises and for the distribution of the proceeds was entered May 17, 1930. On July 18, 1930, by decree of court, the sheriff sold the premises for a sum sufficient to pay the amount due both the trust company and the savings bank, including costs and taxes; but not for a sufficient sum to pay the savings bank the full amount of its claim if the repairs, which are the subject of this controversy, can be taxed as legal costs. After the sale, on August 4, 1930, the receiver filed his quarterly report, and asked that certain expenditures be included in and assessed as court costs. These expenditures were for repairs made between January 1 and May 1, 1930, and comprised $135 for emergency expenses paid by the receiver, and the further sum of $1,173.37 for various general repairs to the apartment, such as plumbing, carpentering, mason work, and material; also repairs to the heating plant, papering, and various other items. In his report the receiver stated to the court that about the 1st of January, 1930, the plumbing had broken throughout the building, causing a great flow of water which impaired the property, and that, having no funds in his hands, he appealed to the trust company, the first mortgagee, informing it of the condition of the property, and stating that it was necessary to make repairs before the property could be rented. As a result of that appeal, the trust company advanced to the receiver the sum of $1,173.37, which the receiver paid out for general repairs and the court allowed as costs. On September 4, 1930, on the motion of the receiver to assess the expenditures as costs, the court allowed the sum of $135, expended for emergency repairs, and in its order of that date made a further allowance, its entry reading as follows: "The Court does further find that the Union Trust Company, Plaintiff herein, loaned the sum of Eleven Hundred and Seventy-three and 37/100 Dollars ($1,173.37) to the Receiver for plumbing and furnace repair necessary to be made upon said premises and for decorating the suites in the building on said premises without prior application by the Receiver to the Court for authority to borrow said moneys, and without prior notice to any of the parties interested." The court thereupon ordered said last-named sum paid to the trust company.

To this portion of the decree the savings bank excepted. The judgment of the trial court, allowing the latter item as costs, was affirmed by the Court of Appeals, whereupon error was prosecuted to this court.

The court's order of November 4, 1929, appointing a receiver, after finding that due notice had been served upon the parties, contained the following: "The Court being fully advised in the premises, finds that it is necessary that a receiver be appointed to take charge of the property described, during the pendency of this action. It is therefore ordered that * * * be and is hereby appointed Receiver to take charge of the property described in the motion with full authority to collect the rents and income thereof. * * * By virtue of authority hereby conferred to make such expenditures, it shall be incumbent upon the Receiver to pay insurance premiums, water, coal, gas and light bills, and make such repairs as are necessary for the proper maintenance of the property in his charge. * * * For authority other than that conferred upon the Receiver by virtue of this order, the Receiver shall make application to this court for such authority."

Mr. Gabriel Leeb, for plaintiff in error.

Messrs. Cannon, Spieth, Taggart, Spring Annat, for defendant in error.

JONES, J.

It was stated by counsel in oral argument that the form of entry of appointment of receivers, and their general authority as such, is a stock or standard printed form utilized by the courts of Cuyahoga county whenever a receiver is appointed.

There is a clear distinction, it seems to us, between the express and implied authority conferred upon operating receivers of railroads or industrial establishments and a receiver who is merely appointed to take charge of property and collect rents, as in this case. This distinction is recognized in Lehigh Coal Nav. Co. v. Central Rd. Co. of N.J., 35 N.J. Eq. 426, where Mr. Justice Bradley is quoted as saying of a railroad receiver: "It may be laid down as a general proposition that all outlays made by the receiver in good faith, in the ordinary course, with a view to advance and promote the business of the road, and to render it profitable and successful, are fairly within the line of discretion which is necessarily allowed to a receiver entrusted with the management and operation of a railroad in his hands. His duties, and the discretion with which he is invested, are very different from those of a passive receiver, appointed merely to collect and hold moneys due on prior transactions, or rents accruing from houses and lands."

But even in the case of operating receivers of a railroad, if the expenditures are extraordinary, and involve a large outlay of money, the receiver should first apply to the court and obtain authority for making the expenditures. This seems to be the rule announced in the case last cited, and also in Union Trust Co. v. Illinois Midland Rd. Co., 117 U.S. 434, 6 S.Ct., 809, 29 L.Ed., 963. See, also, 1 Clark on Receivers (2d Ed.), Section 378.

The property in this case was an apartment house consisting of several suites. Under the order of the court the receiver was appointed only to "take charge of the property described during the pendency of this action." He was given authority to pay insurance premiums, water, coal, gas and light bills. These expenditures are not challenged. What is challenged here is the broad and seemingly unrestricted authority of the receiver "to make such repairs as are necessary for the proper maintenance of the property in his charge. If this authority, found in the order of his appointment, means, as it seems to mean, that the receiver is authorized to make any and all repairs on the apartment promises at his discretion, without advance application to the court, and without notice to the interested parties, then such an order is an unwise exercise of the power of the chancellor which may vitally affect the rights of lienholders who are entitled to be heard upon the nature and extent of the proposed expenditures.

Section 11897, General Code, reads: "Under the control of the court, the receiver may * * * take and keep possession of the property, receive rents, * * * and generally do such acts respecting the property as the court authorizes." We would not interfere with the discretion of a receiver in making immediate minor repairs upon rented property without previous application to the court under authority so conferred upon him, if the existing or probable income therefrom by way of rents justifies it; nor would we deny him discretion to make minor emergency expenditures to conserve the property. However, whether such repairs are emergency or otherwise, if they are of such unusual or substantial character as to require a substantial sum for their payment, it becomes the duty of the receiver to apprise the court of the necessity and extent of such repairs and to apply to the court for authority to make them; and it then becomes the duty of the court to give to the parties in interest notice of such application, thus giving them an opportunity to be heard. Naturally large expenditures made by the receiver upon mortgaged property enhance the value of the mortgagee's lien, and cases might arise where their allowance would prejudice the rights of the owner or of junior lienholders. Allowance of expenditures by the court as costs is tantamount to placing a lien upon the property prior to that of other liens. The expenditures made by the receiver in this case, without authority of court, were not for minor emergency repairs, but were very substantial in amount. The record presents no reason why the receiver did not apply to the court for authority to make such expenditures, and give notice of his application to the parties in interest, and there was ample time for him to have done so. Although a full report of the receiver is not contained in this record, counsel states that the report of the receiver, covering the several months of his incumbency from January to May, disclosed that, while he had made expenditures of $1,173.37 upon the apartments, he had collected only a total of $12 rental from the entire eight suites. There might be reason justifying the expenditures if their payment could reasonably have been expected to be made out of income or rents derived during the receivership. But in this case they are paid from and made a prior lien upon the corpus of the property. Another cogent reason why the expenditures should not have been allowed over the objection of the savings bank is that the premises were offered for sale in July, 1930. The receiver did not report these expenditures until August 4, 1930. Meanwhile neither bidder nor the junior lienholder, the savings bank, had knowledge that these expenditures allowed as costs had been incurred by the receiver when the sale was made. Since it appeared that at the time of sale the proceeds of sale were sufficient to pay both the first and second mortgage, and the costs, the second mortgagee might rest content to have the sale made at the price bid; whereas, had it known that these additional costs would jeopardize its lien, the second mortgagee might have become a bidder for the property in order to secure the full amount of its lien. The better practice would be for the receiver to submit his report of the amount of expenditures incurred prior to the time the property was put up for sale. The parties in interest must be held to have known that the ordinary costs of the action, including reasonable fees for the receiver and his attorney, would follow the suit; but, with the probable exception of the trust company, other lien-holders apparently did not know until after the sale that these extraordinary expenditures would be allowed as costs, thus becoming a lien upon the property, to be deducted from the bid price.

The court is of the opinion that the utilized standard form, appointing receivers and clothing them with apparently unlimited authority to make substantial repairs at their discretion, without first applying to the court — a form used in this case — does not conform to equitable principles, and that the order to make substantial repairs, such as appears here, without first applying to the court therefor, and without giving notice to the parties immediately interested, as well as the order of allowance thereafter, were erroneous and prejudicial to the plaintiff in error.

The judgments of the lower courts are reversed, and the case is remanded to the court of common pleas, with instructions to disallow the items of expenditure amounting to $1,173.37.

Judgment reversed and cause remanded.

MATTHIAS, DAY, ALLEN, KINKADE and ROBINSON, JJ., concur.

MARSHALL, C.J., not participating.