Summary
recognizing the court's discretionary power to appoint a receiver
Summary of this case from In re Carlisle Etcetera LLCOpinion
June 18, 1940.
Proceeding by Clarence A. Southerland, receiver of Consolidated Chemical Corporation, and others against Dorothy McCurdy Brill and Standard Accident Insurance Company, a corporation of the state of Michigan, on a cost bond. To review an adverse decree, defendants bring error.
Affirmed.
Appeal from decree of the Court of Chancery for New Castle County, on petition of receiver for allowances and expenses.
Consolidated Chemical Corporation was incorporated in Delaware in 1930. The incorporation of this company was the final step in a series of reorganizations of various companies engaged in the manufacture of wood alcohol and its by-products, including among them Miner Edgar Chemical Corporation. This corporation conveyed to Consolidated Chemical Corporation all of its assets, real and personal.
On October 16, 1933, Dorothy McCurdy Brill and August Stickel, for themselves and for all other stockholders of Consolidated Chemical Corporation who should become parties thereto and contribute to the expense thereof, filed a bill for the appointment of a receiver pursuant to Section 3883 of the Revised Code of 1915. The bill alleged that the company mortgaged all of its assets to secure a bond issue of $1,500,000 of which the National Bank of New Jersey was trustee; that the corporation had defaulted in the payment of interest due thereon; that the corporation was insolvent in the equity sense; that suit had been instituted against it in the United States District Court for the District of New Jersey to foreclose the trust indenture; that suits also had been instituted against the corporation and others in the same court and in the United States District Court for the Southern District of West Virginia by John N. Charnock, trustee in bankruptcy of the Miner Edgar Chemical Corporation, seeking a reconveyance of the properties to the bankrupt and a cancellation of the trust indenture on the ground that certain properties of the bankrupt has been fraudulently transferred to the defendant corporation; and that a decree pro confesso had been entered against the corporation in New Jersey, and a similar decree would be entered in West Virginia unless prompt action were taken. The bill further alleged, upon advice and belief, that the suits against the corporation were without merit and should be defended in the interest of creditors and stockholders by a receiver appointed by the Court of Chancery. In her supporting affidavit, Dorothy McCurdy Brill stated that "it is indispensable that the Chancellor * * * pending a final hearing * * * appoint a temporary receiver who will be empowered to take all steps deemed by him to be necessary to properly defend the New Jersey suit * * *" before the date Of the hearing which was set for October 23, 1933. On October 20, 1933, the chancellor appointed Clarence A. Southerland receiver pendente lite, and he was expressly ordered to defend all claims and suits against the respondent corporation in the name of the respondent, or in his own name as receiver, and, generally, was authorized to take such steps as should seem advisable either in aid of or in opposition to the Charnock suit in New Jersey. Specifically, the receiver was authorized to apply for the appointment of ancillary receiver in any other state or jurisdiction. It was ordered that the complainants or either of them "give a cost bond in the sum of $3000.00 in the usual form with surety for the purpose of securing the payment of the costs in this cause, including the cost of the temporary receivership, and, should the receivership be made
permanent, of the permanent receivership and including also allowances to the receiver and his counsel". On October 21, 1933, the cost bond, executed by Dorothy McCurdy Brill as principal, and Standard Accident Insurance Company, as surety, was filed. The condition of the bond was for compliance with all orders and decrees of the Court of Chancery relating "to the payment of the costs of the cause, and the cost and expense of the temporary receivership, and should the receivership be made permanent, of said permanent receivership". On November 17, 1933, the corporation was adjudged insolvent and Clarence A. Southerland was appointed receiver pursuant to Section 3884 of the Code of 1915.
On November 22, 1933, the receiver petitioned for leave authorizing him to consent to the appointment of an ancillary receiver by the United States District Court for the District of New Jersey, representing that under the practice of the Federal Court in New Jersey ancillary receivers would not be appointed without the consent of the primary receiver. Upon this petition the authority prayed for was granted; and it appeared from the record that Dorothy McCurdy Brill applied to the New Jersey Court for the appointment of an ancillary receiver, and that Joseph C. Paul was appointed.
On June 15, 1938, the. receiver filed his report and petition for allowances and expenses. It appeared from the petition that the receiver employed Carl A. Feick, Esquire, of the firm of Pitney, Hardin Skinner, of Newark, New Jersey, to represent him in the New Jersey suits, and that after the appointment of the ancillary receiver, Mr. Feick likewise acted as counsel for the ancillary receiver; that the decree pro confesso obtained against the defendant corporation in the New Jersey suit was vacated, and the ancillary receiver was given leave to answer the bill of complaint and defend the action; that the cause was tried, necessitating the presence in court of the receiver's counsel for twenty-seven full days; that efforts were made to effect a settlement of the litigation without success; that on November 2, 1937, the New Jersey Court filed an opinion sustaining the contentions of the complainant, the trustee in bankruptcy of the Miner Edgar Chemical Corporation, and rescinding and setting aside the reorganization and the conveyances of assets and properties made in pursuance thereof. The result was that Consolidated Chemical Corporation was stripped of all assets. Prior to the entry of the final decree, the ancillary receiver and his counsel applied to the New Jersey Court for allowances for services and expenses in connection with the cause. The court denied their application for allowances to be paid out of any funds or property formerly of Consolidated Chemical Corporation which had been ordered to be reconveyed to the trustee in bankruptcy of Miner Edgar Chemical Corporation; but on March 25, 1938, the court entered an order fixing the amounts of such allowances and expenses. No assets of any kind came into the possession of the receiver. The services of Pitney, Hardin and Skinner, as solicitors for the. receiver and counsel for the ancillary receiver in New Jersey, while not productive of successful result, were extensive and arduous. Recourse to the cost bond became necessary. The receiver prayed for the following allowances: to the receiver $200, and for his out of pocket disbursements, $74.52; to Joseph C. Paul, ancillary receiver, for services rendered in connection with the New Jersey litigation, $200; to Pitney, Hardin and Skinner, solicitors for the receiver and ancillary receiver $2,500. A rule was prayed and issued to Dorothy McCurdy Brill and her surety, directing them to appear and show cause why an order should not be made fixing the costs of the cause and directing their payment by the principal and surety. Service of the rule was accepted by counsel for the principal, and service was made on the resident agent of the surety. On March 15, 1939, "no objection having been made as to the amount of the allowances and expenses", the rule was made absolute; an order was entered fixing the amounts of the allowance and expenses as prayed for; and the appellant, Dorothy McCurdy Brill and her surety, Standard Accident Insurance Company, were ordered to pay the sum of $3,000 pursuant to the terms of the bond, to the Register of the Court of Chancery within thirty days or attachment. On March 30, 1939, a writ of error issued from this court; and on May 11, 1939, cash bond in the sum of $3,500 was deposited with the Register in Chancery.
Warren R. Schenck, of New Brunswick, N. J., for appellants.
David F. Anderson, of Wilmington (Southerland, Berl, Potter Leahy, of Wilmington, of counsel), for appellees.
LAYTON, C. J., and RICHARDS, RODNEY, SPEAKMAN, and TERRY, JJ., sitting.
The appellants offer numerous reasons why the decree of the court below should be reversed, none of them having substantial merit.
It is urged that no determination can be made by this court without notice to August Stickel, co-complainant; that the order of the Federal Court in New Jersey fixing allowances to the ancillary receiver and counsel was futile as an ex parte order; that the bond given by the appellants was a cost bond only and did not embrace allowances and fees to the receivers and counsel; that the suit, being a class suit, cost allowances cannot be decreed against the complainants alone; that the decision of the New Jersey Court denying allowances to the receiver and counsel was res adjudicata; that no litigation took place in Delaware, no burden of responsibility was on the receiver and no burden of advice or services of any consequence rested upon counsel in this State, wherefore allowances should be on that basis; that the burden of costs is on the trust estate; that the litigation in New Jersey should not have been barren, and, in fact, was not barren; that the receiver and his counsel should seek payment for the allowances in the West Virginia Court by filing claims in bankruptcy; and that the surety on the bond was discharged by the failure of the receiver to present his claims to the West Virginia Court. These contentions will be answered briefly.
While the record does not disclose the fact, it is stated in the brief of counsel for the appellants that the co-complainant, August Stickel, is dead. The argument is that no notice of the application for allowances was, or could have been, given to the co-complainant, and no decree can be entered against one of the co-complainants, and certainly not against the deceased without having his personal representative brought into court.
The condition imposed by the order appointing a receiver was that the complainants, or either of them, should execute and file a cost bond with surety in the sum of $3,000, for the purpose of prosecuting the complaint. The appellants, the one as principal, the other as surety, voluntarily obligated themselves to pay the costs and expenses of the receivership. Why the cocomplainant did not join in the obligation, and whatever right the appellant, Brill, may have against her co-complainant, or his estate, is not a matter for inquiry or decision. The obligation assumed by the appellants was individual, in conformity with the order, and, within its proper limitations, is binding on them.
[2, 3] It may be conceded that the order made by the New Jersey Court fixing the amount of allowances to the receiver and his counsel, was entered ex parte, and had no binding force or effect. At the most the order was advisory only. The chancellor was not concluded by it. As was proper, the receiver petitioned the court below for the allowances. The appellants were brought into court by rule properly issued and served. The decree complained of was made by the court below, not by the New Jersey Court; and the fact that the allowances were in amounts as were deemed just by the New Jersey Court is without importance.
[4, 5] The bond was denominated as a cost bond, but it is entirely clear that it was not merely a bond to secure the payment of those statutory costs of the Register in Chancery as are provided by Section 5352 of the Code. The order of the chancellor and the amount of the bond preclude the idea. The language of the condition of the bond itself is descriptive of the extent of the obligation. It was that the obligors should comply with all of the orders of the Court of Chancery relating to the payment of the costs of the cause and the cost and expense of the temporary and permanent receiverships, if the receivership should be made permanent. Authorities defining the word "costs" as that word is usually understood in law are without point. We are not. called upon to decide whether the bond is to be construed according to the intention of the order of the court thai directed its execution. See Sonneborn v. Libbey, 102 N.Y. 539, 7 N.E. 813. The language of the condition of the bond is sufficiently clear and comprehensive without the necessity of recourse to construction. The word, "expense", signifies not only an actual expenditure, outlay or disbursement of money, but also the obligation there-for; and included in the broad significance of the word are reasonable charges and incurrences that are necessary for the proper functioning of the receivership. Ordinarily, a receiver is entitled to compensation for authorized services performed by him, measured by the reasonable value thereof. An allowance made to a receiver is an expense of the receivership. Likewise, the claim of the receiver's counsel for such compensation as is properly due him ranks as a part of the expense of the receivership. 53 C.J. 261. The record discloses that the counsel
to whom the allowance was made was employed by the receiver, and served under his direction under an authorization of the court below.
[6, 7] The purpose of an ancillary receivership is to assist in carrying out the purpose of the court at the place of domicile. Conklin v. United States Shipbuilding Co., C.C., 123 F. 913. The complainant, Brill, knew that the corporation was possessed of no assets in this State, and that the sole possibility of recovering assets, and thereby creating a fund from which the expense of the receivership could be paid, lay in obtaining intervention on behalf of the corporation in the suit pending against it in the Federal Court in New Jersey and defending it successfully. In the bill of complaint it was averred that a decree pro confesso had been entered against the corporation in that suit; and in her supporting affidavit, she stated that it was indispensable that a temporary receiver be appointed to take all steps deemed necessary to defend the New Jersey suit. The appointment of an ancillary receiver in New Jersey was an absolute prerequisite to any defense to that suit under the rules and practice of the Federal Court in New Jersey. The appointment of a receiver in this State was sought solely with the object and purpose of obtaining the appointment of an ancillary receiver in New Jersey so that the suit against the corporation in that State could be defended. If appears also that the ancillary receiver was appointed on the petition of the appellants; and the court stated that the appointment was "in aid" of the primary receiver. Upon the particular facts disclosed by the record the appellants are in no position to contend that the allowances ordered were not expenses of the receivership.
[8-10] As a general rule a receiver's compensation and expenses are payable from the funds in his hands, and no part is taxable against the party at whose instance the receiver was appointed. 23 R.C.L. 106. Where there is no fund out of which expenses can be paid, or the fund is insufficient, the usual rule is that the party at whose instance the receiver was appointed should be required to provide the means of payment. Clark on Receivers, 2d Ed., Vol. 1, 890; Beach, Receiver, § 773; Pomeroy's Equity Jurisprudence, 4th Ed., Vol. 4, 3879. Moreover, the court, generally speaking, has a large discretion in appointing receivers, and where the appointment is conditioned upon the complainant's giving a bond, there is no reason to doubt the obligor's liability thereon. Farmers' National Bank v. Backus, 74 Minn. 264, 77 N.W. 142; Farmers L. T. Co. v. Oregon Pac. R. Co., 31 Or. 237, 48 P. 706, 38 L.R.A. 424, 65 Am.St.Rep. 822. The fact that the instant suit was a class suit can make no difference. It is idle to suppose that one bringing a class suit can escape all liability for costs and expenses, even upon his specific contract, merely because the suit was of the type called a class suit, no other of the class being interested enough to join therein.
It appears from the record that, at the instance of the then chancellor application was made to the New Jersey Court for allowances to the receivers and counsel on the theory, as it may be supposed, that the services rendered were properly compensable out of assets under the control of that court. The effect of the decision of that court in the case of Charnock, trustee in bankruptcy of Miner Edgar Chemical Corporation v. Consolidated Chemical Corporation et al. was that the defendant corporation never had existence except as a paper entity for the purpose of stock manipulation; that the conveyances made to it by Miner Edgar Chemical Corporation were absolute nullities; and the result of the decision was that the defendant corporation was deprived of all of the property and assets claimed by it. Consequently it was held that the expense incident to the receivership could not be paid out of property or assets of Miner Edgar Chemical Corporation. In the course of the court's supplemental opinion it was said that the complainant, Brill, had not been shown to have acted in bad faith in prosecuting her demand for the appointment of a receiver for the defendant corporation, but that there were no circumstances that would entitle the receiver or his counsel to receive from the complainant payment for their expenses or services. It is obvious that by "complainant" the court referred to the trustee in bankruptcy for Miner Edgar Chemical Corporation, the complainant in the suit by which it was determined that the conveyances of property by Miner Edgar Chemical Corporation to the defendant corporation were nullities. It will not be seriously contended that the Federal Court in New Jersey assumed to adjudicate
the liability of the complainants in the court below for costs and expenses of the receivership under the bond that was required of them. All that the New Jersey Court decided was that the receiver and his counsel could not look to the assets of Miner Edgar Chemical Corporation for the payment of their expenses and services. The decision of that court was not res adjudicata.
The appellants made no objection to the amounts of the allowances when that matter was in hearing before the chancellor. They now belittle the services rendered. It was the duty of the receiver to search for, collect and administer the assets of the defendant corporation committed to his charge. In entire good faith, and with the full knowledge and active assistance of the appellants, intervention was sought and allowed in the New Jersey suit. The proposition that a receiver and his counsel can be recompensed only for services performed in the territorial limits of the court making the appointment is startling. No authority is cited, and independent research has disclosed no authority for the proposition.
The litigation in New Jersey, prosecuted in good faith, was barren in its results. It is not a case of penalizing the complainants for having the enterprise to act for the benefit of all of the class, as suggested in brief of counsel. The simple fact is that the complainants voluntarily and solemnly obligated themselves to pay the costs and expenses of the receivership.
In view of the decision of the New Jersey Court in the matter of the payment of allowances and expenses from the property of Miner Edgar Chemical Corporation, it is entirely unreasonable to suppose that such claims would meet with any greater favor at the hands of the court in the State of West Virginia where that corporation was adjudicated a bankrupt. It appears from the brief of counsel for the appellants that the receiver refused to apply to the West Virginia Court for compensation for himself and his counsel. In the circumstances his refusal was justified. The fact that counsel for the appellants requested him to make the application is of no significance, and does not affect the obligation of the surety on the bond.
The decree of the chancellor is sustained.