Opinion
No. 3158.
Decided May 7, 1940.
A court of equity has power to authorize receivers to borrow money necessary for the preservation and management of the property involved and to secure loans by liens charged thereon.
Such power should, if possible, be exercised after notice to and consent of the parties interested in the fund or under circumstances equivalent to prior notice.
The power is exercisable not only in the insolvency of public utilities but in cases of receivership in general.
Receivers pursuant to an order of court obtained a loan for the pay-roll obligations and raw materials needed for the operation of a corporation's business giving a chattel mortgage on machinery to secure the debt. The mortgage was properly executed and sworn to by them but was not sworn to by the mortgagee. The mortgage nevertheless created a priority in the assets in favor of the mortgagee either because of the court's authorization of the lien or because the mortgage though not sworn to (P. L., c. 216, s. 16) was valid as between the parties thereto where no rights of attaching creditors or purchasers were involved.
INTERLOCUTORY ORDER, in a receivership over an insolvent corporation.
On April 2, 1934, temporary receivers of the defendant corporation were appointed by an order of the Superior Court which authorized them to continue the operation of the defendant's manufacturing business. On May 15, 1935, the receivers, alleging that an emergency then existed in the affairs of the company, asked for and obtained the court's authority to borrow $5,000 from Lillian H. Tilton and to secure the same by a mortgage upon certain machinery not subject to prior lien. The loan was for the purpose of meeting pay roll obligations and to pay for raw materials needed in the operation of the business. It has never been re-paid.
The chattel mortgage given to Mrs. Tilton by the receivers was properly executed and sworn to by them in accordance with the provisions of Public Laws, chapter 216, section 8, but it was not so subscribed and sworn to by the mortgagee. It was properly recorded.
On March 3, 1937, the receivers petitioned the court for an order of liquidation, notice of which was given to creditors by publication newspaper of local circulation and by sending to each of them copy thereof by registered mail, and on June 9 following, the petition was granted. Soon thereafter the receivers, by order of court, sold all the real and personal property in their hands, including the machinery described in the mortgage to Mrs. Tilton, which was found by the court to be worth $6570, as of the date of sale.
A master was thereafter appointed who, upon notice, heard the claims of creditors and reported thereon. With respect to Mrs. Tilton's claim he found that "it would be inequitable not to have her paid the amount of her loan," and recommended that "she be paid the full sum of $5,000 from the moneys in the hands of the Receivers without interest." The court, in passing upon this part of the master's report, ruled that Mrs. Tilton was not entitled to a preference. Specifically, with respect to this loan, he found and ruled as follows: "However, the loan was authorized by the Court and the Receivers received the money, it was used in the conduct of the business and for the benefit of the estate, and consequently is a proper Receivers' indebtedness. The claim stands on the same footing as other unsecured creditors' debts, and is so allowed. The Court rules it being a receivers' creditors' debt incurred in the conduct of the business, and properly authorized, it is to be allowed sine interest, as all other claims of unsecured receivers' creditors. In as much as the findings and rulings of the master are at variance with the above, they are set aside."
Thereafter, upon petition of Mrs. Tilton, he made a further ruling to the effect that "If Lillian Tilton had perfected her mortgage by taking the oath thereto equity would require that her loan should be a preference at least to the value of the security; . . . if Mrs. Tilton is entitled to a preference then she is also entitled to interest on her mortgage note." After payment of the expenses of the receivership, the funds remaining in the hands of the receivers after liquidation were not sufficient to pay the receivers' creditors in full.
Mrs. Tilton excepted to the refusal of the court to rule that she was entitled to a preference over other unsecured receivers' creditors "at least to the value of her mortgage security," and her bill of exceptions was allowed by Burque, C.J.
Harold E. Wescott, by brief, for Lillian H. Tilton.
Franklin Hollis (orally, but, by special permission of this court without brief), for the New England Thread Co., a general unsecured creditor of the receivers.
The Supreme Court of the United States has said that the power of a court of equity to appoint receivers and to authorize them "to raise money necessary for the preservation and management of the property, and make the same chargeable as a lien thereon for its repayment, cannot, at this day, be seriously disputed." But that court has also said "It is, undoubtedly, a power to be exercised with great caution; and, if possible, with the consent or acquiescence of the parties interested in the fund." Wallace v. Loomis, 97 U.S. 146, quoted with approval in Union Trust Co. v. Railway, 117 U.S. 434, 455.
The suggestion in these cases that this power of the court is limited to receiverships over public utilities for the reason that they owe to the public a duty of continued operation is not supported by any citation of authorities and does not appear to be sound upon principle. The underlying reason for the appointment of receivers is to conserve assets for the benefit of creditors. There may be occasions when this purpose can best be accomplished by continuing the business in operation even though such continued operation entails borrowing by the receivers, but whether, in any particular case, there is occasion for continued operation by receivers and borrowing by them for that purpose depends not so much upon the nature of the business as upon the condition of its affairs. In our opinion the nature of the business of a utility is not the test of the existence of this power of the court to permit borrowing by a receiver. It only affects the exercise of it. So, although the better practice would apparently have been to authorize Mrs. Tilton's loan to the receivers and the giving of security therefor by the latter only after special notice to other creditors, we cannot say that under the circumstances the court was without power to authorize either the loan or its security.
The reason why loans and liens authorized without notice may be valid in spite of the effect of such transactions upon the rights of other creditors is, as pointed out in the case last cited, that "many circumstances may be judicially equivalent to prior notice." The equivalent mentioned in that case is that the general creditors were given "A full opportunity . . . to be heard, on evidence, as to the propriety of the expenditures and of making them a first lien" at the time when the respective rights of all persons interested were determined at the final hearing held after liquidation, and such opportunity was given to all creditors in the case at bar. It follows that the loan from Mrs. Tilton to the receivers and the lien given to secure it were properly authorized.
Whether her lien, if valid, arose by reason of its authorization by the court or whether it arose because of the mortgage given by the receivers (Brown v. Schintz, 98 Ill. App. 452; 1 Clark, Receivers, s. 553), is a question which we need not decide. If it arose because of the action of the court, the incomplete execution of the mortgage is immaterial. If it arose only because of the mortgage, the failure of the mortgagee to subscribe and swear to it does not render it invalid as between the parties (P. L., c. 216, s. 16; General Motors Acceptance Corp. v. Berry, 86 N.H. 280, 285), or as against general unsecured creditors of the mortgagor (Commonwealth Trust Co. v. Company, 77 N.H. 146), and no rights of attaching creditors or of the purchasers of the machinery are here involved. Thus the receivers sold property subject to a mortgage which so far as they were concerned was valid, and such sale constituted a conversion by them of the mortgaged property. White v. Phelps, 12 N.H. 382; Knapp v. Hobbs, 50 N.H. 476. The proceeds of the sale of the mortgaged machinery were therefore held by the receivers subject to an equitable lien in favor of Mrs. Tilton (3 Scott, Trusts, s. 508. 1), and since those proceeds are still in their hands, she is entitled to the amount of her loan with interest.
Exception sustained.
All concurred.