Opinion
No. 133515
Decided June 30, 1972.
Appointment of a receiver — R. C. 2735.01 and 2735.02 — Notice and hearing required — Possibility of irreparable damage an exception to that requirement — Court costs incident to such an appointment — Liability for costs incident to an invalid appointment — Attorney representing both receiver and creditor not permitted.
1. Ohio courts lack authority to appoint a receiver pursuant to R. C. 2735.01 until after notice has been given to all parties and a hearing held, unless the plaintiff establishes that the time taken to give such notice will result in irreparable loss to the plaintiff.
2. Before the court may appoint a receiver without notice to the other parties, evidence must be received by the court which will substantiate a finding that irreparable damage will result if such appointment is not made forthwith.
3. The appointment of a receiver without notice is illegal and invalid where the evidence does not establish that irreparable damage will result.
4. In the appointment of a receiver the court costs include the expenses of the custody and preservation of the property taken by the receiver, including, but not limited to: (1) the receiver's salary, (2) the receiver's attorney, (3) the receiver's accountant, and (4) any other services which would not be necessary if a receiver had not been appointed.
5. The costs incurred as the result of the appointment of a receiver who has been illegally appointed may not be paid from receivership property or funds.
6. When a receiver is illegally appointed, the party seeking the appointment must pay all costs including the receiver's salary, the receiver's attorney, the receiver's accountant, and all other expense incurred solely as a result of such illegal appointment.
7. An attorney for a creditor in a receivership cannot serve as an attorney for the receiver.
Messrs. Goldman, Bogin Fox, Mr. Dennis L. Patterson, for plaintiffs and the receiver, and co-counsel Donald G. Schnornak.
Messrs. Geisenfeld Izenson, Mr. James R. Geisenfeld, Messrs. Lucas, Prendergast, Albright, Gibson, Brown Newman and Mr. James H. Callard, for Thunder Corp., Winthrop Homes, Inc., Julius J. Cohen, Muriel P. Cohen and Robert E. Albright.
Messrs. Bieser, Greer Landis and Mr. Edward L. Shank, for Equitable Life Assurance Society of the United States.
Messrs. Shaman, Winer, Shulman Ziegler and Mr. Jeffrey B. Shulman, for Silver Coin-O-Matic, Inc.
Mr. Joseph J. Freemas, for C. A. Washington.
Mr. Lee C. Falke, prosecuting attorney, for Robert L. Roderer, Treasurer.
Messrs. Vorys, Sater, Seymour Pease, Mr. Scott N. Whitlock and Mr. James B. Cushman, for Lawrence W. Berman.
Numerous individuals and corporations are involved with this action and the many participants are as follows:
(1) Real Estate Capital Corporation, hereinafter referred to as R. E. C. C.;
(2) Thunder Corp., hereinafter referred to as Thunder Corp.;
(3) Julius J. Cohen, hereinafter referred to as Cohen;
(4) Lawrence W. Berman, hereinafter referred to as Berman;
(5) Equitable Life Assurance Society of the United States, hereinafter referred to as Equitable;
(6) K. B. Weissman, hereinafter referred to as Weissman;
(7) Paul Tipps, hereinafter referred to as the Receiver;
(8) Robert E. Albright, hereinafter referred to as Albright.
Since its incorporation on the 16th day of May, 1966, Thunder Corp. has had only two shareholders: Cohen, who has always owned 80% of the outstanding stock; and Berman, who has always owned 20% of the outstanding stock.
On August 9, 1966, Thunder Corp. signed a first mortgage to Equitable in the principle amount $765,000.00, and this mortgage was recorded in the Montgomery County Recorder's office on October 8, 1966, in Book 2426, page 415.
On March 14, 1967, Thunder Corp. issued what purports to be a valid second mortgage on its property to R. E. C. C. and Weissman, in the principle amount of $105,000.00, but the $105,000.00 was not paid to Thunder Corp., rather it was paid to Winthrop Homes, Inc. (now named Amber Builders, Inc.). There was not, and is not now, any relationship between Thunder Corp. and Winthrop Homes, Inc., other than the fact that Cohen, who performed all of these transactions, was the sole shareholder of Winthrop Homes, Inc., in addition to being an 80% shareholder of Thunder Corp.
Thunder Corp. failed to make timely payments on its note and mortgage to Equitable, and thereafter R. E. C. C. made the following three payments on behalf of Thunder Corp.:
(1) Two payments of $5,482.00 each received by Equitable on March 11, 1969;
(2) One payment of $5,482.00 received by Equitable on May 6, 1969; and
(3) On May 20, 1969, R. E. C. C. paid the real estate taxes on Thunder Corp. property in the sum of $26,070.87.
On May 23, 1969, R. E. C. C. and Weissman filed this action as plaintiffs to foreclose on the mortgage and to appoint a receiver. Also on May 23, 1969, without notice or a hearing, Paul Tipps was appointed receiver, and on June 14, 1969, Dennis L. Patterson, of the law firm of Goldman, Bogin and Fox, attorneys for the plaintiffs herein, was authorized to represent the receiver. The receiver also employed Flagel, Huber and Flagel to act as accountants for him in his capacity as receiver.
For their services, prior to June 9, 1971, these individuals had been paid the following monies from the assets of Thunder Corp.:
Paul Tipps, Receiver $21,500.00 Dennis L. Patterson, Attorney $ 5,080.00 Flagel, Huber Flagel, Accountants for Receiver $ 2,595.00
On March 11, 1971, Equitable also filed an action to foreclose its mortgage.
It should be noted at this point that numerous other cross-pleadings have been filed in this case, however, since the outcome of these claims depends upon the findings on the above stated facts, the court on September 14, 1971, made the following order:
"This trial shall be limited to the two foreclosures, being the alleged second mortgage of the plaintiff, Real Estate Capital Corp., and the alleged first mortgage of the Equitable Life Assurance Society of the United States, together with any questions regarding the court's appointment of a receiver and its authority to make such an appointment. The remaining claims, all of which are contingent upon the court's findings in the above mentioned trial, shall be given a new case number, and copies of all papers filed in this suit shall be placed in a new file under that new case number. Upon a final determination of the facts in the trial of those foreclosure claims, the remaining issues presented in the new case number shall be tried by the court."
Thus, the issues presently before the court may be summarized as follows:
(1) Is the mortgage issued by Thunder Corp. to R. E. C. C. and Weissman valid as between those parties?
(2) Is the appointment of the receiver a valid appointment?
(3) What is the status of the R. E. C. C.'s rights in regard to the funds paid by R. E. C. C. on behalf of Thunder Corp. to Equitable as mortgage payments, and the payment made by R. E. C. C. to the Montgomery County Treasurer for real estate taxes of Thunder Corp.?
(4) What are the costs in this case and who is responsible for the payment of those costs?
(5) Is the note and mortgage issued by Thunder Corp. to Equitable valid?
(6) Is Equitable entitled to a foreclosure of its mortgage?
ISSUE I
Is the mortgage issued by Thunder Corp. to R. E. C. C. and Weissman valid as between those parties?
On March 14, 1967, Winthrop Homes, Inc., signed a note (Exhibit L) for $105,000.00 payable to R. E. C. C. and Weissman. As consideration for the note R. E. C. C. and Weissman paid Winthrop Homes, Inc., the sum of $105,000.00. The note was executed by Robert E. Albright, Secretary of Winthrop Homes, Inc., and Julius J. Cohen, President and sole shareholder of Winthrop Homes, Inc. This note was secured by the personal guarantee of Julius J. Cohen and by a mortgage deed from Thunder Corp. (Exhibit F) on premises known as Regal Club Apartments, located at 821-869 South Gettysburg Avenue, Dayton, Ohio, together with an assignment of rents and leases from Thunder Corp. to R. E. C. C. and Weissman for those same apartments (Exhibit G). There is no mention in any of these papers nor any of the evidence that R. E. C. C. or Weissman had been told that there was any consideration passing to Thunder Corp. for its mortgage and assignment of rents and leases. And, although Cohen signed the mortgage as a corporate officer, Berman as a 20% shareholder objects to the mortgage of corporate property.
As a general proposition of law, corporate officers and agents may deal only within their authority, but when a corporation allows it to appear that the officer or agent has the authority to perform certain business or to engage in certain transactions, the corporation is bound by those acts of the agent even though he in fact lacks such authority. However, a corporation has only that authority which is granted to it by the Ohio Revised Code, and acts of the agent which are outside the authority granted to it by the Ohio Statutes cannot be performed even though such acts may be within the authority granted to the agent by the corporation.
R. C. 1701.13 grants Ohio Corporations their ability to function, and the pertinent portion of that section reads as follows:
"(F) In carrying out the purposes stated in its articles and subject to limitations prescribed by law or in its articles, a corporation may:
"* * *
"(6) Borrow money, and issue, sell, and pledge its notes, bonds, and other evidences of indebtedness, and secure any of its obligations by mortgage, pledge, or deed of trust of all or any of its property, and guarantee or secure obligations of any person";
Here then is the authority for the corporation to guarantee or secure the obligation of another person, provided the guarantee is made, or the security given, in carrying out the purposes of the corporation and subject to the limitations prescribed by law.
The purpose clause of Thunder Corp. reads as follows: (Plaintiffs Exhibit O):
"Third. The purposes for which it is formed are:
"To purchase, lease, take or otherwise acquire and own, use, hold, sell, exchange, lease, mortgage, work, improve, develop, subdivide, cultivate and otherwise handle and dispose of real estate, real property and any interest or right therein and to contract for and engage the services of other parties for the purpose of carrying on the same.
"To make, enter upon, and carry out contracts for constructing, building, altering, improving, repairing, decorating, maintaining, furnishing and fitting up buildings, structures and improvements of every description, and for fabricating and manufacturing sections and component parts of the same, to advance money to and enter into agreements of all kinds with builders, contractors, property owners and others for said purpose.
"To purchase, lease, take or otherwise acquire and to own, hold, sell, convey, exchange, hire, pledge, lease, mortgage or otherwise deal and dispose of all kinds of personal property, chattels real, choses in action, notes, bonds, stocks, mortgages and securities including stock issued by this corporation.
"To purchase or otherwise acquire all or any part of the business, good will, rights, property and assets and to assume all or any part of the liabilities of any corporation, association or individual engaged in any business in which any corporation organized under the laws of the state of Ohio is entitled to engage, and to acquire the stock of any corporation engaged in such business, to enter into joint ventures with others to engage in such business and to enter into partnership agreements and become a member of any partnership to engage in such business.
"To carry on any other lawful business and to do any and everything necessary, suitable, convenient or proper for the accomplishment of any of the purposes or the attainment of any or all of the objects hereinbefore enumerated or incidental to the powers herein named or for the enhancement of the value of the property of the corporation or which shall at any time appear conducive thereto or expedient; to have all the rights, powers and privileges now or hereafter conferred by the laws of the state of Ohio or under any act amendatory thereof, supplemental thereto or substituted therefor.
"The foregoing clauses shall be construed both as purposes and powers and it is hereby expressly provided that the enumeration herein of specific purposes and powers shall not be held to limit or restrict in any manner the general powers of the corporation."
At the hearing of this matter some questions were asked about what happened to the $105,000.00 loan, and from that testimony and evidence, and the depositions, there is some inference that part of those funds may have been used to repay obligations of Thunder Corp.; but such evidence, if it can be called evidence, is purely speculative in nature and not of probative value. Therefore, the court must conclude that the evidence does not establish that Thunder Corp. received any benefit from the $105,000.00 loan.
Thus, having found that there is no consideration for the mortgage it becomes exceedingly difficult for this court to conceive how the mortgage could further the corporate purpose. Further the record is clear that the $105,000.00 was paid directly for the benefit of Winthrop Homes, Inc., by R. E. C. C. and Weissman, and neither R. E. C. C. or Weissman produced any evidence that the mortgage and rent assignment was anything more than a gratuitous guarantee.
The validity of gratuitous guarantees and gifts by corporations was passed upon by the Ohio Supreme Court in MacQueen v. The Dollar Savings Bank Co., 133 Ohio St. 579, and the second and third branches of the syllabus of that case read as follows:
"(2) The voluntary transfer of property by a corporation to secure the individual indebtedness of one of its officers is binding upon the corporation if all its stockholders assent thereto; but such transfer is subject to the rights of creditors prejudiced thereby.
"(3) A gift or voluntary transfer of corporate property by a corporation is not constructively fraudulent as to subsequent creditors, and, if the corporation is solvent and reserves property clearly and beyond doubt sufficient to pay its existing indebtedness, such gift or voluntary transfer is not constructively fraudulent as to existing creditors."
And, at pages 582 and 583 Judge Williams stated:
"* * * it is fundamental that the directors or other officers of a corporation, have no right, under mere guise of official capacity, to convert corporate funds or property to the use of themselves or others by means of a gift, a loan or otherwise; so, ordinarily a policy by which an officer is insured by the corporation in its own behalf and at its own expense cannot be pledged by its directors or officers, acting by themselves, to secure the private indebtedness of one of its officers. Yet if the rights of creditors are not affected and all stockholders consent, such a pledge of the policy may be made in the absence of positive law forbidding it. The rational basis for this power to pledge corporate collateral is the well recognized principle of law that, subject to the rights of creditors, a corporation may give away its property or pay out money from its treasury if the stockholders consent and the act is not illegal. 1 Cook on Corporations (8 Ed.), 15, Section 3; Perkins v. Trinity Realty Co., 69 N. J. Eq., 723, 61A., 167; Murphy v. Arkansas L. Land Improvement Co., 97 F., 723; Millsap v. Merchants' Planters' Bank of Greenville, 71 Miss. 361, 13 So., 903; Swift v. Smith, Dixon Co., 65 Md. 428, 5 A., 534; Stoney Brook Lumber Co. v. Blackman, 286 Pa. 305, 133 A., 556. The consent of the stockholders, of itself, does not confer corporate power, but does make the pledge good as between the corporation and the creditor to whom the pledge is made."
The evidence in this case is clear that Berman, a 20% shareholder, objects to the mortgage given to the plaintiffs and to the assignment of rents and leases, and following the MacQueen case, the mortgage given to the plaintiffs by Thunder Corp., as well as the assignment of rents and leases, would be valid as between the corporation and the creditor only if they secured the approval of all stockholders.
Therefore, it is the finding of this court that the mortgage and the assignment of rents and leases given to R. E. C. C. and Weissman by Thunder Corp., are invalid.
ISSUE II
Is the appointment of the receiver a valid appointment?
The authority of Ohio Courts to appoint a receiver is set forth in R. C. 2735.01 to 2735.06, inclusive.
R. C. 2735.01 reads as follows:
"A receiver may be appointed by the Supreme Court or a judge thereof, the Court of Appeals or a judge thereof in his district, the Court of Common Pleas or a judge thereof in his county, or the Probate Court, in causes pending in such courts respectively, in the following cases:
"(A) In an action by a vendor to vacate a fraudulent purchase of property, or by a creditor to subject property or a fund to his claim, or between partners or others jointly owning or interested in any property or fund, on the application of the plaintiff, or of a party whose right to or interest in the property or fund, or the proceeds thereof, is probable, and when it is shown that the property or fund is in danger of being lost, removed, or materially injured;
"(B) In an action by a mortgagee, for the foreclosure of his mortgage and sale of the mortgaged property, when it appears that the mortgaged property is in danger of being lost, removed, or materially injured, or that the condition of the mortgage has not been performed, and the property is probably insufficient to discharge the mortgage debt;
"(C) After judgment, to carry the judgment into effect;
"(D) After judgment, to dispose of the property according to the judgment, or to preserve it during the pendency of an appeal, or when an execution has been returned unsatisfied and the judgment debtor refuses to apply the property in satisfaction of the judgment;
"(E) When a corporation has been dissolved, or is insolvent, or in imminent danger of insolvency, or has forfeited its corporate rights;
"(F) In all other cases in which receivers have been appointed by the usages of equity."
R. C. 2735.02 reads as follows:
"No party, attorney, or person interested in an action shall be appointed receiver therein except by consent of the parties. No person except a resident of this state shall be appointed or act as receiver of a railroad or other corporation within this state."
The language of R. C. 2735.01, supra, does not specifically mention the ex parte appointment of receivers. In fact, the language implies that such appointment shall be made only upon the receipt of some evidence by the court. In paragraph (A) we find this language: "When it is shown that the property or fund is in danger of being lost, removed or materially injured" (Emphasis added).
And, in paragraph (B) we similarly see the language: "When it appears that the mortgaged property is in danger of being lost, removed, or materially injured" (Emphasis added).
Paragraphs (C) and (D) have reference to the appointment of a receiver only after the parties have had an opportunity to be before the court and an adjudication has been made as to their rights.
Paragraph (E) also assumes that an adjudication has been made because it takes effect only when a corporation has been dissolved or is insolvent, or is in imminent danger of insolvency, or has forfeited its corporate rights, all of which would imply a finding of fact of one of those items. Nowhere in this section do we find the words "alleged, plead, averred," or similar wording, by which we could conclude that the legislature intended the appointment of receivers to be made without the presentation of any evidence. Further, note that R. C. 2735.02 specifically makes mention of the consent of the parties thereby implying that notice had been given. And, how would one determine lack of interest without a hearing?
The second branch of the syllabus in Railway Co. v. Jewett, 37 Ohio St. 649, reads as follows:
"(2) The appointment of a receiver to take from the defendant the possession of his property, cannot be lawfully made without notice, unless the delay required to give such notice will result in irreparable loss."
In Madigan v. Dollar Bldg. Loan Co., 49 Ohio App. 69, the third branch of the syllabus reads as follows:
"(3) It is error for the court to appoint a receiver in a mortgage foreclosure action to take from the defendants the possession of their property, where there is a failure to give notice to the defendants and there is no showing that the delay required to give notice would result in irreparable damage."
And, at page 75, we find the following language:
"In the instant case no showing is made that the delay required to give notice would result in an irreparable loss. Counsel for the building and loan company attempt to distinguish*** the instant case from the Jewett case, in that there was a general receivership in the reported case, whereas it is claimed that we are here dealing with a special receivership. We find no authority for this contention, nor is it supported in reason. The appointment of a receiver is the taking of property; and, whether it is only a part or all, there can be no difference in principle."
The Fourteenth Amendment to the U.S. Constitution reads, in pertinent part, as follows:
"No state shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any state deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws."
In Hamilton v. Keiter, 16 Ohio Misc. 260, decided October 14, 1968, by Judge Brenton of the Montgomery County Common Pleas Court, the third branch of the syllabus reads, as follows:
"Due process of law includes the opportunity to be heard, when necessary, for the just protection of rights."
The above quoted law leads this court to the conclusion that the Ohio courts lack authority to appoint a receiver pursuant to R. C. 2735.01(B) until after notice has been given to the parties and evidence presented, unless by evidence the plaintiff establishes that the time taken to give such notice will result in irreparable loss.
There being no evidence of irreparable loss in the case now before the court, the court finds that the appointment of the receiver in this case was illegal and that said appointment is therefore invalid.
Moreover, in the most recent cases of Margarita Fuentes et al., v. Robert L. Shevin et al., and Paul Parham et al., v. Americo v. Cortese et al., 40 Law Week 4692, decided June 12, 1972, the United States Supreme Court, in passing on replevin provisions of the state laws of Florida and Pennsylvania, indicated that any taking of a person's property by court order must be preceded by notice and a hearing.
The pertinent portion of the syllabus in that case reads as follows:
"1. The Florida and Pennsylvania replevin provisions are invalid under the Fourteenth Amendment since they work a deprivation of property without due process of law by denying the right to a prior opportunity to be heard before chattels are taken from the possessor.
"(a) Procedural due process in the context of these cases requires an opportunity for a hearing before the state authorizes its agents to seize property in the possession of a person upon the application of another, and the minimal deterrent effect of the bond requirement against unfounded applications for a writ constitutes no substitute for a preseizure hearing."
The intent of the U.S. Supreme Court is clear and undeniable when one reads the body of the opinion and the following excerpts may be found at pages 4696 and 4697:
"* * *
"For more than a century the central meaning of procedural due process has been clear: `Parties whose rights are to be affected are entitled to be heard; and in order that they may enjoy that right they must be notified.' Baldwin v. Hale, 68 U.S. 223. See Windsor v. McVeigh, 93 U.S. 274; Hovey v. Elliott, 167 U.S. 409; Grannis v. Ordean, 234 U.S. 385. It is equally fundamental that the right to notice and an opportunity to be heard `must be granted at a meaningful time and in a meaningful manner.' Armstrong v. Manzo, 380 U.S. 545, 552.
"* * *
"The constitutional right to be heard is a basic aspect of the duty of government to follow a fair process of decision making when it acts to deprive a person of his possessions. The purpose of this requirement is not only to ensure abstract fair play to the individual. Its purpose, more particularly, is to protect his use and possession of property from arbitrary encroachment — to minimize substantively unfair or mistaken deprivations of property, a danger that is especially great when the state seizes goods simply upon the application of and for the benefit of a private party. So viewed, the prohibition against the deprivation of property without due process of law reflects the high value, embedded in our constitutional and political history, that we place on a person's right to enjoy what is his, free of governmental interference. See Lynch v. Household Finance Corp., ___ U.S. ___, ___.
"* * *
"If the right to notice and a hearing is to serve its full purpose, then, it is clear that it must be granted at a time when the deprivation can still be prevented. At a later hearing, an individual's possessions can be returned to him if it was unfairly or mistakenly taken in the first place. Damages may even be awarded to him for the wrongful deprivation. But no later hearing and no damage award can undo the fact that the arbitrary taking that was subject to the right of procedural due process has already occurred. "This court has not . . . embraced the general proposition that a wrong may be done if it can be undone." Stanley v. Illinois, ___ U.S. ___, ___.
"* * *
"To be sure the requirements that a party seeking a writ must first post a bond, allege conclusorily that he is entitled to specific goods, and open himself to possible liability in damages if he is wrong, serve to deter wholly unfounded applications for a writ. But those requirements are hardly a substitute for a prior hearing, for they test no more than the strength of the applicant's own belief in his rights. Since his private gain is at stake, the danger is all too great that his confidence in his cause will be misplaced. Lawyers and judges are familiar with the phenomenon of a party mistakenly but firmly convinced that his view of the facts and law will prevail, and therefore quite willing to risk the costs of litigation. Because of the understandable, self-interested fallibility of litigants, a court does not decide a dispute until it has had an opportunity to hear both sides — and does not generally take even tentative action until it has itself examined the support for the plaintiff's position.
"* * *
"The right to a prior hearing, of course attaches only to the deprivation of an interest encompassed within the Fourteenth Amendment's protection. In the present cases, the Florida and Pennsylvania statutes were applied to replevy chattels in the appellants' possession. The replevin was not cast as a final judgment; most, if not all, of the appellants lacked full title to the chattels; and their claim even to continued possession was a matter in dispute. Moreover, the chattels at stake were nothing more than an assortment of household goods. Nonetheless, it is clear that the appellants were deprived of possessory interest in those chattels that were within the protection of the Fourteenth Amendment."
This court in its holding, that the appointment of the receiver is illegal and invalid does not go as far as the U.S. Supreme Court has gone in the Fuentes and Americo cases, supra, for this court is not holding that all appointments of receivers are invalid unless notice is given and a hearing held. It is not necessary for this court to go that far in this case. This court is limiting its holding to conform to its findings that there was no evidence presented, prior to the appointment, that irreparable loss would result if the receiver were not immediately appointed without notice. And, therefore, following the prior holdings of the Ohio courts, the appointment is illegal and invalid.
ISSUE III
What is the status of R. E. C. C.'s right in regard to the funds paid by R. E. C. C. on behalf of Thunder Corp. to Equitable as mortgage payments, and the payment made by R. E. C. C. to the Montgomery County Treasurer for real estate taxes of Thunder Corp.?
The court having found that the mortgage and the assignment of rents and leases are invalid, must of necessity find that the plaintiffs do not have a contractual right to receive reimbursement of those funds.
In Sommers v. Putnam County Board of Education, 113 Ohio St. 177, at page 184, we find the following language:
"An act of beneficial intervention in the discharge of another's legal obligation, which results in a quasi contractual obligation, must contain the following elements: The obligation must be of such a nature that actual and prompt performance thereof is of grave public concern; the person upon whom the obligation rests must have failed or refused with knowledge of the facts to perform the obligation; or it must reasonably appear that it is impossible to perform it; and the person who intervenes must, under the circumstances, be not a mere intermeddler but a proper person to perform the duty. Woodward, Law of Quasi Contracts, p. 310; Forsyth v. Ganson, 5 Wend. (N.Y.) 558, 21 Am. Dec. 241; Rundell v. Bentley, 53 Hun. (N. Y.), 272, 6 N. Y. S., 609."
The mortgage given to Equitable by Thunder Corp. (Equitable Exhibit 3) contains the following pertinent provisions:
"And the mortgagor covenants with the mortgagee as follows:
"* * *
"That the mortgagor will not assign the whole or any part of the rents, income or profits arising from the premises without the written consent of the mortgagee and any assignment thereof shall be null and void";
This mortgage was filed with the Recorder of Montgomery County, Ohio on August 16, 1966, and was recorded in Volume 2426, page 415, Montgomery County Mortgage Records. (See quoted stipulation, infra.)
The plaintiffs in this case have taken an assignment of rents contrary to the recorded contractual obligations of Thunder Corp.; they have taken a mortgage on Thunder Corp. property knowing that the proceeds of the loan were paid to another corporation and without the consent of the shareholders of Thunder Corp.; they have had a receiver appointed by ex parte order, and they have allowed their attorney to represent both their interests as plaintiff and the receiver; they have by their actions taken the property of Thunder Corp. for a period of over three years under an invalid mortgage and an illegal appointment of a receiver; in view of all of this the court must conclude that these plaintiffs are certainly intermeddlers of the first class.
The court therefore finds that R. E. C. C. is not entitled to restitution of the payments they made to Equitable on behalf of Thunder Corp. or of the payment made to the Montgomery County Treasurer for real estate taxes on behalf of Thunder Corp.
ISSUE IV
What are the costs in this case and who is responsible for the payment of those costs?
In Brown v. Winterbottom, 98 Ohio St. 127, at page 133, we find the following language:
"The rule is generally recognized that the cost of the custody and preservation of the property in the hands of the court, as well as the taxes, are of course payable out of the corpus of the realty encumbered, either in the case of individuals or private corporations, and are considered part of the expenses and costs of suit."
The court thus finds that the costs include, in addition to those filing costs at the clerk's office to date, the funds paid to the following persons prior to June 9, 1971:
Paul Tipps, Receiver $21,500.00 Dennis L. Patterson, Attorney 5,080.00 Flagel, Huber Flagel, Accountants for Receiver 2,595.00 Total $29,175.00
On January 5, 1971, R. Peter Finke was appointed a referee, with the approval of the plaintiffs by and through their attorney, Dennis L. Patterson (being the same Dennis L. Patterson who represents the receiver). All attorneys have agreed that the value of R. Peter Finke's services is $1,500.00 and since his services were directly related to the appointment of a receiver the $1,500.00 is an item of cost in this case.
Paul Tipps has continued to serve as receiver without compensation since June of 1971 and his services are reasonably worth $1,000.00 per month. The court finds that his services are directly related to the custody and preservation of the property and that the sum payable to him since June of 1971 through June of 1972 should be taxed as costs in the amount of $1,300.00.
Flagel, Huber Flagel, accountants, have rendered services that were personal to the receiver in the custody and preservation of the property and they have served without compensation since June of 1971. Their services are reasonably worth the sum of $2,200.00 from June of 1971 through May 24, 1972, and the sum of $2,200.00 shall be taxed as costs.
Dennis L. Patterson has performed legal services for the receiver Paul Tipps since June of 1971 without compensation and several applications for partial compensation have been submitted.
R.C. 2735.02, supra, prohibits the appointment of a party, attorney or person interested in the action as a receiver.
In Cheney v. The Maumee Cycle Company, 64 Ohio St. 205, Judge Spear described the position of the receiver at page 213, as follows:
"* * * the property of an insolvent corporation which has ceased to do business, and to carry out the objects of its creation, constitutes a trust fund for the equal benefit of its creditors, and the conclusion which inevitably follows that, upon the filing of the petition and service on the corporation and its answer admitting the truth of the charges and consenting to the granting of the prayer, the court's jurisdiction attached to all the property of the corporation, and its power to administer it for the benefit of all the creditors was complete. Rouse v. Bank, 46 Ohio St. 493; Belmont Nail Co. v. The C. I. S. Co., 46 Fed. Rep., 8."
And at page 214:
"* * * standing as the ministerial officer of the court, his relation to the property being much like that of a sheriff or master in chancery. Bank v. Buckingham, 12 Ohio St. 419. His appointment is an equitable remedy, bearing the same relation to courts of equity that proceedings in attachment bear to courts of law, the appointment being treated as an equitable execution. The purpose is to secure the means for satisfying the final order and judgment of the court in the action, and the effect of the seizure is to place the property seized in the custody of the court. Railroad Co. v. Sloan, 31 Ohio St. 1. By express provision of R. S. 5590, the receiver is given power, under the control of the court, to take and keep possession of the property, and generally to do such acts respecting the property as the court may authorize. This statutory provision establishes a legal right, and this legal right is not affected by the fact that it is conferred in an action in its nature equitable, nor by the fact that it is to be enforced against a claim which would have been good as between the claimant and the debtor. It follows from this that the effect of the appointment, and the seizure of the property by the receiver, was to fasten the claims of creditors upon it and to give that officer control over it for the benefit of creditors, and in this respect his relation to it was, for all practical purposes, the same as that which an assignee would have had. The property thus sequestered was held by the receiver as effectually as an assignee could have held it, or as creditors could have held it by attachment or levy. In no other way than through him could the rights of creditors be worked out, and, in this aspect of the case, he represented the creditors rather than the debtor. Graham Button Co. v. Spielmann, 50 N. J. Eq., 120; Hebberd v. S. L. Cattle Co., 55 N. J. Eq., 18; In re W. H. Co., 70 Conn. 220; Farmers' L. T. Co. v. M. E. M. Works, 35 Minn. 543; Bayne v. Brewery Pottery Co., 90 Fed. Rep., 754; High on Rec., Sec. 454; Smith on Rec., Secs. 230, 231.
"We think that, upon principle as well as upon the above authorities and many others of like import which might be cited, the right of the receiver to the property in dispute was a legal right to its possession with authority to manage it and dispose of it for the benefit of creditors generally; that it antedated the taking effect of plaintiff's mortgage, and that, therefore, as between the plaintiff and the receiver, the proceeds of the sale belong to the latter."
The position of the receiver then is not to represent the interest of the plaintiffs. Rather the position of the receiver is to hold the property intact for all creditors and the residue thereafter, if any, for the stockholders. The receiver, as stated by the Ohio Supreme Court, represents the court, and must of necessity be as impartial as the court itself, advancing the cause of none of the participants to the litigation, and with total freedom to pursue the rights of the corporation against any and all parties to the action when necessary and proper.
Since a lawyer has a duty to maintain the independence of his professional judgment, he is precluded from accepting employment that will adversely affect such judgment on behalf of his client or such employment as will dilute his loyalty to a client. If a lawyer has this duty then he could not represent both the plaintiff in an action and a receiver of the property involved in that action for a situation could arise where it would be necessary for the receiver to file suit against the plaintiff or to deny the claims of the plaintiff.
There is also a very real problem, as in this particular case, where the assets of the corporation in receivership are not sufficient to pay off the creditors, and the receiver must decide which of the creditors he will pay and which of the creditors he will not pay. In this case the receiver has elected to discontinue paying the purported first mortgage holder, Equitable.
Based upon these conclusions of the court, it is the finding of this court that Dennis L. Patterson has a conflict of interest in his representation of both the receiver and the plaintiffs in this case, and therefore he should look to the plaintiff for his compensation, and his request for further payment is hereby denied. Further, the receiver is hereby authorized to retain independnt counsel to represent him if he finds it necessary in the future to retain counsel.
Since in this case we are dealing with an invalid mortgage and an illegal appointment of the receiver, these costs cannot be ordered to be paid from the receivership, as these funds belong to Thunder Corp., its creditors, and stockholders. Some of Thunder Corp.'s funds have already been advanced to pay these costs and Thunder Corp. is entitled to reimbursement since they were taken under an illegal appointment and an invalid mortgage.
These costs are the natural consequences of the acts of the plaintiff in seeking the appointment of a receiver which they had no right to do. The plaintiff clearly had other remedies, for they could, and did, sue Winthrop Homes, Inc., the maker of the note, and also the individual grantor, Cohen.
The costs in this case are directly related to the filing of the suit and must be assessed against the plaintiffs. These costs include the filing fees for the clerk's office and following additional items:
Paul Tipps, Receiver for services prior to June 9, 1971 $21,500.00 for services subsequent to June 9, 1971 13,000.00 Dennis L. Patterson for services prior to June 9, 1971 5,080.00 Flagel, Huber Flagel for services prior to June 9, 1971 2,595.00 for services subsequent to June 9, 1971 and through May 24, 1972 2,200.00 R. Peter Finke 1,500.00 Total Additional Items $45,875.00
IT IS THEREFORE HEREBY ORDERED, ADJUDGED AND DECREED that the costs in this case to date be assessed against the plaintiffs, R. E. C. C. and Weissman, and that such costs include the additional items above referred to in the sum of $45,875.00 plus the clerk's other charges.
IT IS FURTHER ORDERED that the clerk shall upon receipt of these costs, distribute them as follows:
Thunder Corp. $29,175.00 For reimbursement for expenses paid from the funds of Thunder Corp. to Paul Tipps, Dennis L. Patterson and Flagel, Huber Flagel. Paul Tipps 13,000.00 Flagel, Huber Flagel 2,200.00 R. Peter Finke 1,500.00 $45,875.00
ISSUE V
Is the note and mortgage issued by Thunder Corp. to Equitable valid?
A stipulation entered into by the parties and recorded in this court's pretrial order, filed September 14, 1971, reads as follows:
"1. Defendant Thunder Corp. is indebted to Equitable in the sum of Seven Hundred Twenty-three Thousand One Hundred Sixteen Dollars and Eighteen Cents ($723,116.18) with interest at Six (6) per cent per annum from September 1, 1970 to January 20, 1971 and interest at Eight (8) per cent per annum from January 20, 1971 on the note attached to Equitable's cross-claim.
"2. To secure payment of said note, defendant Thunder Corp. executed and delivered to Equitable a mortgage covering the following described real estate:
"Situate in the City of Dayton, County of Montgomery and State of Ohio and being part of Lot Numbered Seventy-five Thousand Eight Hundred Ninety-two (75892) of the revised and consecutive numbers of lots on the plat of said city of Dayton, Ohio, and being a tract of land described as follows:
"Beginning at the northeast corner of said Lot 75892, said point being in the centerline of Gettysburg Avenue; thence with north line of said Lot 75892, South eighty-five degrees twenty-nine minutes (85° 29') West for three hundred fifty-nine and 02/100 (359.02) feet to the northeast corner of land conveyed to the University of Dayton by deed recorded in Book 1981, page 544 in the Deed Records of Montgomery County, Ohio; thence with the east line of said University of Dayton land, South four degrees twenty-seven minutes (4° 27') East for five hundred ten and 75/100 (510.74) feet; thence North eighty-six degrees zero minutes (86° 00') (354.99) feet to a point in the East line of said Lot 75892 and the centerline of said Gettysburg Avenue; thence with the east line of said Lot 75892 and the centerline of said Gettysburg Avenue, North four degrees zero minutes (4° 00') West for five hundred thirteen and 96/100 (513.96) feet to the point of beginning containing 4.199 acres more or less.
"3. Said mortgage was filed for record with the Recorder of Montgomery County, Ohio, on August 10, 1966 at 1:35 P. M. and was recorded in Volume 2426, page 415, Montgomery County Mortgage Records, at which time defendant Thunder Corp. was the owner of record of said real estate. Said mortgage is the first lien against said real estate except the real estate taxes thereon.
"4. Financing statements identifying "equipment" as used in said mortgage were executed by defendant Thunder Corp. and were filed as follows:
"Financing Statement filed August 12, 1966 at 3:37 P. M. in the office of the Secretary of State of Ohio under File No. B62405.
"Financing Statement filed August 15, 1966 at 1:29 P. M. in the office of the Recorder of Montgomery County, Ohio under File No. D12975.
"Financing Statement filed August 12, 1966 at 4:10 P. M. in the Office of the Recorder of Franklin County, Ohio under File No. 29997.
"5. By reason of said mortgage and financing statements Equitable has perfected a security interest in said equipment (as defined in said mortgage) prior to all other security interests in the equipment as additional security for the payment of said note.
"6. There is default in the performance of the obligations of said mortgage.
"7. The Equitable Life Assurance Society of the United States has not received any payments on its mortgage since the 29th of September, 1970, which payment was due September 1, 1970.
"8. The balance due on the alleged first mortgage of the Equitable Life Assurance Society of the United States as of September 3, 1971, is $775,656.01, and thereafter the sum of $158.94 per day accrues on said mortgage.
"9. The Equitable Life Assurance Society of the United States shall type and certify a copy of its account cards, and said copy shall be marked as Equitable's Exhibit 1. The original account cards shall be available for comparison with the certified copy at the time of trial on September 14, 1971.
"10. The Equitable Life Assurance Society of the United States shall introduce evidence as its Exhibit Number 2, a copy of its note, and as Exhibit 3, a copy of its mortgage, and the originals shall be available at the time of trial for inspection by all counsel.
"By stipulating the foregoing facts the parties have not intended to stipulate to the ultimate question of law whether the Equitable Life Assurance Society of the United States may foreclose its mortgage."
Pursuant to this stipulation the court finds that Equitable does have a valid mortgage on the property in question, and that said mortgage is a first lien upon said property having a balance due of $775,656.01 with interest due of $158.94 per day from September 3, 1971 until paid.
ISSUE VI
Is Equitable entitled to a foreclosure of its mortgage?
In Eagle Savings Loan Assn. v. Williams, 19 Ohio App.2d 264, decided May 26, 1969, the trial court had refused to grant judgment and a decree of foreclosure, and continued the matter to afford the defendants an opportunity to pay the deficit in the account. The appellate court overruled the judgment of the trial court and ordered judgment to be entered for the plaintiff and a decree of foreclosure granted. The syllabus of the Eagle case reads as follows:
"Where the allegations of a petition, praying for judgment on a note secured by a mortgage, on real estate and for foreclosure of the mortgage, are uncontroverted, it is the clear legal duty of the court to grant judgment on the note and decree foreclosure of the mortgage."
If this court failed to grant judgment and a decree of foreclosure, its action would be an interference with Equitable's contractual rights and a denial of Equitable's property. The court will not, however, order that the property be immediately foreclosed, and the defendant will be granted a few days to pay the mortgage.
It is the finding of this court that Equitable is entitled to recover on said mortgage the amount due on said note; said mortgage has become absolute and liable to foreclosure; and Equitable is entitled to have the equity of redemption of defendant Thunder Corp. and all persons claiming through it foreclosed.
IT IS ORDERED, ADJUDGED AND DECREED that Equitable recover from the defendant Thunder Corp. the sum of $775,656.01 with interest at the rate of $158.94 per day from September 3, 1971 and its costs of this action not hereinbefore specifically found against the plaintiff; unless defendant Thunder Corp. shall, within three days of the entry of this judgment, pay to Equitable the sum herein found to be due Equitable, together with interest, the equity of redemption of defendant Thunder Corp. and all persons claiming through it shall be foreclosed and an order of sale shall be issued for said real estate, including the equipment, to the sheriff of Montgomery County, Ohio directing him to appraise, advertise and sell said real estate, including the equipment, as upon execution, free and clear of all liens, claims, and interests of all parties to this action, and to report his proceedings to this court for further order and that the proceeds of sale shall be applied first to the payment of Equitable's claim and then in accordance with further orders of this court.
IT IS THE FURTHER ORDER OF THIS COURT that the mortgage of Thunder Corp. to Real Estate Capital Corporation, and K.B. Weissman be, and the same is, hereby cancelled together with a cancellation of the assignment of the rents and leases.
The court notes that the tremendous costs of this action are due mostly to the appointment of a receiver and the failure to make the mortgage payments to Equitable. Therefore, if an appeal is filed from this judgment entry and that appeal includes an appeal from the order of sale of this court in granting judgment to Equitable then the appeal bond should guarantee payment of the additional interest costs of $158.9412 per day, and the monthly costs of the receiver, his attorney and accountant which approximate $1600.00 a month. This court would therefore set an appeal bond of (365 × $158.94 plus $1600.00 × 12) $77,213.54 for any appeal that included an appeal from the order of sale of the property.
Exceptions to all parties.