Opinion
December 1, 1931.
McManus, Ernst, Ernst Lynch, of New York City (Irving L. Ernst, of New York City, of counsel), for receivers in equity and Irving Trust Co.
Walter D. Wile, of New York City, for Wile Corporation.
George W. Alger, of New York City, for Sheffield Farms Co.
Frank B. Lent, of New York City, for Dairymen's League.
In Equity. Receivership proceeding by the Seaboard National Bank against the Rogers Milk Products Company, Inc. From an order of distribution of the proceeds of certain mortgaged property, Edwin H. Spence, trustee for mortgage bondholders, appealed, and the Circuit Court of Appeals reversed such order in part and remanded the cause for further proceedings in conformity with its opinion [ 21 F.2d 414]. On motion of attorneys for the receivers and the Irving Trust Company, a bondholder, to confirm the special master's report, and to fix and tax his fee.
Report confirmed, and fee fixed and taxed.
The Report of William W. Hoppin, Special Master, is as follows:
To the Honorable John C. Knox, Judge of said District Court.
Statement of Facts.
The hearings before me were reopened by an order of the United States District Court for the Southern District of New York dated May 20, 1929, to take proof of the following:
(1) To take such testimony as may be offered by the parties in interest tending to establish the jurisdiction of the court.
(2) Whether Spence, as trustee, is estopped by any of his acts from questioning the jurisdiction of this court.
(3) What, if any, interest in any of the property of the defendant Spence as trustee and the other interested parties established in this cause as of March 4, 1925, and in the purchase of property sold by the receivers herein pursuant to the orders of this court.
(4) What valid bonds existed upon which claims were filed in this suit up to March 4, 1925.
(5) What claims, if any, any person or persons have asserted to the receivers or their attorneys since that time upon any of the mortgage bonds.
(6) Whether Spence, as trustee, by his participation in proceedings instituted to sell the real property of the company, or by seeking any of the proceeds thereof, or by acquiescence in the result of the sale, is estopped from asserting the irregularity of the sale.
(7) To take such testimony as the interested parties may produce as to the advisability of causing said premises to be sold free of liens.
(8) Further ordered to report the facts with findings to the court.
After considerable delay, the parties appeared before the special master for the first hearing on July 15, 1930, which hearings were continued thereafter until January 27, 1931, some twelve hearings having been held during that period. Opportunity was also given to counsel to sum up before me after time had been given them to digest the testimony. In all, 485 pages of testimony were taken at these hearings. Much of this testimony was not introduced before me in the hearings upon which I based my report dated November 16, 1928.
I previously found that all of the parties were properly before the court, they having submitted to its jurisdiction by appearing and admitting all of the allegations in the bill. Furthermore, it appears that the defendant had offices in New York City (S.M. p. 53), where it kept its stock books and books of account. The mortgage was executed in New York City and the coupons payable at their New York office, and there was evidence that the directors' meetings were all held in New York City and that the minute book as well as the stock books were also there. (S.M. 448, 449.)
On an order to show cause why the property in question should not be sold free and clear of liens, Spence was represented by counsel. On the return day, he filed an affidavit in opposition to selling the properties secured by the mortgage as separate parcels, and requested the court to direct the receivers to offer all of the properties as a whole or direct their sale under foreclosure. He did not, however, object to the sale of the properties as such, or their sale free and clear of all liens, nor was any jurisdictional question raised as to the right of the court to sell the property. The only bids received, however, for the property securing the mortgage were for the milk feeding stations and the Pulaski plant as separate parcels. It was evident from the character of these plants and the use to which they could be put that the possible purchasers were limited to those in the milk business. The property was thereupon, pursuant to the orders of this court dated February 26, 1924, covering the milk stations and the Pulaski plant by order dated October 16, 1924, sold at the bid prices, and the defendant corporation, through its officers, directed to execute deeds to the purchasers or their nominees. Deeds were also executed in favor of the purchasers or their nominees by the receivers.
The property was situated in the Northern District of New York where ancillary receivers had been appointed. After the sale in the Southern District, a confirmatory order was sought by counsel for the receivers appointed in the Southern District, in the Northern District, but denied on the ground of lack of jurisdiction by the court sitting there. The aforesaid orders of sale were not appealed from, although Spence personally had full knowledge of the intention of the receivers to endeavor to sell the property and approved those efforts as president of E.H. Spence Co. Inc. (Exhibit 6 S.M. 104.) Further, he sought to have the fund so derived from the sale of the property turned over to him for distribution rather than left in the receivers' hands. (See Petition Edwin H. Spence dated December 6, 1924, Printed Record 160-167.) In other words, he sought to pursue the fund rather than resort to legal remedies.
Furthermore, Spence did not file his claim on the 197 bonds held by him and produced before the special master within the time set by the court for the filing of claims, which was within ninety days from July 24, 1923. (Printed Record, p. 68.) It should also be noted that Niedner, one of the trustee's witnesses, testified (S.M. 309) that the Pulaski plant cost the Rogers Milk Corporation about $35,000 probably in 1919 or 1920. It was principally on this plant that the mortgage for $500,000 was placed at the time of the organization of the Rogers Milk Products Corporation. (Spence's testimony S.M. 38, 51.) The date of this mortgage was March 31, 1921; the 197 bonds held by Spence and later assigned to Spence Co. being part of the issue thereunder.
On November 13, 1924, an order was entered herein making certain allowances to counsel, amongst other things; on the return day Spence was represented in the court by counsel. (S.M. 384.) As the entry of this order is sufficient under the statute, no notice of such entry to the parties is necessary. No appeal was taken from this order awarding allowances, etc., to counsel, and, that being so, it would appear to be too late to question it now, particularly as Spence, as trustee, was represented by counsel at the hearings and participated in it and impliedly approved and acquiesced in the proceedings. He therefore would appear to be bound by the resultant order.
By notice of motion dated October 23, 1924, E.H. Spence Co. asked for leave to file proof of claim on the 197 bonds held by them with the receivers nunc pro tunc. This paper was indorsed "Filed U.S. District Court, November 19, 1924, Motion Denied, November 18, 1924, F.A.W.S.D.J." (Respondents Exhibit 4, S.M. 101, 102.) No previous attempt had been made to file a claim on the 197 bonds secured by the mortgage on the milk stations and on the Pulaski plant prior to that date, although the court had, as previously stated, limited by order the time within which such claims must be filed.
In fact, the evidence appears to disclose conduct on the part of Spence in the prosecution of the sales campaign of the stock of the Milk Products Corporation which throws doubt on the entire transaction involved in the issuance of the 197 bonds to E.H. Spence Co. and now held by Spence Co. Furthermore, it must be borne in mind that Spence as trustee had not only notice of the time within which claims were to be filed, but had notified bondholders that the attorney for the trustees would look out for their interests. Nor were any books to substantiate his claim produced before the special master, as it was alleged they had been destroyed in a fire on Spence's place in the country. The only records submitted were certain bank accounts of E.H. Spence Co. and check books showing certain payments by Spence as trustee. None of these showed any evidence of loans to the Rogers Milk Corporation, nor could the receivers or their counsel produce any books of account.
It further appears from the testimony that Spence continued to sell the stock of the company even after its desperate financial situation was known to him, nor was Mr. Frank Rogers, president of the Rogers Milk Corporation (S.M. 424), ever able to get an accounting of these sales from Mr. E.H. Spence (S.M. 430). In fact, the record shows a surprising lack of conclusive evidence as to the amounts loaned by E.H. Spence Co. to the defendant corporation, to secure which it was claimed the aforesaid bonds were delivered. In this connection, Mr. Niedner, a witness called by Spence, testified that the financial affairs of the company were fully discussed at the meetings, and that they had large financial obligations they could not pay. (S.M. 288.) Spence thereupon, as trustee, delivered these bonds to E.H. Spence Co., presumably on the authority of the board of the Milk Products Company, of which it was testified to he was chairman, and although at the time it was the only security the corporation had in the way of liquid assets. (S.M. 291.)
It was further testified to that the advances made were from sale of stock and not from moneys belonging to E.H. Spence Co. (S.M. 323, 324, 372.) Subsequently, Niedner changed his testimony considerably (S.M. 412, and following pages), and this was after he had been interviewed by E.H. Spence (S.M. 395). Kingsley stated that the amount owed to E.H. Spence Co. was about $65,000 (S.M. 401), but could produce nothing to prove it. However, Mr. Judd, an excellent witness, testified that Mr. E.H. Spence informed him that their only resources were derived from the sale of stock. (S.M. 323, 324.) It should also be noted that Mr. Kingsley testified that about $44,000 worth of preferred stock of the defendant corporation had been issued to E.H. Spence Co., and that this was just prior to the equity receivership, and that this evened up the account between Spence and the defendant corporation. (S.M. 480, 481.)
The financial condition of E.H. Spence Co. was not shown to have been of such a character as to warrant the belief that any substantial loans could have been made to the Rogers Company by it. The only documentary evidence of any indebtedness to E.H. Spence Co. produced before me were certain demand notes signed by the officers of the Milk Products Corporation. There was nothing to show from the notes themselves that the 197 bonds were collateral therefor.
The fact that Spence was trustee under the mortgage and was also acting as principal in a stock selling campaign handling all of the moneys derived therefrom should put him to strict proof that the bonds produced before me were acquired with the consent of the trustee for value, and on the proved authority and request of the corporation for additional loans from E.H. Spence Co. other than moneys derived from the sale of the stock of the Milk Products Company. The whole transaction as to how E.H. Spence Co. acquired those 197 bonds is uncertain, and the testimony thereon, to say the least, is not only unsatisfactory but unconvincing.
The District Court for the Southern District of New York, by order dated January 10, 1924, ordered the property sold free of liens, the proceeds, however, to remain subject to valid liens. No appeal was taken from this order. At the return day the chairman of the Stockholders' committee was present as well as counsel for the trustee. (Respondents' Exhibit 8, S.M. 142.) At this meeting a thorough discussion was had, and no objection raised by any of the counsel present or any other party as to the property being sold free and clear of liens. Neither the order dated February 26, 1924, confirming the sale of the milk feeding stations nor the order of October 16, 1924, confirming the sale of the Pulaski plant were appealed from, although Spence was represented by counsel in both cases. A recital in the order dated October 16, 1924, stated that no one appeared in opposition to the sale.
While it affirmatively appears that the proceeds of these sales were insufficient to cover the face amount of the mortgage, it clearly appears that all parties in interest had ample opportunity to be heard, and that it seemed advisable, due to the physical condition of the properties in question, that they be sold as speedily as possible. In any event, all parties appear to have legally acquiesced in the sales, the only dissent coming from the trustee, who claimed that higher prices could be received for the property, and desired that the proceeds thereof be turned over to him for distribution rather than be handled by the receivers, which application was denied and from which no appeal was taken.
From this testimony it should be clear that the trustee participated in all of these proceedings, and had every opportunity to object. Furthermore, he had a direct mandate to foreclose the mortgage secured by these properties, and failed to do so. Based on his conduct throughout the proceedings, it was within the discretion of the court to determine whether the funds should be distributed by the officers appointed by it or by the trustee who had already failed to perform his duty to the bondholders.
Nor would anything have been gained were the property sold subject to existing liens, as it was impossible to determine at that time whether or not all the bonds issued under the mortgage were valid and issued for a valuable consideration. It might also have seriously interfered with the sale of the property. Whether or not the amounts awarded to counsel and then charged against only part of the fund would have been changed had the various orders been appealed from cannot here be decided. The fact that the trustee did not avail himself of his rights or properly protect the bondholders precludes him from now seeking equitable relief. No doubt he hoped to save the corporation whose stock he was selling. However, no matter what his motives were, his action at this date is too late to repair any damage that may have resulted from his laches or failure to act when he should have done so.
Findings.
Pursuant to the printed record, the testimony and exhibits produced before me, and in accordance with the order of this court dated May 20, 1929, appointing me Special Master, I hereby find as follows:
(1) That the court had jurisdiction both of the parties to the action and of the real estate in question herein and securing a certain mortgage dated March 31, 1921, made by Rogers Milk Corporation to Edwin H. Spence and Loren F. Vosburg as trustees.
The above is directly contrary to my finding in my report heretofore filed herein on November 21, 1928, to the effect that the court did not have jurisdiction to sell the property securing the mortgage above referred to, on the ground that it was situated in another district, and therefore without its jurisdiction. Some very recent decisions of the Supreme Court of the United States appear to have changed the law as heretofore interpreted. The cases I refer to and on which I base the above finding are as follows: Straton v. New, 283 U.S. 318, 51 S. Ct. 465, 75 L. Ed. 1060; Isaacs, as Trustee v. Hobbs Tie Timber Co., 282 U.S. 734, 51 S. Ct. 270, 75 L. Ed. 645 (decided February 24, 1931).
(2) That E.H. Spence, as trustee, is estopped by his conduct and failure to act from questioning the jurisdiction of this court. See Burnrite Coal Briquette Co. v. Riggs, 274 U.S. 208, and particularly pages 213, 214, 47 S. Ct. 578, 579, 71 L. Ed. 1002. See, also, Equitable Trust Co. v. Vanderbilt Realty Co., 155 App. Div. 723, 140 N.Y.S. 1008.
(3) That the following established an interest in the fund derived from the sale of the real estate herein as of March 4, 1925: Irving Trust Company (successor to Irving Bank-Columbia Trust Company); the Wile Corporation (successor to Young Wile, Limited); and Dairymen's League Co-Operative Association.
That the following established an interest in the purchase of the property sold by the receivers and the defendant pursuant to the orders of this court: Pursuant to order dated February 26, 1924, the Dairymen's League Co-Operative Association established an interest in the three milk feeding stations located at Fernwood, Altmar, and Mapleview, N Y
Pursuant to order dated October 16, 1924, one Roscoe Sargent established an interest in the property and plant situated at Pulaski, N.Y. That it appears that said Roscoe Sargent nominated the Pulaski Milk Products Company to take title to the aforesaid property bid in by him, and that the said Pulaski Milk Products Company in turn conveyed the same to Sheffield Farms Company, a New York corporation.
(4) That the only valid bonds, upon which claims were filed and allowed in this suit up to March 4, 1925, were as follows:
Irving Trust Company (successor to Irving Bank-Columbia Trust Company) $ 50,000; The Wile Corporation (successor to Young Wile, Limited) 20,000; Dairymen's League Co-Operative Association, 100,000.
(5) That, since March 4, 1925, no person or persons have asserted any claims to the receivers or to their attorneys upon any of the mortgage bonds.
(6) That E.H. Spence, as trustee by his participation in proceedings instituted to sell the real property of the defendant corporation and by his failure to appeal from the orders of sale, and by seeking the proceeds of sales, is estopped from asserting the irregularity of such sales.
(7) That, in view of the physical condition of the property, the inability of the court or the receivers to determine the amount of valid bonds upon which claims would be made and allowed, and the resultant difficulty of obtaining a purchaser under such circumstances, and the acquiescence of all parties to the sale, free and clear of all liens, the court was justified in selling the property free and clear of mortgage liens.
(8) That the payments made from the fund derived from the sale of the mortgaged property made pursuant to the order of this court dated November 13, 1924, cannot now be attacked or repayment thereof required.
The undersigned files herewith the evidence taken, before him, together with the exhibits introduced at the hearings, with the exception of certain exhibits which were marked and returned to counsel until the time for filing this report, which exhibits counsel has not as yet delivered to the special master, and of the bonds produced before him, which latter were left in the custody of the various parties producing the same until such time as they were required to be exhibited to the court.
This cause having duly come on to be heard at a term of this court, held on November 4, 1931, and on November 25, 1931, on a motion to fix the fee of William W. Hoppin, Esq., as special master, and to tax the same against Edwin H. Spence, individually and as trustee, and after due consideration and after hearing counsel, it is on motion of McManus, Ernst, Ernst Lynch, attorneys for the receivers and Irving Trust Company (successor to Irving Bank-Columbia Trust Company), a bondholder, hereby ordered and decreed:
(1) That the report of William W. Hoppin, Esq., Special Master herein, dated July 17, 1931, be, and the same hereby is, in all respects approved and confirmed, no exceptions having been filed thereto by any of the parties in interest, and the time for their filing having expired.
(2) That the fee of William W. Hoppin, Esq., special master herein, for his services under the order entered herein, dated May 20, 1929, be, and the same hereby is, fixed at the sum of $1,500.
(3) That the said fee be taxed against and paid by the parties to this suit, on whose behalf the order dated May 20, 1929, was made, and, inasmuch as counsel for Edwin H. Spence has waived the collection by or payment to said Spence, either individually or as trustee, the sum of $345.50, taxed as costs in his favor under the order of this court dated January 30, 1928, it is ordered that no part of the fee of the special master shall be taxed against said Edwin H. Spence, either individually or as trustee.