Central Trust and Savings Company v. Chester County Electric Company

• Citation: 9 Del.Ch. 247,80 A. 801
• Court: Court of Chancery of Delaware
• Decision Date: 05 August 1911
• Parties: CENTRAL TRUST AND SAVINGS COMPANY, Trustee in a Mortgage executed by Chester County Electric Company, v. CHESTER COUNTY ELECTRIC COMPANY

80 A. 801

9 Del.Ch. 247

CENTRAL TRUST AND SAVINGS COMPANY, Trustee in a Mortgage executed by Chester County Electric Company, v. CHESTER COUNTY ELECTRIC COMPANY

Court of Chancery of Delaware, New Castle

August 5, 1911

PETITION FOR PAYMENT OF ALLOWANCES TO RECEIVER AND HIS COUNSEL OUT OF FUNDS PAID INTO COURT IN FORECLOSURE PROCEEDINGS. The matter before the Court is as to allowances to the receiver of the Chester County Electric Company for compensation for himself and his counsel. On March 26th 1909, by a bill filed in Kent County by Elisha W. Meloney, a holder of one of the bonds of the company, and a stockholder thereof, William M. Hope was appointed receiver pendente lite of the company, a Delaware corporation, on the ground of its insolvency. The company owned real estate, two plants for generating electricity, operated by water power, and poles and wires to conduct the electricity to Pennsylvania, where it was sold. In Pennsylvania there was another corporation for the Pennsylvania end of the business. After the appointment of the receiver in Delaware, he and another person were appointed in Pennsylvania receivers for the Pennsylvania corporation. All the income from the operation of the Delaware plant was received and disbursed for operating expenses by the Pennsylvania receivers. They accounted to the Pennsylvania Court and were allowed some compensation there from moneys collected by them. After paying these allowances there was a balance of $ 20, which by order of the Pennsylvania Court was paid over to the Delaware receiver; and that sum is the only source from which the Delaware receiver and his counsel can be paid. No accounting has ever been made to this Court, except the exhibition of the account passed in Pennsylvania. All the property of the Delaware company was mortgaged to a trustee to secure bonds of which $ 190,000 were issued, and the mortgaged property was grossly inadequate security for the bonds. The receivers continued to operate the plant for about one year, and until the mortgaged property was sold by William M. Hope, receiver as one of the defendants, and not as receiver, by order of this Court made in this cause in New Castle County, which was one brought by the trustee of the bondholders to foreclose the mortgage. The amount realized by the sale was very small in proportion to the debt, and the purchaser who represented the bondholders paid into Court part of the purchase price to meet the costs and expenses of the receivership. From the proceeds of sale the costs of the suit, allowances to the trustee under the mortgage and its counsel, and the Delaware receiver and his counsel for services in that suit, have been paid. In the cause in Kent County in which he was appointed, the Delaware receiver, who subsequently was made a permanent receiver, asked for and was allowed compensation for himself and counsel employed by him, and the same were made in that cause; but no order was made for the payment thereof, as there was only twenty dollars available for the purpose. Now he has filed his petition in this cause, the foreclosure suit, by leave of the Court, asking that the allowances made for himself and his counsel be paid from the proceeds of sale of the mortgaged property sold in this cause. It is alleged in his petition that the plant was improved by the receivers, as well as being cared for, and operated until the sale by the receiver under the foreclosure proceedings. The petition is that of the Delaware receiver alone, and not of the two receivers who actually administered the property under appointment from the Pennsylvania Court. Objection to the allowance was made by the trustee for the bondholders at the argument of the petition, though no answer to it was made.

John R. Nicholson and Arley B. Magee, for the petitioner.

Saulsbury, Ponder and Morris, for the trustee.

OPINION

THE CHANCELLOR:

The insolvent corporation was a public service corporation and a continuance of its operation was essential to a proper protection of the property of the company and the maintenance of its franchises. The receivers took charge and operated it, improved its physical condition, and so conserved it until the sale under the foreclosure proceedings. Considering the matter as though the plant and property of the company had been in Delaware, operated for about one year by a Delaware receiver, conserved as a going concern by him, and its physical condition somewhat improved; and considering that subsequently in another suit by the trustee mortgagee the property and plant had all been sold to pay the bonds secured by the mortgage, and that the proceeds of the sale were grossly inadequate for the payment of the bonds, the question is: Has this Court power to diminish the fund due the lienors by the payment of the allowances to the receiver for services rendered by himself and his counsel?

Courts of equity have to a limited extent, and sparingly, exercised the power to make the expenses of a receiver of a public corporation a lien upon the property of the company, superior to prior liens. Makeel v. Hotchkiss, 190 Ill. 311, 315, 60 N.E. 524; Beckwith v. Carroll, 56 Ala. 12; Cake v. Mohun 164 U.S. 311, 41 L.Ed. 447, 17 S.Ct. 100. Such expenses should be charged first against income but when that is insufficient, may be charged against the corpus. Knickerbocker v. McKindley Coal Co., 172 Ill. 535, 50 N.E. 330. Indeed, it seems clearly established now, that through receivers' certificates for funds to operate the business of a corporation may be authorized for quasi public corporations, they should not be authorized for the purpose of private business corporations, if the certificates are given priority over mortgage liens for bondholders or otherwise. High on Receivers, 312b; Hanna v. State Trust Co., 70 F. 2, 30 L. R. A. 201; U. S. Investment Co. v. Portland Hospital, 40 Ore. 523, 67 Pac. 194, 56 L. R. A. 627. There are cases in which courts of standing have denied compensation to a receiver, when to do so would diminish the fund which would otherwise come to the holders of liens on the property administered by the receiver. In Lammon v. Giles, 3 Wash. Terr. 117, 13 P. 417, 420, an insolvent debtor filed a petition in insolvency, and about the same time there were several attachment suits commenced by unsecured creditors, and the personal property was taken possession of by the sheriff. Then the insolvent applied for a receiver and one was appointed and went into possession of the property and held and managed the same. A mortgagee of personal property, by leave of the Court, foreclosed his mortgage, bought in the property, paid the costs and satisfied his mortgage. Then the receiver closed his accounts and the question was whether the mortgaged property was liable for the costs and expenses of the receivership. The Court held not, for it would be to the prejudice of the mortgagee, where the property was not more than sufficient to pay the debt secured by the mortgage on the property. The Court said:

"A mortgagee of personal property not more than sufficient to pay his debt, is the only one who needs to borrow trouble about its preservation. If one interfere with it officiously under the plea that he has rights therein but inferior to those of the mortgagee which require the sequestration of the property, he ought to pay all the expenses of such interference if it turn out that the property is insufficient, after satisfying the mortgage, to do so."

The Court also said that a receiver should not be appointed where the property was no more than sufficient to pay the mortgage debt. In Lane v. Washington Hotel Co., 190 Pa. 230, 42 A. 697, a receiver of a hotel was appointed and goods in it which were subject to the landlord's lien for rent, were sold by the receiver. Held, that the landlord had a lien for rent on the fund raised by the sale, and it could not be reduced by any part of expense of the receivership. To the same effect was the case of Moore v. Lincoln Park, etc., Co., 196 Pa. 519, 46 A. 857, where the receiver of a steamboat company sold vessels of the company on which there were maritime liens fixed prior to the receivership, and it was held that the fund for the lien creditors could not be diminished for the payment of any part of the commissioners of the receiver.

The case of Makeel v. Hotchkiss, 190 Ill. 311, 60 N.E 524, was one where a receiver was appointed for a hotel in a suit concerning ownership of it, and the receiver was authorized to conduct the hotel. Afterwards the hotel was sold by a master in a foreclosure suit brought by the holder of a mortgage, who was not a party to the receivership. The proceeds of the sale were only enough to pay the mortgage debt and costs. The Court refused to make the receiver's charges, disbursements and expenses for running the hotel a paramount lien superior to that of the mortgagee. The prior case of Knickerbocker v. McKindley Coal Co., 172 Ill. 535, 50 N.E. 330, was distinguished, because there the prior mortgagee was a party to and consented to the receivership. The case of Ephraim v. Pacific Bank, 129 Cal. 589, 62 P. 177, was one where in a suit pending, a receiver was appointed for a defendant company, after suit had been brought to foreclose a mortgage of the...