Durand & Co. v. Howard & Co.

• Decision Date: 30 July 1914
• Docket Number: 298.
• Citation: 216 F. 585
• Parties: DURAND & CO. et al. v. HOWARD & CO. et al.
• Court: U.S. Court of Appeals — Second Circuit

216 F. 585

DURAND & CO. et al. v. HOWARD & CO. et al.

No. 298.

United States Court of Appeals, Second Circuit.

July 30, 1914

The bill alleged that the defendant was engaged in business in New York City and that its assets were largely in excess of $100,000; that it owed approximately $140,000 to more than 150 creditors; that it did not have sufficient money to meet its obligations as they fell due and was not able to borrow the money necessary for such purpose; that it was indebted to complainants in certain specified amounts; that unless a receiver was appointed certain creditors would obtain a preference over other creditors; and that the assets consisting of jewelry and silver, would be sacrificed at half their value and great injury result to creditors. It therefore asked for the appointment of a receiver. The defendant filed an answer admitting the truth of the allegations contained in the bill and joined in the prayers thereof.

On January 6, 1914, the cause came on to be heard upon the bill and answer, and the court appointed Samuel Strasbourger and Nathaniel S. Corwin temporary receivers. The receivers were authorized to take possession of all the property, business assets, and effects of the defendant, 'and to run manage, and operate the said property in such manner as will in their judgment produce most satisfactory results, and to preserve the same in proper condition, and to protect the title and possession and to secure and develop the business of the same. ' They were also authorized to pay the necessary expenses of operating the property. All persons were 'enjoined and restrained from selling, transferring disposing of, or in any manner interfering with any of the property of the defendant company, or from taking possession of or in any way interfering with any part thereof, or from in any manner obstructing or interfering with the possession or management of any part of the said property.'

On January 30, 1914, the appointment of the receivers was made permanent, and all creditors were required to file their claims with the receivers on or before February 16, 1914, 'or they may be excluded from the benefit of these proceedings.'

On January 30, 1914, the landlords asked the court to fix a time within which the receivers should decide whether they would adopt or renounce the lease held by the defendants. On February 9, 1914, the receivers were required on the application of the landlord to elect on or before March 4, 1914, whether they would assume and adopt on behalf of the estate of the defendant the lease of the premises 624 Fifth avenue in the city of New York and dated January 18, 1911, between the executrix and executor of Henry S. Redmond, deceased, and Equitable Trust Company as trustee under the will, as lessors, and the defendant, as lessees, or whether they would renounce the same. And on March 3, 1914, the court, acting upon the recommendation of a committee appointed by the creditors and upon the facts as set forth by them, authorized the receivers 'to affirm the lease,' and an order was entered declaring that the receivers 'be and they hereby are authorized to assume and adopt on behalf of the estate of the defendant and as such receivers the lease of the premises ' describing them. And on March 4, 1914, the attorney for the receivers notified the attorneys for the landlord that they assumed and adopted the lease and that 'the adoption of the lease is made pursuant to the request of the creditors' committee and upon the authority of the court in the above action upon application of the aforesaid creditors' committee.'

The other material facts are stated in the opinion of the court.

Cadwalader, Wickersham & Taft, of New York City (Cornelius W. Wickersham, of New York City, on the brief), for appellants.

Philip W. Russell, of New York City (Edmund L. Durkin, of New York City, on the brief), for receivers.

Before COXE and ROGERS, Circuit Judges, and HAND, District Judge.

ROGERS Circuit Judge (after stating the facts as above).

The question which this cause presents is as to the right of a landlord to proceed against chancery receivers for the forfeiture of a lease because of default made by the lessee in the payment of rent, which lease has been adopted by the receivers appointed over the estate of the lessee. After the receivers notified the landlords, on March 4, 1914, that upon the authority of the court they had adopted the lease, they received a communication, also dated March 4, 1914, which read as follows:

'On behalf of the lessors, we hereby return this notice on the ground that it is void and of no effect, and on the further ground that there is now due and unpaid the rent due from July 12, 1913, to January 6, 1914, with accrued interest, and that there is also due and unpaid the rent which accrued for the month of February, with interest from the 12th day of February, 1914 to date, and that there could be no such ratification nor adoption until said defaults are made good, on the further ground that even admitting that such notice, adoption, or assumption were valid, that then and in that event the said receivers are now in default under the terms of said lease.'

On March 6, 1914, the landlords petitioned the court for an order directing the receivers to remove from and vacate the premises or pay the petitioners all past due rent, amounting to $8,694.37, with interest, and in the event of the failure to pay the same that the petitioners be authorized 'to take such steps as may be proper, including proceedings instituted in the Municipal Court of the City of New York, or any other court, to compel said receivers to remove from, vacate, and give up said premises, and to dispossess them therefrom. ' As a matter of fact the rent due from the receivers during the time they have had possession of the property has been paid and all arrears of rent are such as are owing from the lessees, Howard & Co.

The petition was heard on March 25, 1914, and was denied. It was denied on three grounds: (1) That a landlord is not entitled, as a matter of right, to back rent as a condition of the affirmance by receivers in equity of a lease; (2) that if the landlords have such a right, they had waived it in this case; (3) that so far as the application is one addressed to the discretion of the court, that discretion should not be exercised in the landlords' favor.

The power of a court of equity to appoint a receiver has long been recognized as one of as great utility as any which belongs to the court. It is exercised to prevent fraud, or to save the subject of litigation from material injury, or to rescue it from inevitable destruction. A receiver is appointed when it appears necessary to do so to preserve the property and give adequate protection to the rights of the parties interested in it. This was the purpose of the court in the appointment of the receivers in this cause. The intention was to prevent injury to creditors by a slaughter of the assets through forced sales and also to prevent a preference among creditors. This may well be kept in mind in passing upon the question which is presented. The receivers have not been appointed for the benefit of any particular party, but upon a principle of justice and for the benefit of all parties interested. These receivers are the representatives of the court and of all the parties in interest. They have been put into the possession of this property because the interests of justice can in this way be best secured. The receivers are but the arm and the hand of the court, a part of the machinery of the court to work out the ends of justice. The property of which they have the possession is in custodia legis. It is elementary that the receivers have only such power and authority as are given them by the court and that they cannot be sued touching the property in their charge without the court's consent.

It being conceded that where property is in the hands of receivers no action can be brought against the receivers without the consent of the court appointing them, it is said it is not usual for the court to refuse leave unless it is perfectly clear that there is no foundation for the demand. Ordinarily this is true, and if the question is whether the property which a receiver has taken into his possession as being the property of A. is the property of A. or in reality belongs to B., who is claiming it, there may be no sufficient reason why the court should not allow that question to be determined in a suit against the receiver, unless the court can see upon the facts stated that B.'s claim is clearly without merit. But that is not the question in this case. There is no dispute here as to whether the lessees, Howard &amp Co., got a good title under their lease. The question is whether, having obtained a concededly good title under the lease, the lessors will be permitted by a court of chancery to forfeit the lease, after it has been adopted by the receivers, for a default which is not the default of the receivers, but of the lessees, who failed to pay all the rent due before the receivers took possession. The lessees insist that unless the receivers pay the arrears of rent they must surrender the premises. They insist that receivers have no right to assume a lease unless all arrears of rent are paid. If that be the law, then the court must authorize a preference in favor of the lessor creditors or else surrender the lease; and whichever course the court adopts would work to the prejudice of the body of the creditors, and nullify in some degree the purpose of the court in the appointment of the receivers. Either the court must give a preference to the lessors by compelling the payment of the entire amount of their claim, or else it must deprive the...