In re Technical Land, Inc.
| Decision Date | 01 June 1994 |
| Docket Number | Bankruptcy No. 93-1166. Adv. No. 94-0020. |
| Citation | 172 BR 429 |
| Parties | In re TECHNICAL LAND, INC., Debtor. N. William JARVIS, et al., Plaintiffs, v. TECHNICAL LAND, INC., et al., Defendants. |
| Court | United States Bankruptcy Courts – District of Columbia Circuit |
Paul Webber, IV, Washington, DC, for plaintiff Jarvis.
Patrick J. Kearney, Washington, DC, for plaintiff Kaiser.
James J. Levin, Rockville, MD, for defendants Technical Land, Inc., William E. Moore and Judith Deitz.
The issue before the court is the ownership of certain real property. Technical Land, Inc. ("Technical") asserts title to the property by virtue of a marshal's deed issued on January 7, 1993, pursuant to an execution sale on a judgment lien. The plaintiffs assert that this deed was ineffective to convey any interest to the debtor because prior to the foreclosure sale, the property was taken into custodia legis by the appointment, by the Superior Court of the District of Columbia, of a receiver for the property. The central facts are undisputed and the primary issue is purely one of law: is a marshal's sale of property in the custody of a receiver, conducted without leave of the receivership court, effective to convey title to property? I conclude it is not.
The plaintiffs are Ralph D. Kaiser, Inc. ("RDK") and N. William Jarvis ("the Receiver").1 RDK claims to hold certain mortgages on the disputed property. On August 4, 1986, Techniarts Video, Inc., William Moore and Judith Deitz filed a complaint against the then-owner of the property, 1631 Kalorama Associates ("1631 Kalorama"2), for breach of contract and related claims. On December 11, 1991, judgment was entered against 1631 Kalorama and in favor of Moore and Deitz in the amount of $131,055.13.
On March 11, 1991, RDK petitioned for appointment of a receiver for the property. A receiver was appointed the next day to collect the rents and income from the property. No bond was required under the terms of this order. By order dated November 4, 1991, the receiver's authority was expanded to that of a general receivership for the property and Jarvis was appointed to replace the prior receiver. At all relevant times since then, Jarvis was in possession of the property, collecting the rents, paying the bills and maintaining the property.
The November 4 order provided that "within 10 business days of the entry of this Order, the Receiver shall secure his performance with a bond in the amount of $2,500.00." On December 10, 1991, Jarvis obtained a bond in the amount of $2,500.00. On or about December 10, 1991, Jarvis's attorney attempted to post the bond with the court, but for unknown reasons the clerk did not accept the bond. However, by order dated October 18, 1993, the Superior Court accepted Jarvis's bond nunc pro tunc to November 4, 1991.3
During 1992, Moore and Deitz obtained a writ of fieri facias directing the sale of the property. An execution sale was held at which Moore and Deitz were the high bidders, at $1.00. Moore and Deitz had the debtor, a corporation which they own, substituted as the purchaser and the Marshal's deed was issued to the debtor on January 7, 1993.
Since then, both 1631 Kalorama and the debtor became subject to bankruptcy proceedings. The title to the property is the only substantial asset that either of these entities claims. The court is abstaining in 1631 Kalorama's bankruptcy case, leaving the matters raised therein to the receivership proceedings. In its bankruptcy case, Technical has urged that the receivership was fraudulently procured because RDK failed to disclose that it had liens on other properties that may substantially secure it; has challenged the validity and amount of RDK's liens; and has proposed a plan to reorganize the property. RDK has filed a competing plan. The competing efforts to reorganize the property have been contentious and involve substantial attorneys' fees.
Despite the vigorous advocacy of the defendants, the law on the central question was settled long ago in favor of the receiver. In Hitz v. Jenks, 185 U.S. 155, 22 S.Ct. 598, 46 L.Ed. 851 (1902) (gathering cases), a receiver appointed by the Supreme Court of the District of Columbia, who was also a trustee under a deed of trust for the property, sold the property pursuant to the deed of trust. The United States Supreme Court held that this sale was invalid and conferred no title because the property was in custodia legis and the receivership court had not granted permission for the sale. Quoting Wiswall v. Sampson, 55 U.S. (14 How.) 52, 14 L.Ed. 322, 14 L.Ed. 322 (1852), the Court wrote:
The settled rule also appears to be that where the subject-matter of the suit in equity is real estate, and which is taken into the possession of the court pending the litigation, by the appointment of a receiver, or by sequestration, the title is bound from the filing of the bill; and any purchaser pendente lite, even if for valuable consideration, comes in at his peril.
185 U.S. at 166-67, 22 S.Ct. at 603 (citation omitted).
Wiswall v. Sampson was also relied on by the D.C. Supreme Court in Barton v. Barbour, 10 D.C. 212 (1877), aff'd, 104 U.S. 126, 26 L.Ed. 672 (1881), in which the court held that a tort plaintiff could not maintain a suit against the receiver for a railroad company without first seeking leave of the receivership court. Cf. Herman v. Siney, 190 A.2d 650 (D.C.App.1963) ().
The defendants claim that possession by the receiver does not invalidate an execution sale because the sale does not disturb the receiver's possession of the property. Yet this argument was also advanced in Wiswall and was firmly rejected:
It has been argued, that a sale of the premises on execution and purchase, occasioned no interference with the possession of the receiver, and hence no contempt of the authority of the court, and that the sale therefore, in such a case, should be upheld. But, conceding the proceedings did not disturb the possession of the receiver, the argument does not meet the objection. The property is a fund in court, to abide the event of the litigation, and to be applied to the payment of the judgment creditor, who has filed his bill to remove any impediments in the way of his execution.... And, in order to effectuate this, the court must administer it independently of any rights acquired by third persons, pending the litigation.
55 U.S. at 66. The argument was also raised and rejected in Hitz, 185 U.S. at 166, 22 S.Ct. at 602, and in Barton, 10 D.C. at 219.
The defendants rely on Johnson v. Smith, 297 N.Y. 165, 77 N.E.2d 386 (N.Y.1948), Chautauque County Bank v. Risley, 19 N.Y. 369, 75 Am.Dec. 347 (1859), and Mercantile Trust Co. v. Sunset Road Oil Co., 50 Cal. App. 485, 195 P. 466 (Cal.Ct.App.1921). These cases hold that a purchaser may acquire title by purchase at an execution sale notwithstanding the failure to obtain leave of the receivership court (although the levying creditor may be held in contempt for failing to obtain leave of the court). However, the New York cases do not distinguish Wiswall, they simply reject it as not being the law of New York State. Johnson, 297 N.Y. at 173, 77 N.E.2d at 390; Chautauque, 19 N.Y. at 877. Wiswall does appear to be the law in the District of Columbia.
Similarly, in the California case, the court notes that "whatever confusion or doubt may exist upon this question in other jurisdictions," California applies a different rule to receiverships that protect only the interests of parties to the immediate proceeding (such as a mortgage foreclosure or divorce receivership) and receiverships in cases such as insolvency, where the interests of all creditors are to be protected. Mercantile Trust, 195 P. at 471. If any such distinction exists in the District of Columbia, the District of Columbia courts have not found the distinction to warrant differing results. Moreover, this distinction is not so clear under District of Columbia law, given the standard for appointment of a receiver set forth in Totten v. Harlowe, 90 F.2d 377 (D.C.Cir.1937) and applied in this case. That standard, as described in the Superior Court order of November 4, 1991, is "1) the value of the mortgaged property is not sufficient to insure payment of the mortgage debt, 2) the party liable for payment of the debt is insolvent, and 3) there are conditions which make an immediate foreclosure impractical." The fact that insolvency of the debtor is a factor indicates that the receivership is not limited to protecting the interests of the mortgagor and mortgagee, but that the receiver holds the property as an officer of the court for the benefit of any and all parties who may have interests in the property. See Hitz, 185 U.S. at 165, 22 S.Ct. at 602 (). Any such parties are entitled to bring their interests to the receivership court for determination and protection.
The present case is governed by the law of the District of Columbia which, according to Hitz and Barton, embraces Wiswall v. Sampson. Moreover, Wiswall is followed by many other jurisdictions. See e.g., Wilzig v. Sisselman, 209 N.J.Super. 25, 506 A.2d 1238, cert. denied, 104 N.J. 417, 517 A.2d 415 (1986); Hemisphere Pictures, Inc. v. Lust, 36 Md.App. 67, 373 A.2d 48 (Md.1977); First Southern Properties, Inc. v. Vallone, 533 S.W.2d 339 (Tex.1976); Tippins v. Belle Mead Development Corp., 112 Fla. 372, 150 So. 719 (Fla.1933); Davis v. Mazzuchelli, 238 Mass. 550, 131 N.E. 186 (Mass.1921). In light of the Supreme Court precedent, the D.C. ...
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