J. W. Pierson Co. v. W. Orangeverona Bldg. Co.

• Decision Date: 23 February 1933
• Citation: 164 A. 567
• Parties: J. W. PIERSON CO. v. WEST ORANGEVERONA BLDG. CO.
• Court: New Jersey Court of Chancery

164 A. 567

J. W. PIERSON CO.

v. WEST ORANGEVERONA BLDG. CO.

Court of Chancery of New Jersey.

Feb. 23, 1933.

Syllabus by the Court.

1. Wage Hens have priority over mechanics' liens upon assets of an insolvent corporation.

2. The power of sale of property in custodia legis, free and clear of liens, justiciable in the suit in which it was taken, is inherent in the court. Section 81 (2 Comp. St. 1910, p. 1649, § 81) applies to liens, the legality of which may be elsewhere litigated.

Suit by the J. W. Pierson Company against the West Orange-Verona Building Company, wherein a receiver was appointed for the defendant corporation. On exceptions to the receiver's report.

Decision in accordance with opinion.

Harry Phillipson, of Newark, for receiver.

Morris Wurgaft, of New York City, for wage claimants.

Razen & Danowitz, of Passaic, Robert Gordon, of Newark, Abraham M. Herman, of Orange, Samuel B. Krasny and Harry Dvorken, both of Newark, for mechanics' lien claimants.

BACKES, Vice Chancellor.

The appeal is from the ruling of the receiver, that labor claims are entitled to priority of payment over mechanics' lien claims.

The only assets of the defendant company were six unfinished houses, subject to inchoate mechanics' liens, which the receiver sold free of liens, the proceeds of which are about to be distributed.

By the 83rd and 84th sections of the Corporation Act (2 Comp. St. 1910, pp. 1650, 1651, §§ 83, 84), laborers and workmen have a first and prior lien for wages earned within two months next preceding proceedings in insolvency, prior to all other liens that can or may be acquired upon the corporate assets, except real estate mortgages or mortgages on chattels recorded more than two months before, and those recorded within two months of insolvency proceedings, given for money loaned or goods purchased within two months. The lien for wages comes into being upon the institution of insolvency proceedings. Hinkle v. Camden Safe-Deposit & Trust Co., 47 N. J. Eq. 333, 21 A. 861.

The position taken by the mechanics' lien claimants is that, inasmuch as their liens, under the Mechanics' Lien Act (3 Comp. St. 1910, p. 3291 et seq., § 1 et seq., and Comp. St. Supp. § 126—1 et seq.), relate to the commencement of the buildings, and as the title to the six incompleted houses vested in the receiver burdened with their liens, only the "equity" passed to the receiver to be administered as assets, and that upon this alone wages is a lien. The answer to this is, that by the appointment of the receiver the properties passed into custodia legis as assets for this court to administer, to liquidate, and its jurisdiction became exclusive. All other means to recover debts and liens, including mechanics' liens, were suspended. Demott v Stockton Paper Ware Mfg. Co., 32 N. J. Eq. 124. Demonstrably, the properties in custodia legis were assets to be administered, primarily, for the lienholders in the order of their priority, and for the other and less fortunate creditors of the defunct corporation.

The fact that the receiver's funds were realized from the sale of the properties free and clear of mechanics' liens, under section 81 of the Corporation Act (2 Comp. St. 1910, p. 1649, § 81), is an incident without moment. The power of sale of property in custodia legis free and clear of liens, justiciable in the suit in which it was taken, is inherent in the court. Section 81 applies to liens, the legality of which may be elsewhere litigated.

Now as to the priorities. Both sets of liens are creatures of legislative favor; each privileged class is supreme and independent of the other within its statutory field, but in conflict, when property, subject to mechanics' liens, becomes an asset in the hands of a receiver, the legislative preference for the wage claims is expressed in no uncertain terms, that they shall have priority to the exclusion of all others, except three types of recorded liens. Upon such an event, mechanics' lien claimants, it is true, suffer disappointment in the subordination of their privilege, but as recipients of favors, they cannot be critics of legislative manners in distributing them.

Vice Chancellor Emery, back in 1896, in Fitzgerald v. Maxim Powder Mfg. Co. (N. J. Ch.) 33 A. 1064 (not reported [in State Report]) settled the point now raised. In an elaborate opinion construing sections 83 and 84 of the Corporation Act he held that "assets" as there used does not mean property remaining after existing liens thereon, accruing prior to insolvency, as it had been held to mean in earlier...