Pyrites Co. v. SILICA GEL CORPORATION
| Decision Date | 22 October 1934 |
| Docket Number | No. 2176.,2176. |
| Citation | 8 F. Supp. 423 |
| Parties | PYRITES CO. v. SILICA GEL CORPORATION. |
| Court | U.S. District Court — District of Maryland |
Roszel C. Thomsen, Emory H. Niles (of Niles, Barton, Morrow & Yost), and Joseph T. Brennan, all of Baltimore, Md., and Wm. Burnet Wright, for petitioners.
G. Ridgely Sappington and Wilson K. Barnes, for respondent.
The defendant, the Silica Gel Corporation, is in this court in federal equity receivership. The creditors' bill did not expressly allege insolvency or pray for immediate liquidation but represented that the corporation was unable to meet current indebtedness and that its available assets consisted principally of commercially undeveloped patents and that receivership was necessary to conserve its assets for the ultimate benefit of all creditors. The corporation consented to the receivership by a vote of the majority of its board of directors but a minority thereof intervened stating in substance that they had originally opposed the receivership but consented to what was referred to as a limited or holding receivership. See Miller et al. v. Pyrites Co., Inc., et al. (C. C. A.) 71 F.(2d) 804. The receiver was appointed on April 22, 1933. The corporate affairs have since then been managed by the receiver who has filed monthly reports of receipts and disbursements.
On July 13, 1934, on the petition of the receiver the papers in the case were referred to an auditor to state an expense account including the present allowance and payment of such wage and salary claims as were entitled to preferential payment in accordance with the Maryland statute, art. 47, § 15 of Bagby's Annotated Code of Maryland. The relevant portion of this statute reads as follows: "Whenever any * * * body corporate * * * shall have * * * its property or estate taken possession of by a receiver under a decree of a court of equity, in the distribution of the property or estate of such * * * body corporate, all the money due and owing from such * * * body corporate for wages or salaries to clerks, servants, salesmen or employees contracted not more than three months anterior to the * * * appointment of receiver, shall first be paid in full out of such property or estate, after payment of the proper and legitimate costs, expenses, taxes and commissions, and shall be preferred to all claims against the property and estate of such * * * body corporate, except the lien claims of such persons as shall hold liens upon such property or estate, recorded at least three months prior to such assignment, adjudication or decree." (Italics supplied.) In a number of Maryland cases this statute has been construed and applied in determination of what classes of persons were entitled to its benefit. See American Casualty Insurance Co.'s Case, 82 Md. 565, 34 A. 778, 38 L. R. A. 97; Lewis v. Fisher, 80 Md. 140, 30 A. 608, 26 L. R. A. 278, 45 Am. St. Rep. 327; Baltimore Trust Co. v. Rowe, 141 Md. 160, 118 A. 405; Roberts v. Edie, 85 Md. 183, 36 A. 820; Perkins v. Barr, 126 Md. 94, 94 A. 533. See also In re Rodgers & Garrett Timber Co. (D. C. Md.) 22 F.(2d) 571.
Claims for preferential payment for wages or salaries were presented to the auditor by counsel by and on behalf of various officers and employes. Counsel for the receiver conceded before the auditor that certain of the claimants were entitled to preferential payment but opposed the claims of others. In due course an auditor's account was stated allowing certain claims but rejecting others not entitled to preference under the statute. Among those rejected were the claims of Messrs. Ernest B. Miller, J. Roberts Wilson, James C. Patterson, Frank C. Dehler and William Marshall. No exceptions were filed to the auditor's account by any of these claimants and their counsel concede that the auditor was justified in rejecting their claims as not within the statute, but thereafter each of the claimants has filed a petition in the case praying that the amount of unpaid salary accruing prior to the receivership and within three months theretofore shall now be paid, on the ground that the "claim is entitled to priority of payment in this equity proceeding because the services upon which the claim is based created a current expense of ordinary operation of the business, were necessary to keep it a going concern, and were rendered with the intention of the parties that they should be paid out of current earnings of the business," and also alleging that the receiver had collected and has on hand sufficient "current funds" to pay the claims of the petitioners and of all other persons similarly situated. The answer of the receiver in each case admitted that he had on hand "sufficient current funds" to pay the claims but denied that the services of the petitioners were necessary to keep the business a going concern and denied that it was the intention of the parties that the petitioners' services "should be paid for out of the current earnings of the business"; and denied that the petitioners were entitled to preferential payment.
The contention of counsel for the petitioners as now advanced is based principally on the recent decision of the Circuit Court of Appeals for this Circuit in Bowen v. Hockley, Receiver of the Davison Chemical Co., 71 F.(2d) 781, 783, in which case the court held that installments currently accruing after the receivership under a compensation award made under the Maryland Workmens' Compensation Law should be paid by the receiver as an expense of operation of the business. It is conceded by counsel that the factual situation with regard to the claims in this case is different from that in Bowen v. Hockley but nevertheless it is urged that the principle of that decision is broad enough to cover the present claims. It is said that the basic theory of the decision in Bowen v. Hockley is that "he who seeks equity must do equity," and that as the receivership is being conducted by this court for the benefit of creditors the court has the power, and should exercise it in this case, to require the receiver to make the payments for these overdue salary claims. It is further said that "claims for human services, whether founded in contract (wages), workmens' compensation statutes, or no contract at all (old age pensions) are entitled to the preference," and it is further contended (as in this case it is necessary to do to be successful) that such "claims for human services" must be preferred over those of other general creditors for supplies furnished to the corporation or based on other considerations.
The Silica Gel Corporation is an ordinary commercial corporation formed for and engaged in the exploitation of silica gel patents for commercial refrigeration and other analogous uses. There are no mortgage or other lien claimants. It is not a railroad or other public utility. It is, however, contended by counsel that the principles upon which labor and supply claims originating within six months prior to receivership have been preferentially allowed in railroad cases are properly to be extended (a) to similar claims against private corporations; (b) without proof of the actual express intention of the parties to be paid out of current receipts; (c) irrespective of any provision of the particular state statute and (d) in the case where there is no mortgage upon the assets of the corporation, the claims of general creditors with supply claims are pro tanto to be reduced by the allowance of labor claims. And counsel urge upon me that the principle of Bowen v. Hockley necessarily supports these contentions.
It is needless to say that I have very carefully studied the opinion of the court in Bowen v. Hockley as the law of this circuit and if it goes to the extent contended for by counsel for these petitioners, it should be followed and here applied. But it is contended by counsel for the receiver that the petitioners' contentions are far beyond the scope of what was actually decided in Bowen v. Hockley; and that the opinion of the court must be considered in relation to the particular claim there passed on. A careful study of the opinion leads me to the conclusion that the equitable principle there applied is that in an operating receivership for the benefit of creditors, the court has the power as a matter of equity to require the receiver, who is acting for the benefit of general creditors, to make preferential payment of such claims as in the determination of the court have an established equity over and above that of other creditors, whether mortgagees or lien claimants or merely general creditors; and in the exercise of this equitable power payment in such a case of currently accruing installments under a prior workmens' compensation award should be made by the receiver, as a current expense of the business, "from income earned by the business while it is being preserved and carried on as a going concern by the court." Reference was made to the federal statute, 28 USC, § 124 (28 USCA § 124), requiring that in the management of property by federal receivers "such receiver or manager shall manage and operate such property according to the requirements of the valid laws of the state in which such property shall be situated, in the same manner that the owner or possessor thereof would be bound to do if in possession thereof." The nature of the particular claim allowed seems to have been analogized to currently accruing taxes on the property which must be discharged by the receiver as would have been required by the owner of the property if not in receivership. The nature of the particular claim in that case was described by the court as follows: ...
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