Raht v. Attrill

• Decision Date: 31 October 1887
• Citation: 13 N.E. 282,106 N.Y. 423
• Parties: RAHT v. ATTRILL.
• Court: New York Supreme Court

106 N.Y. 423

13 N.E. 282

RAHT

v.ATTRILL.

Supreme Court, New York County, New York.

October, 1887.

Appeal from an order of the general term, second Department, reversing an order of the special term which confirmed a referee's report, and directed as to the distribution of surplus moneys in foreclosure.

Charles Raht, as executor, &c., of Julius E. Raht, deceased, brought this action against Henry Y. Attrill, the Rockaway Beach Improvement Company (Limited), and others, to foreclose a mortgage for $72,000, given by defendant Attrill and assigned by the mortgagee to the plaintiff, covering certain real estate at Rockway Beach in the State of New York.

The Rockway Beach Improvement Company (Limited) was organized as a business corporation under the Business Corporations Act ( L. 1875, c. 611), and became the purchaser of the premises covered by the said mortgage and subject thereto, March 1, 1880, and on the same day the corporation executed a second mortgage thereon to William K. Soutter as trustee to secure payment of an issue of $700,000 of bonds; and the company immediately proceeded to the erection of a large hotel upon the premises.

The corporation becoming financially involved, on or about July 30, 1880, Attrill, the defendant herein, on behalf of himself and other stockholders brought an action against the corporation for its dissolution, and on August 2, 1880, an order was made therein appointing John A. Rice receiver of all the property and effects of the company to take possession of and administer the same for the benefit of all concerned.

On August 3, 1880, an affidavit of the general manager of the company was presented to the court, stating: “That the defendant is now building a large hotel at Rockaway Beach, in said State; that a large number of workmen have been employed thereon, to the number at one time of nearly two thousand; that, owing to delay in paying them, they all, a short time ago, refused to work, and more than one-half have left; that about eight hundred resumed work and are now working under a promise by the said company that they shall be soon paid; that no provision has been made for their payment, and this deponent is satisfied that no provision can be made by the said company in its present condition; that if not paid, the men will stop work, and this deponent fears there will be a serious disturbance; that it is imperative that the receiver in this cause should be authorized to borrow the amount needed to pay the said workmen; that about $100,000 will be required for that purpose, which can be borrowed upon receiver's certificates duly authorized.”

Upon this affidavit, an ex parte order was made August 17, 1880, by which the receiver was “authorized to issue receiver's certificates to the amount of $110,000, to be paid to the employees of said company, the said certificates to be a first lien upon all the property of said company in the hands of said receiver and prior to the mortgage by the said company to William K. Soutter, trustee, of $700,000, executed April 13, 1880, and the interest on said mortgage.” Under this order the receiver issued certificates in the form prescribed therein, declaring on their face that they were a debt of the receiver incurred for the benefit and protection of the property in his hands, and a first lien thereon prior to the mortgage to William K. Soutter, trustee, and to the interest thereon; and, from time to time thereafter, orders of a similar character were obtained also authorizing the receiver to issue certificates with a prior lien over the Soutter mortgage.

In May, 1881, while the suit brought by Attrill for dissolution was pending, an action was commenced by the attorney-general to dissolve the corporation, and in that action an answer was interposed, but no further proceedings were had. Thereafter, in September, 1881, this action was commenced, to foreclose the purchase money mortgage of $72,000, and, pursuant to a decree of sale therein, the hotel property was sold, realizing a surplus of $86,283.39, the distribution of which is the subject of the present controversy.

The expenses of reorganization, referred to in the opinion arose out of the following facts: In the autumn of 1882, a scheme for the reorganization of the company was set on foot, under which all parties holding liens, certificates or claims against the property, upon the terms named in a reorganization agreement, were invited to assist in the reorganization of the property and to complete the work. Certain persons were appointed trustees under the reorganization scheme, and a large number of the holders of the bonds secured by the Soutter mortgage, a large number of holders of receiver's certificates, of lienors, and other claimants became parties thereto. For a period of one year or thereabouts, efforts were made to reorganize the company, the plan being to sell the property, to purchase the same, and effect a reorganization, allowing all claims a representation. Such efforts were not successful, and were finally abandoned in the autumn of 1882. The securities deposited with the trustees under the reorganization agreement remained in their hands, and it was claimed that such of the same as should be adjudged to have a claim upon the surplus, were liable for certain expenses incurred in reorganization, under a clause in the reorganization agreement to that effect.

Upon the hearing before the referee appointed to ascertain and report as to the several liens upon the surplus moneys and their priorities, the holders of receiver's certificates sought to sustain their claim to priority over the Soutter mortgage by evidence that, at the time the order was made, the workmen were in a state of riot threatening to fire and destroy the hotel; that they refused to take the receiver's certificates, and mobbed three or four men who had done so; and that the property was in great peril; that, at a mass meeting of the workmen, they consented that one McDonald should negotiate $110,000 receiver's certificates, which he subsequently did, to the claimants in these proceedings. This evidence was admitted against objection.

The referee reported in favor of the receiver's certificates as a lien superior to the lien of the Soutter mortgage.

The special term confirmed his report; and held that the bondholders were bound by the order by reason of the fact that the trustee, in his capacity as a director of the corporation was an assenting party to the proceedings which approved their issuance, and that the evidence showed exigencies which justified the order giving the receiver's certificates priority.

The supreme court a general term, upon appeal, reversed the decision below, holding that the case of Metropolitan Trust Co. v. Tonawanda Valley &c. R. R. Co. (103 N. Y. 245), was conclusive against the right of the court to postpone the lien of the mortgage to the receiver's certificates, and that the facts were insufficient to show that the trustee, as such, consented to the issue of the certificates.

The general term thereupon sustained the exceptions of the bondholders and of the trustee to the referee's report postponing their lien to the lien of the receiver's certificates, set aside the receiver's report, vacated the order of reference, and appointed a new referee, “to ascertain the amount due to any person or persons, which is a lien upon such surplus moneys herein, and also as to the priorities of the several liens and claims to said surplus moneys, in accordance with the opinion of this court, to the exclusion of all receiver's certificates, it appearing that the claims of the bondholders will absorb the fund.” Adding: “And it is further ordered, that said referee summon before him, on this reference herein, every party who has appeared in this action, and every person who has duly filed his notice of his claim to such surplus moneys, and that he, the said referee, cause them to have the usual notice of all subsequent proceedings, and report thereon with all convenient speed;” and the judgment directed “that the referee pass upon the question as to the liability of the fund to pay the expenses of the unsuccessful attempt to reorganize.” Decision reported in 42 Hun, 414.

From this judgment the holders of the receiver's certificates and various other lienors took this appeal.

John L. Cadwalader ( Strong & Cadwalader, attorneys), for holders of receiver's certificates, appellants.

Clarence D. Ashley, for other appellants.

James McNamee ( Work & McNamee, attorneys), for other appellants.

Edward S. Clinch, for other appellants.

Herman Aaron, for other appellants.

Roswell W. Keene, for other appellants.

Thomas M. Wheeler, for other respondents.

Lewis Sanders, for other respondents.

Vanderpoel, Green & Cuming, for the trustee, respondent.

ANDREWS, J.

The scheme set on foot by the principal stockholder, with the consent of a majority of the Rockaway Beach Improvement Company for the administration of its affairs, and for the completion, finishing and operating the hotel through the instrumentality of a receiver appointed by the court, has proved a signal and disastrous failure. The receiver was appointed August 2, 1880, within six months after the organization of the company. Prior to that date, the company had expended more than $350,000 raised on the sale and hypothecation of its bonds, secured by the trust mortgage to Soutter, leaving the hotel building and structures but partially completed, and had exhausted all its available means, and was indebted in the sum of nearly $300,000 for labor, materials and furniture, which it had no means to pay. The receiver, a few days after his appointment, made his first application to borrow money on receiver's certificates, and on 17th day of August an order was made ex parte, at special term, authorizing him to borrow $130,000 for the “purpose of paying the employees of said company,” and to issue therefor certificates containing on their...