Seaboard Nat. Bank v. Rogers Milk Products Co.

Decision Date18 August 1927
Docket NumberNo. 323.,323.
Citation21 F.2d 414
PartiesSEABOARD NAT. BANK v. ROGERS MILK PRODUCTS CO., Inc., et al.
CourtU.S. Court of Appeals — Second Circuit

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Charles G. Hill and John W. App, both of New York City, and Edwin H. Spence, for appellant.

McManus, Ernst & Ernst, of New York City (Irving L. Ernst, of New York City, of counsel), for appellees receivers, American Exchange Irving Trust Co., McManus, Ernst & Ernst, and Curley C. Hoffpauir.

Albert Ottinger, Atty. Gen., of the State of New York (Robert P. Beyer, Deputy Atty. Gen., of counsel), for appellee New York State Tax Commission.

Before L. HAND and SWAN, Circuit Judges, and CAMPBELL, District Judge.

SWAN, Circuit Judge (after stating the facts as above).

There is no doubt of the power of a court of equity under proper circumstances to sell property free of liens, transferring the lien to the proceeds. But generally this power should not be exercised unless there is a reasonable prospect that a surplus will be left for general creditors. See In re Franklin Brewing Co., 249 F. 333, 335 (C. C. A. 2); In re National Grain Corp., 9 F.(2d) 802, 803 (C. C. A. 2); In re Harralson, 179 F. 490, 492, 29 L. R. A. (N. S.) 737 (C. C. A. 8); Remington, Bankruptcy (3d Ed.) § 2583. These cases relate to sales in bankruptcy, but authority for selling free of liens is found in the general equity powers of the bankruptcy court, and we think the principle is equally applicable to equity receiverships. The case at bar illustrates the wisdom of such rule. Here a fund of $37,000 was realized from the mortgaged premises, and under the distribution which the receivers seek to sustain less than $10,000 of it is to be paid to the mortgage bondholders, although their bonds exceed many times the total fund. The rest is to be eaten up by expenses of administration, principally fees for receivers and attorneys. They are the only ones to profit by having sold the property under the receivership, instead of allowing the mortgage to be foreclosed in the usual manner. It is a shocking result, and such as justly brings receiverships into disrepute in the popular mind.

Even if there was a dispute about the validity of some of the bonds, as is suggested in one of the affidavits, that dispute was not alleged in the petition for sale, and there is no doubt but that there were enough valid bonds, so that no equity could remain for general creditors. We can conceive of no benefit which the estate in receivership could obtain by selling free of liens, and of no interest which the receivers could have in so selling, except to get fees for themselves and their attorneys. We wish to condemn in no uncertain terms the practice of permitting the receiver to sell free of liens and without the consent of the lienors, under such circumstances.

The impropriety of ordering the sale free of liens in this particular instance appears to be the more egregious, because, so far as this record discloses, the District Court for the Southern district of New York had absolutely no jurisdiction of the subject-matter. The land was located in the Northern district of New York. The only conceivable basis for jurisdiction in the District Court for the Southern district is to be found in section 55 of the Judicial Code (Comp. St. § 1037 28 USCA § 116), and is limited to a case where part of the property is located in that district. There is no suggestion in the record that any of the defendant's property was located in the Southern district, and it would seem that the order of sale was void for lack of jurisdiction. See Primos Chemical Co. v. Fulton Steel Corp. (D. C.) 254 F. 454 (N. D. N. Y.); Equitable Trust Co. v. Washington-Idaho Water Co. (D. C.) 300 F. 601 (E. D. Wash.). Whether the District Court for the Northern district entered an order of sale does not appear.

However, the appellant does not question the validity of the order of sale, but has chosen to pursue the proceeds. We are not disposed to throw him out of court on the theory that it does not affirmatively appear that the lien of his mortgage has been discharged. The record is not complete, and we shall assume in the remainder of this opinion that the District Court in some manner obtained lawful custody of the proceeds of sale, subject to the lien of the mortgage. If it did not, the remedies of the appellant would be very different. See Hawes v. First Nat. Bank, 229 F. 51, 59 (C. C. A. 8). Whether the court's order of sale had any validity whatever, and whether the mortgage trustee may be estopped by his pursuit of the proceeds, are, therefore, questions upon which we do not pass.

We come, then, to the distribution of the proceeds of sale. The order of sale transferred the mortgage lien to the proceeds, and they should have been ordered paid to the lienors, subject at most only to deduction of the actual expenses of preserving the property and creating the fund by sale. The fund may not be charged with general expenses of administering the estate. Ætna Life Ins. Co. v. Leonard, 186 F. 148 (C. C. A. 5); Gugel v. New Orleans Nat. Bank, 239 F. 676 (C. C. A. 5); In re Williams' Estate, 156 F. 934, 939 (C. C. A. 9); In re Utt, 105 F. 754 (C. C. A. 7). There is doubt whether even the expenses of the sale should be charged to the lienor if he did not consent to the sale. Ætna Life Ins. Co. v. Leonard, supra; In re Vulcan Foundry, etc., Co., 180 F. 671 (C. C. A. 3). Nor is it material that no general estate remains to compensate the receiver or the trustee in bankruptcy or their attorneys, where the fund realized is less than the amount of the valid incumbrance. In re Williams, supra; Smith v. Township of Au Gres, 150 F. 257, 9 L. R. A. (N. S.) 876 (C. C. A. 6); In re Cutler & John (D. C.) 228 F. 771 (E. D. N. C.). This is no hardship, for the sale should not have been asked unless there was a reasonable expectation that the general estate would be benefited.

The procedure by which a lienholder should assert his claim to the fund is by filing an intervening petition. He may be ordered on reasonable notice to come in and assert his rights. In re T. A. McIntyre & Co., 176 F. 552 (C. C. A. 2); In re Lathrop, Haskins & Co., 223 F. 912 (C. C. A. 2). The general order obtained upon the appointment of receivers, directing creditors to file their claims within 90 days, was not such an order. It affected only creditors of the defendant, not claimants of a fund created long afterward. The refusal to allow Spence & Co., Inc., to file its claim as a general creditor adjudicated nothing with respect to the rights of the appellant, or of its rights to share in the fund held subject to the lien of the mortgage. See N. Y. Security & Trust Co. v. Lombard Inv. Co. (C. C.) 75 F. 172 (W. D. Mo.), cited by this court in Re Lathrop, Haskins & Co., supra. There was no bar of any sort to the lienor asserting his rights, unless it be the order entered November 13, 1924, from which no appeal was taken.

That order makes no allusion to the lien of the Spence mortgage. It approved disbursements shown in the preliminary report of the receivers, which had apparently been filed either the day before or the same day as the order. It also authorized payments to the receivers, to attorneys, and to others who had rendered services to the receivers, which, if paid out of the fund held subject to the Spence lien, would impair it by more than $10,000. No other fund was available. The receivers' report showed that they had collected some $88,000, of which about $51,000 was derived from the Booneville plant, and about $37,000 from the Pulaski plant and the feeding stations. The Booneville plant was subject to several incumbrances other than the Spence mortgage, and the order now under discussion recognized these liens and gave the lienors the entire proceeds. This left, as the only property remaining in the receivers' hands, the fund of $37,000, and this was subject to the Spence lien. While the order does not say from what source the receivers are to procure the money for the payments authorized by the order, it is apparent that the only source available is...

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