Sibley County Bank of Henderson v. Crescent Milling Company
| Decision Date | 02 January 1925 |
| Docket Number | 24,298 |
| Parties | SIBLEY COUNTY BANK OF HENDERSON v. CRESCENT MILLING COMPANY |
| Court | Minnesota Supreme Court |
Action in the district court for Hennepin county to recover $2,000 and for appointment of a receiver for defendant company. A receiver was appointed authorized to conduct the business of defendant corporation, incur indebtedness for that purpose and issue receiver's certificates for money borrowed. After his death his successor petitioned for authority to sell the property to the Metropolitan National Bank for the receiver's certificates which it held and the creditors were ordered to show cause why the petition should not be granted. Certain creditors filed objections. From an order confirming the sale, Dickinson, J., the Pacific Elevator Company, as a creditor, appealed. Reversed.
Business may be operated temporarily by receiver.
1. The court may authorize a receiver to operate a private business temporarily.
Receiver's certificates.
2. (a) Receiver's certificates have no principal who is liable in case of default. (b) The court has power to authorize the issuance of such receiver's certificates to carry out the limited purposes for which private property is held. (c) Such power must be used cautiously. (d) In the absence of secured creditors the court may order the issuance of such certificates without notice to the creditors, but upon the facts stated in the opinion the use of such power is disapproved.
Lien of such certificates as regards secured creditors.
3. (a) If receiver's certificates are issued as paramount liens without notice to secured creditors, the purchaser is put upon notice of the authority of the receiver to so issue them and that by final action of the court the validity or security of the certificates may be prejudicially affected.
(b) But, in the absence of secured creditors, the validity of receiver's certificates is not, so far as the holders are concerned, affected by the question of notice to general creditors of the application for authority to issue the certificates.
Their validity not affected by receiver's account.
4. The validity of such certificates does not depend upon the account of the receiver.
Amount of sale bond.
5. When a receiver is selling all the assets in the estate for $26,500, to be paid for by the surrender of receiver's certificates in that amount, a bond in the sum of $10,000 is sufficient.
H. V Mercer, Johnson & Co., for appellant.
Allen & Fletcher, for receiver.
This is an appeal by a creditor of a corporation under a receivership from an order confirming a sale of assets. The record presents 5 matters for our consideration, namely; (1) The power of the court to authorize a receiver to continue the operation of a private business; (2) the power of the court to authorize the issuance of receiver's certificates without notice to creditors; (3) if such certificates are valid, are they claims only against the receiver on his bond? (4) if valid are they to be recognized in advance of the accounting of the receiver? and (5) the sufficiency of the bond of the receiver.
1. A receiver is the representative of the court. The property in his possession is in custodia legis. Since it is not practicable for the court to do the physical work in connection with taking possession and preserving the property, the court appoints the receiver to act. In the order of appointment in the instant case, the court directed the receiver to continue the business so long as the receiver deemed the business necessary and proper in liquidating and administering the estate.
From the record it plainly appears that the only idea in the receiver operating the business was to better keep the plant active and incidentally aid in the sale thereof. It was obviously the intention of the court to operate the business but temporarily. When a receiver of a private corporation is appointed the court may authorize him to continue the business temporarily. 1 Clark, Receivers, § 552. This is within the discretion of the court. Section 556. The power of the receiver to incur obligations incident to such operation necessarily follows.
If the receiver, when running a business, finds that it is losing money, he should promptly report that fact to the court and ask for instructions. It is only seldom that a court will use its discretionary power to authorize the temporary operation of a business which is so disorganized as to be in the hands of a receiver. Usually the operation of a business under a receivership loses money. The power to authorize temporary operation is justified when its purpose is to reorganize, keep it a going concern, fulfil existing contracts or such other condition as to make it, in the judgment of the court, to the best interest of the estate. 34 Cyc. 283; 1 Clark, Rec. § 552; 23 R.C.L. 73, § 78. In this case there were existing contracts unperformed that appeared to be profitable, if performed. When it is running at a loss it should be discontinued. First Nat. Bank v. White Ash Coal Co. 188 Iowa 1227, 176 N.W. 287, 12 A.L.R. 286, and note p. 292. In Green v. National Adv. & A. Co. 137 Minn. 65, 162 N.W. 1056, L.R.A. 1917E, 784, this court practically announced that, pending a determination of the question of final dissolution and before sale, the receiver might be authorized to operate the business.
2. The certificates are not debts of the corporation but of the receiver supported by the pledged faith of the court that the property in its custody will be used for their payment. The purchaser necessarily depends upon the integrity of the court. The certificates have no higher character than the debt they represent. They are usually by their terms, as here, made a paramount lien on the property. The holder is entitled to have the court not release the property until the certificates are redeemed. This, the court has as a matter of law, pledged its faith to do. The payment of such certificates in full is conditioned upon the sufficiency of the property in the hands of the receiver to answer all claims of equal priority. If insufficient to pay all such claims proportional payment only can be collected. They carry no absolute promise to pay beyond the extent of the amount of the assets. They have no principal who is liable in case of default. Persons dealing in such certificates must know that payment can only be had by application to the court having the control of the trust property for an order upon the receiver. The court has power to authorize the issuance of such certificates to carry out the limited purposes for which the court holds the property. We recognize that a court in the exercise of such great power as to create an indebtedness which shall have priority over the claims of persons interested in the property taken into custody by the court must act with the greatest caution. In receiverships of purely private corporations the rule is that such certificates may be issued, but only for the purpose of maintaining and preserving the property. 7 Mich. L. Rev. 239. But not to the detriment of existing liens (without notice) 11 Nat. Corp. Rep. 101. A vitriolic article against such certificates in general may be found in 4 Nat. Corp. Rep. 296.
There were no secured creditors. The court in this case made an order authorizing the issuance of the certificates without notice to the creditors. Conceding and holding as we do that the court had this power, we disapprove of it using such power in such a case as this. Such drastic power possessed by the court ought not to be used without giving those whose interests are to be affected the opportunity to be heard in opposition to it. It is not fatal to the validity of the authority that such notice is not given, but good practice commands it. In a receivership matter the court is constantly using its...
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