Wilkinson, Gaddis & Co. v. Shannon Lodge Sanitorium

• Decision Date: 13 January 1943
• Docket Number: 149/145.
• Citation: 29 A.2d 631,132 N.J.Eq. 591
• Parties: WILKINSON, GADDIS & CO. v. SHANNON LODGE SANITORIUM.
• Court: New Jersey Court of Chancery

29 A.2d 631

132 N.J.Eq. 591

WILKINSON, GADDIS & CO.

v. SHANNON LODGE SANITORIUM.

149/145.

Court of Chancery of New Jersey.

Jan. 13, 1943.

Syllabus by the Court.

1. The power of this court to direct its receiver to dispose of the property of an insolvent corporation in his custody and possession by a sale free of the existing encumbrances has uniformly been exercised pursuant to the terms and provisions of a pertinent statute.

2. The exercise of the statutory power is dependent upon the existence of two factual prerequisites. The legality of the prior liens must be reasonably in controversy and the property must be of a character materially to deteriorate in value pending the litigation.

3. The exercise of the power must be justifiable, in equity and good conscience, by the facts and circumstances of the particular case.

Proceeding between Wilkinson, Gaddis and Company, and Shannon Lodge Sanitorium, wherein a receiver was appointed for defendant corporation. On application of receiver of defendant corporation for power to sell property of the defendant corporation free of lien out of an existing second mortgage, and on application of second mortgagee for permission to make receiver of defendant corporation a party to a pending foreclosure suit.

Order advised in accordance with opinion.

Jerome Alper, of Newark, for receiver.

Harry Silverstein, of Millburn, for Edward A. Pizzi, mortgagee.

Arthur A. Palmer, Jr., of Bernardsville, for Annie Murdock, mortgagee.

JAYNE, Vice Chancellor.

Expediency suggests a simultaneous consideration of these two applications.

The dissolution of the defendant corporation, Shannon Lodge Sanitorium, by reason of its insolvency has been adjudged and a receiver has been appointed by this court to liquidate and distribute its assets. The company is the owner of a tract of land embracing approximately 25 acres at or near Bernardsville in Somerset County, upon which several buildings are situate. This estate has been previously patronized as a retreat for convalescents. The property is encumbered by the liens of two mortgages, the first of which secures the sum of $8,000 with arrearages of interest, the second, recites a subsisting obligation of $13,000 upon which, it is said, interest has also accumulated.

A few days before the filing of the bill in this cause, the holder of the second mortgage, Edward A. Pizzi, instituted in this court proceedings to foreclose that mortgage lien. The progress of the foreclosure was interrupted by the decree entered herein containing restraint of the conventional character against creditors of the defendant company. This mortgagee now seeks permission to make the receiver a party to the foreclosure suit and asks exemption from the decree enjoining him from the prosecution of the suit.

The receiver, apprehending that there is justifiable cause to challenge the legality of the second mortgage, requests an order authorizing him to promptly sell the real estate (and the personal property) free and clear of the lien of the second mortgage.

The power of this court to direct its receiver to dispose of the property of an insolvent corporation in his custody and possession, by a sale free of the existing encumbrances, has uniformly been exercised pursuant to the terms and provisions of a pertinent statute, P.L.1866, p. 296, to R.S. 14:14-20, N.J.S.A. 14:14-20. It was once thought that such an order was not within the power of the court in the absence of a statute. Potts v. New Jersey Arms & Ordnance Co., 17 N.J.Eq. 395, and Id, Err. & App. 17 N.J.Eq. 516. Cf. Kelly v. Neshanic Mining Co., 7 N.J.Eq. 579. See, also, Bahler v. Robert Treat Baths, 100 N.J.Eq. 525, on page 527, 135 A. 814. In J. W. Pierson Co. v. West Orange-Verona Bldg. Co., 112 N.J.Eq. 426, 164 A. 567, 568, Vice Chancellor Backes remarked: "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 [Corporation Act, N.J.S.A. 14:14-20] applies to liens, the legality of which may be elsewhere litigated." In Sullivan v. James Leo Co., 124 N.J.Eq. 317, 326, 1 A.2d 400, 405, Mr. Justice Perskie, speaking for the Court of Errors and Appeals stated: "This power is also regarded and treated as being inherent in the court of chancery where it has been and is now often exercised. * * * But the exercise of this inherent and statutory power must be justifiable, in equity and good conscience, by the facts and circumstances of the particular case."

The present statutory authority is found in R.S. 14:14-20, N.J.S.A. 14:14-20, which ordains: "Where property of an insolvent corporation is at the time of the appointment pi a receiver encumbered with mortgages or any other lien, the legality of which is questioned, and the property is of a character materially to deteriorate in value pending the litigation, the court of chancery may order the receiver to sell the same, clear of encumbrances, at public or private sale, for the best price that can be obtained, and pay the money into court, there to remain subject to the same liens and equities of all parties in interest as was the property before the sale, to be disposed of as the court shall direct."

The manifest intent and object of the legislature was to prevent the mischief arising from the depreciation in value of property of a nature destined materially to deteriorate during the period of a litigation likely to be protracted. Middleton v. New Jersey W. L. R. Co., 26 N.J.Eq. 269, reversed sub nom. Randolph v. Larned, 27 N.J.Eq. 557.

The exercise of the statutory power is dependent upon the existence of two factual prerequisites. The legality of the prior liens must be reasonably in controversy and the property must be of a character materially to deteriorate in value pending the litigation. Randolph v. Larned, supra; Emmons v. Davis & Dowd Pottery Co., N.J.Ch, 16 A. 158; Reilly v. Penn Cordage Co., 58 N.J.Eq. 459, 44 A. 161; Bahler v. Robert Treat Baths, supra; Passaic Plumbing Supply Co. v. Eastside Holding Corp, 105 N.J.Eq. 485, 148 A. 637, affirmed without opinion 106 N.J.Eq. 278, 150 A. 920; Needle v. Perfection Construction Co., 108 N.J.Eq. 312, 154 A. 878; Twenty Nassau...