Wire Wheel Corporation v. Fayette Bank & Trust Co.

• Decision Date: 21 February 1929
• Docket Number: No. 3924,3972.,3924
• Citation: 30 F.2d 318
• Parties: WIRE WHEEL CORPORATION OF AMERICA et al. v. FAYETTE BANK & TRUST CO. OF CONNERSVILLE, IND., et al. FAYETTE BANK & TRUST CO. OF CONNERSVILLE, IND., et al. v. FIRESTONE TIRE & RUBBER CO. et al.
• Court: U.S. Court of Appeals — Seventh Circuit

30 F.2d 318 (1928)

WIRE WHEEL CORPORATION OF AMERICA et al. v. FAYETTE BANK & TRUST CO. OF CONNERSVILLE, IND., et al.

FAYETTE BANK & TRUST CO. OF CONNERSVILLE, IND., et al. v. FIRESTONE TIRE & RUBBER CO. et al.

Nos. 3924, 3972.

Circuit Court of Appeals, Seventh Circuit.

December 12, 1928.

Rehearing Denied February 21, 1929.

In No. 3924:

Harvey Elam, of Indianapolis, Ind., and Willis Bacon, of Akron, Ohio, for appellants.

Geo. L. Wire, of Chicago, Ill., for appellees.

In No. 3972:

Geo. L. Wire and Arthur C. Wetterstorm, both of Chicago, Ill., for appellants.

Albert Ward, of Indianapolis, Ind., for the United States.

R. S. Springer, of Connersville, Ind., for appellee Fayette county treasurer.

Before ALSCHULER, EVANS, and PAGE, Circuit Judges.

EVAN A. EVANS, Circuit Judge.

Both appeals will be considered in one opinion. Appellants seek to modify the decree which determined the order of payment of the debts or claims of the insolvent receivership of the Lexington Motor Company.

One William P. Herod was appointed receiver of the Lexington Motor Company on April 28, 1923. As such receiver he conducted its business as a going concern. In the course of the administration of its affairs he obtained an order for the issuance and sale of $250,000 of receiver's certificates which he duly negotiated. Appellants in No. 3972 are the holders of such certificates.

The business was conducted at a loss. After several years of operation, the first-named receiver, Herod, resigned, and his successor, Barnard, sold the assets of the insolvent company, realizing about $155,000 therefrom.

The order of payment and the amount due each creditor as fixed and determined by the District Court is herewith set forth:

                  1. Receivers' and attorneys' fees ............. $ 47,850 00
                  2. United States excise taxes .................   19,718 86
                  3. State of Indiana personal property taxes ...    9,383 54
                  4. Merchandise creditors of the receiver
                      (having no lien by any order of court)       170,078 17
                  5. Receiver's certificates (made first liens
                      by orders of court subject to costs
                      and expenses) .............................  195,588 13
                  6. Other receivership creditors ...............   52,197 08
                                                                   __________
                                                                  $484,815 78
                

The holders of the receiver's certificates insist that their claim should be paid before any sums are paid for taxes. If this position is not sustained, they insist that their claim should be paid before any merchandise creditors are paid. And if this position be not accepted, the certificate holders insist that they should share pro rata with the merchandise creditors what is left after the first three items are paid. They also object to any allowance to the receiver, Herod.

The evidence justifies this brief statement of facts: The receiver, at the request of the outstanding creditors, sought and secured an order directing him to conduct the business of the insolvent company, the Lexington Motor Company, as a going concern; that to carry on said business receiver's certificates were issued; that to more successfully conduct the business, a second issuance of receiver's certificates was authorized which were sold to various financial institutions or delivered to business concerns furnishing material; that a part of these receiver's certificates were retired through payment; that the action of the receiver was at all times characterized by the utmost good faith; that such business was conducted at such a great loss that the receivership itself became insolvent; that the assets were thereupon sold by the second receiver and approximately $155,000 received therefrom; that the outstanding obligations of the receivership were about $495,000; that the general creditors of the Lexington Motor Company are not interested in these proceedings; that the creditors of the receivership were, by the District Court, divided into six classes as above stated.

In view of the amounts involved, the controversy narrows itself down to a consideration of the contentions of the certificate holders. Inasmuch as these claims exceed the amount of cash on hand, they will, if given priority over the receiver's fees and taxes, consume all of the disposable funds. If, on the other hand, the receiver's fees and the taxes are given priority over the receiver's certificates, they will be paid in full and the balance only paid to the certificate holders. There remain the further contentions of the merchandise creditors and the certificate holders, the importance of which is appreciated when it is observed that the claims of each class exceed the amount available for distribution.

On the cross-appeal, No. 3924, the general merchandise creditors seek a modification of the decree which sanctioned the receiver's retirement of certain certificates during the course of the receivership.

Receiver's and Attorney's Fees. — No question is presented as to the amount or priority of the attorney's fees. It is contended, however, that nothing should have been allowed to the receiver, Herod, for services rendered.

With this position we cannot agree. Were the matter otherwise in doubt, we would unhesitatingly accept the findings and conclusions of the district judge who was fully cognizant of all the doings of the receiver. The court said:

"Upon the issues so joined the Court finds for said respondent William P. Herod, and that the allegations of said respondent's answer are true and correct, and that the allegations of said cross-bill charging said respondent with failure to perform his duties as received herein, and with acts of negligence, misfeasance, malfeasance, disobedience of order of court, and misappropriation and misapplication of receivership funds are all untrue, unfounded and incorrect. The court further finds that said respondent has fully and properly accounted for all funds, property, moneys and assets of Lexington Motor Company and the receivership which came into his possession or under his control, including all automobiles manufactured by said receiver; and further finds that said respondent should be allowed and paid reasonable compensation for his services as receiver herein."

The evidence fully supports this finding. Mr. Herod's conduct as receiver was entirely free from any charge or suspicion of impropriety. He may have been overzealous and oversanguine, but his course was at all times backed by the requests of the general creditors of the Lexington Motor Company, who entertained the hope and expectation that a favorable sale of the company as a going concern could, and would, be advantageously made. The receiver's good faith and his confidence in the plant is evidenced by the fact that, out of his own pocket, he advanced $34,000 to meet the pay roll, and to keep the business going. At the close of his receivership his account showed that he had advanced personally over $20,000 — no part of which will ever be paid to him. By the final decree here under review, he is recognized as a creditor whose status is subservient to the certificate holders and the general merchandise creditors. He has not appealed. This action by him speaks louder than words and leaves us with no doubt as to the propriety of his compensation.

Moreover, it appears that the receiver purchased large amounts of merchandise and employed labor to make this merchandise into automobiles and automobile parts. The total business aggregated over $3,000,000. He accounted fully and satisfactorily for all moneys. The only criticism worthy of consideration is his failure to make written reports to the court concerning the conduct of the business. It is contended that had such written reports been made and the court advised of the great losses the court would have entered an order to cease operations. There is no doubt but what such written reports should have been filed. Regardless of the statements furnished by the receiver to the creditors, the court should have received written, sworn statements periodically. It should have been fully advised of the doings of the receiver at all times.

And this is particularly true where the business is run by the receiver at a loss. No receiver should continue to operate a losing business save upon the consent of the creditors and upon the order of the court after the facts showing such loss has been fully disclosed to the court. Atlantic Trust Co. v. Chapman, 208 U. S. 360, 377, 28 S. Ct. 406, 52 L. Ed. 528, 13 Ann. Cas. 1155.

But the present controversy is between the creditors and the receiver, and the latter's failure to file written reports in no wise prejudiced the creditors. They were fully advised of the receiver's doings. He acted upon their urgent request. He conducted the business of the motor company only because the creditors wished him to do so. His one large undertaking in automobile manufacturing was undertaken at their insistence and concerning it the court was fully advised. These creditors were in many instances creditors of the insolvent motor company as well as of the receivership.

Under such circumstances, the court properly allowed the receiver his compensation. The amount of the allowance was far from extravagant. In fact, it was a most conservative allowance.

Taxes. — The receiver made the required reports to the United States government showing the number of automobiles manufactured. He only paid a portion of the excise tax. The certificate holders contend that the government's claim for the balance of its tax never became a lien either upon the cars or other property in the hands of the receiver and must be paid as any other general unsecured creditor.

The government relies upon section 3466, R. S. (31 USCA § 191) and cites Bramwell v. U. S. Fidelity Co., 269 U. S. 483, 46 S. Ct. 176, 70 L. Ed. 368; Price v. U. S., 269 U. S. 492, 46 S. Ct. 180, 70 L. Ed. 373; In re Tyler, 149 U. S....