
    152 F. 78
    INTERNATIONAL TRUST CO. v. DECKER BROS. et al.
    No. 1,335.
    Circuit Court of Appeals, Ninth Circuit.
    Feb. 11, 1907.
    
      John J. Boyce, Shackleford & Lyons, and Pillsbury, Madison & Sutro, for appellant.
    Curtis H. Lindley and Henry Eickhoff, for appellees.
    Before GILBERT and ROSS, Circuit Judges, and WOLVERTON, District Judge.
   WOLYERTON, District Judge,

after stating the facts, delivered the opinion of the court.

The essential and ultimate inquiry is whether the court erred in decreeing a sale of the mining properties, in view of the proceedings theretofore had and the administration of the affairs of the defendant .corporations under the receivership, and it is important to a clear understanding and solution of the principal question that certain legal principles be first ascertained and determined. As a general rule, “to warrant the interposition of a court of equity by the aid of a receiver it is essential that plaintiff should show, first, either a clear, legal right in himself to the property in controversy, or that he has some lien upon it, or that it constitutes a special fund out of which he is entitled to satisfaction of his demand; and, secondly, it must appear that possession of the property was obtained by defendant through fraud, or that the property itself, or the income from it, is in danger of loss from the neglect, waste, misconduct, or insolvency of the defendant.” High on Receivers (2d Ed.) § 11. See, also, 23 Am. & Eng.Enc. of Law, 1036.

The receiver being an arm of the court, his authority for taking over the properties of the concerns involved, for administering their business affairs, and for issuing receiver’s certificates, with a view to obtaining funds for discharging liabilities and obligations incident to the receivership, is but another expression for the authority of the court, without whose orders and directions the receiver is powerless to do anything." A practice has grown up incident to railroad receiverships, which, indeed, has become firmly established by judicial sanction, whereby the receiver is considered to be legally competent under conditions of insolvency, and perhaps for other causes peculiar to the business of public service corporations, to issue receiver’s certificates for the purpose of paying labor claims, within prescribed limits as to time, and other incidental and necessary expenses for carrying forward the business of the corporation, so that it may continue a going concern, and thereby to supplant or supersede the liens of mortgage claimants. The reasons, however, for the authority are peculiar to railroad corporations, and to the enterprises in which they engage, the most salient of which are that railroads are quasi public concerns, through which the public interests and convenience, as well as private ownership, are largely subserved, and that a maintenance of the roadway and equipment, and a continuation of the business and operation of the road, are essential to the preservation of the mortgage security. Any person or corporation, in taking and accepting a mortgage upon the property of a railroad, therefore, does so with reference to the law governing such corporations, and with knowledge, presumably, of the legal condition that, for the purpose of keeping the enterprise a going concern, receivers may be appointed and receiver’s certificates issued in appropriate cases, which, in their force and effect, will supplant the mortgage, and hence with the understanding that the mortgage lien may be superseded by the necessary expenses for continuing the business and thereby preserving the security of the mortgage. These principles have been established by numerous adjudications in the Supreme Court of the United States. Fosdick v. Schall, .99 U.S. 235, 25 L.Ed. 339; Barton v. Barbour, 104 U.S. 126, 26 L.Ed. 672; Miltenberger v. Logansport Railway Co., 106 U. S. 286, 1 S.Ct. 140, 27 L.Ed. 117; Burnham v. Bowen, 111 U.S. 776, 4 S.Ct. 675, 28 L.Ed. 596; Union Trust Co. v. Illinois Midland Co., 117 U.S. 434, 6 S.Ct. 809, 29 L.Ed. 963; Wood v. Guarantee Trust Co., 128 U.S. 416, 9 S.Ct. 131, 32 L.Ed. 472; Kneeland v. American Loan Co, 136 U.S. 89, 10 S.Ct. 950, 34 L.Ed. 379. Neither the rule, nor the reasons which go to its support, have application to corporations engaged in strictly private enterprise. The Supreme Court of the United States has not as yet expressly said this, but it has so strongly observed the distinction in that relation between the two characters of corporations that there is left but little room for conjecture as to what its determination in a case calling for a decision in the premises would be. It is said in Wood v. Guarantee Trust Co, supra, that: “The doctrine of Fosdick v. Schall has never yet been applied in any case, except that of a railroad. The case lays great emphasis on the consideration that a railroad is a peculiar property, of a public nature, and discharging a great public work. There is a broad distinction between such a case and that of a purely private concern. We do not undertake to decide the question here, but only point it out.”

And so in Kneeland v. American Loan Co, supra: “It is the exception, and not the rule, that such priority of liens can' be displaced. We emphasize this fact of the sacredness of contract liens, for the reason that there seems to be growing an idea that the chancellor, in the exercise of his equitable powers, has unlimited discretion in this matter of the displacement of vested liens.”

The federal courts, in both the circuit and district, have, however, passed upon the question, and are uniform in holding that a receiver of a private corporation has no such latitude in legal contemplation as it respects the issuance of receiver’s certificates as do those of a railroad or public-service corporation, and that his authority for displacing mortgage liens, unless by the consent of the mortgagee, extends only to the necessary expenditures incident to administering the assets and preserving the property from deterioration pending the winding up of the business and the settlement of the receivership. This was held in Farmers’ Loan & Trust Co. v. Grape Creek Coal Co. (C.C.) 50 F. 481, 16 L.R.A. 603. We quote from the headnote: “In a suit to foreclose a mortgage on the property of a coal-mining company the court has no power, as against the objection of even a small minority of the holders of the mortgage bonds, to authorize a receiver appointed in the suit to issue certificates which shall be a first lien on the mortgaged property, in order to enable him to continue the operation of the mines.”

So in Fidelity Insurance, Trust & Safe Deposit Co. v. Roanoke Iron Co. (C.C.) 68 F. 623: “A court of equity has no power, without the consent of all lien creditors, to authorize the receiver of an insolvent private corporation, whose business is not affected with any public interest, to issue certificates which will be a paramount lien upon its property for the purpose of carrying on its business, unless it be necessary to do so in order to preserve the existence of the property or franchises.”

The same doctrine was enunciated in the case of Hanna v. State Trust Co., 70 F. 2, 16 C.C.A. 586, 30 L.R.A. 201, wherein it was sought to issue receiver’s certificates for the purpose of raising funds whereby to carry out certain contracts of sale of real property with purchasers. And in Newton v. Eagle & Phœnix Manufacturing Co. (C.C.) 76 F. 418, it was determined that the court would not order receiver’s certificates to issue for the purpose of raising money to pay interest on the bonds of the company, and thus displace existing liens. To the same purpose is Baltimore Building & Loan Association v. Alderson, 90 F. 142, 32 C.C.A. 542, wherein the court says: “In the case of private corporations the court cannot authorize the issue of receiver’s certificates for the purpose of improving, adding to, or carrying on the business of the company, without first having the consent of creditors whose liens would be affected thereby.”

The state courts "are quite as uniform in their enunciation of and adherence to the doctrine. In Merriam v. Victory Mining Co., 37 Or. 321, 56 P. 75, 58 P. 37, 60 P. 997, which involved the operation of mining property, the same as in the case at bar, Mr. Justice Bean, after a review of the adjudications of the courts of the United States touching the authority of the receiver in railroad matters to issue certificates in displacement of mortgage liens, says: “It will thus be seen that the right of a court appointing a receiver to give priority of payment to unsecured debts oyer the lien of a mortgage is restricted to creditors of railroads which are public concerns, and is only exercised as to them under special circumstances, and in favor of a particular class of claims.”

See, also, Investment Corp. v. Hospital, .40 Or. 523, 64 P. 644, 67 P. 194, 56 L.R.A. 627.

In the case of Raht v. Attrill et al., 106 N.Y. 423, 1N.E. 282, 60 Am.Rep. 456, it is held, in effect, that the court, in administering assets through the receiver, is not empowered to- displace a mortgage lien by receiver’s certificates, except for “expenses of realization, and also certain expenses, which are called expenses of preservation,” which may be incurred under the order of the court on the credit of the property. That was a case wherein it was sought to have issued receiver’s certificates by which to raise the necessary funds for completing a hotel then in course of construction. A later case is that of International Trust Co. v. United Coal Co., 27 Colo. 246, 60 P. 621, 83 Am. St.Rep. 59. The court there, after having examined many authorities, some of which we have cited, says: “We are of opinion that, in administering the affairs of an ordinary insolvent private business ■ corporation for which a receiver has been appointed, a court of equity has not the power to authorize the receiver to incur indebtedness for carrying on the business, and to make the same a first and paramount lien upon the corpus of the property, superior to that of prior lienholders, without their consent. While it may, in a proper action, and with the proper parties present, through the instrumentality of a receiver, carry on the business of private corporations or individuals temporarily, and incur obligations therefor that may be made a paramount lien on the corpus of the property, such obligations must have been contracted for, and must relate strictly to, the preservation of the status of the property at the time of the appointment of the receiver.”

This is the clearest enunciation of the rule that we have found. In a very late and well-considered case from Idaho the same conclusion is reached. Dalliba v. Winschell, 11 Idaho, 364, 82 P. 107.

So that, in the light of these authorities, there can remain no question as to the rule as it relates to private corporations. The court is without authority, except by the consent of the mortgage lienholders, to supplant their liens by receiver’s certificates issued for any obligations other than those arising by way of expenditures for realization and for preserving the property while the business is in course of administration under the receivership. It cannot, by its edict, make any debt or obligation a prior lien, unless appropriately entitled thereto under the law governing receiverships.

Now, to the order of sale. From an inspection of the complaint of Decker Bros, it is extremely doubtful whether it states a cause entitling the plaintiffs to the appointment of a receiver. Under the rule above first noted the plaintiffs were required to show that the property of the mining companies constituted a special fund to which they had a right to resort for the satisfaction of their claims, and that the property itself, or the income arising therefrom, was in danger of loss from neglect, waste, misconduct, or insolvency of the defendant companies. Being simple contract creditors only, the property of the mining companies could not be regarded as a special fund for their peculiar protection, and they had a right to resort to it only as other creditors had the right; that is, to reach it through the process of law, by way of attachment or execution, or, in case of insolvency, through a creditors’ bill. But there was no insolvency in the present case at the time. At most, there was only danger of the companies becoming insolvent, and this because it was feared that a large number of suits would be instituted, whereby the assets would be wasted and exhausted. This, it must be conceded, was scant cause for the appointment of a receiver. Further than this, it is apparent that the purpose of the appointment was not that the assets of the mining company should be disposed of for the payment of indebtedness and liabilities, but that the properties might be operated as mines, and, presumably, that the claims should be discharged out of the earnings of such operation. Not only does the complaint indicate as much by very strong implication, but the subsequent management and conduct of the parties proves it. The first order obtained, whereby leave was granted for issuing receiver’s certificates, extended no further than to enable the receiver to borrow money for the payment of labor claims without specification as to any particular claim. But the second, fifth, and sixth orders clearly contemplated the development of the mines, as well as their operation. Clearly the court was without authority of law to permit the receiver to conduct the business of the defendant companies in this way, even if the complaint was sufficient to warrant his appointment in the first instance. These orders were probably all entered by the consent and sanction of the defendant companies (although the record is not explicit as to that), which would estop them to deny their validity. But the thing of peculiar moment is that they were made and entered without the appearance or consent of the International Trust Company, although they purport to subordinate its mortgage lien to the lien of the receiver’s certificates. This would be the conclusion from the record up to the time of filing the petition of the defendants with a view to having the trust company brought in and made a party to the suit or proceeding. By this petition, and by the answer and cross-complaint subsequently filed by the defendant companies, it is alleged that all such orders were made and entered with the consent and approval of the holders of the bonds. These allegations, however, are specifically denied by the trust company, thus bringing into the record an issue as to the real fact. By the further petition of the trust company for leave to sue the receiver, and its cross-complaint, it appears that the presence of other parties is necessary to a complete determination of the matters at issue; it being shown that such parties are claiming such an interest as beclouds the title to some of the properties. Now, without settling these matters, or determining priorities in any way, the court made and entered the order of sale complained of. The order is one resting in the sound discretion of the court —a judicial discretion, however, not arbitrary, but impartial, to be exercised in obedience to the rules of law.

It is inevitable that all these properties must be sold to satisfy the various demands existing against them, and it is most important that they bring the very highest price in the market. To our minds the questionable irregularity attending the appointment of the receiver, the clear want of authority in the court, first, to authorize the receiver to develop the properties or to operate them for any purposes except for those of realization for the payment of creditprs; and, second, to subordinate, without the assent of the mortgage claimants, the lien of the mortgage to that of the receiver’s certificates, and the alleged existence of adverse claims undetermined — will stand largely in the way. of realizing full value at the sale, and that such value can-, not be obtained except under the foreclosure of the trust company’s mortgage, which may be required in the original suit, or may be had under the cross-bill of that company filed by leave first granted.

We quite agree with the trial judge (who, it should be said, was not on the bench when the suit was instituted or the orders authorizing the issuance of the receiver’s certificates were made and entered) that “eight years is too long for a court to hold a mining property in its custody.” The main trouble is, however, that it ever assumed custody in the first instance, and attempted to subordinate the mortgage lien of the trust company, without its assent, to the supposed lien of receiver’s certificates issued wholly without warrant or authority of law. It is manifest that such patent irregularities must necessarily detract largely from the realization of a full or fair value of the properties under a sale had in pursuance thereof.

The decree of the trial court will therefore be reversed, and the cause remanded for such other proceedings as may seem proper.  