
    Common Pleas Court of Montgomery county.
    Harrie P. Clegg v. Dayton & Troy Electric Ry. Co.
    (Decided June 14, 1933.)
    
      McMahon, Corwin, Landis & Markham, for the receiver,
    
      Marshall & Harlan, for B. & O. Ry. Co.
    
      L. Calvin Craivford, prosecutor and E. E. Duncan, ass’t. prosecutor, for the State and for Montgomery County.
    
      Leonard Shipman, Craighead, Cowden, Smith & Schnacke, and Turner & Turner, for the Banks.
    
      Nolan, Beigel & Mahrt, for a creditor.
    
      McConnaughey, Shea, Demann & McConnaughey, Brief
    
      Amicus Curiae.
    
   Snediker, J.

This case is before the court on an application filed by the receiver, asking instructions with reference to the payment of certain obligations and particularly seeking the advice of the court with regard to the priorities of claims for costs, operating and administrative expenses incurred by the receiver, taxes, and mortgages. At the hearing on this application our attention was particularly directed to the. taxes, assessments, and penalties, some of which became due and payable prior to the appointment of the receiver. The grand total thereof is $18,237.90. The funds in the hands of the receiver and of which he is now prepared to make a distribution arise from the sale of personal property belonging to the defendant company and from his operation of its business.

The receiver was appointed on March Í, 1932. On that date mortgages on the property sold by the receiver were held by the Winters National Bank & Trust Company, the Third National Bank & Trust Company, and the First-Troy National Bank & Trust Company. These were all of date June 1, 1931. The taxes and assessments unpaid were partially due and payable before that date but almost the entire amount has accrued since.

The defendant company is a public utility and was operated by the receiver until about August 1932, when such operation was made practically impossible by the breaking down of a bridge along its line. Shortly thereafter the receiver was given leave by the public utilities commission to discontinue operations, and since that time has been principally engaged in preserving the property and reducing it to cash. At a public sale of the personal property belonging to the defendant, which was made with the acquiescence of the mortgagees to whom we have referred, a large sum of money was realized. If the receiver is required to first pay the taxes and penalties, which we have spoken of, before he pays the mortgages to the several banks and before he pays the general creditors, their dividends on this distribution will be very largely reduced. It is not the fact that any distraint was ever made by the taxing authorities on the personal property sold by the receiver, and it is contended by the mortgagees that such taxes and penalties have only such lien and priority as is given them by the code provisions of the state. It is insisted that there is no statute which makes personal property tax a lien upon such property, and that in the absence of such a provision personal property taxes are but a general claim, and that the state or county, which is a subdivision of the state, is only entitled to participate in the distribution as does any general creditor.

There has been a diversity of opinion among the courts with respect to the priority of personal property taxes and assessments. It is unnecessary for us to discuss and review the difference of opinion. We need only to follow out what appears to us to be a proper solution of the question, which we do not regard as involving arbitrary law alone, but rather a duty imposed upon the receiver and upon the court on behalf of the state.

The property sold in the instant case was then in custodia legis and the sale was a judicial sale. As said by Judge Vorhees in the case of Creech et al vs P., A. & W. Ry. Co., 2 O. N. P. 164:

“The power to levy and collect the tax overshadows all such property within the state — no matter by whom or how owned. It is the property, not the owner, that is taxed. The incident of ownership may be wholly immaterial; so the property itself be within the jurisdictional power of the state, it matters not whether the property be in the hands of its real owner or in that of his agent, trustee, or in the hands of a tort feasor, or whether the owner be under legal disability or not — infancy, coverture, or mental incapacity. Even death itself can interpose no bar to the exercise of this prerogative of the state, and failure to pay the taxes in such cases leaves the property taxed liable. Nor is the power to impose and collect the statutory penalty by the means provided by law in any sort impeded by reason of such disability. No one interested in the preservation and enjoyment of the property taxed, or to be taxed, who does not see to it that the impost is paid can complain that the legal consequences of dereliction follow the property. The rights of lienholders, whatever they be, are not exempt from the paramount rights of the state. Nor does it make any difference whether the property subject to taxes is real or personal; both alike are subject to the power and rights of the state. Both kinds of property are taxed by uniform rule. As to railroad property the method of appraising and assessing is the same as to both and both are included in the same appraisal; so that, no matter what legal distinctions may be imagined to exist when real or personal property is considered these distinctions fade away in judicial determination of this case. The real question is: Has the property been properly assessed and has the tax been paid?”

Reasoning along the same line, the Circuit Court of Appeals, 9th Circuit (U. S.), in the 222 Fed., page 90, said:

“It is too clear for argument that the appointment of a receiver and the taking of property into the hands of the court through its officer does not withdraw it from taxation. It remains subject to assessment and to the payment of all legal taxes thereon while in custodia, legis to the same extent as it was while in the possession of the owner; and whether or not such taxes be a lien or a debt by the laws of the government within whose jurisdiction the property is situated, such taxes are and should be regarded by the courts as a preferred and paramount claim over all other claims, for they are essential to the existence and maintenance of the very government under which the property is acquired and protected.”

And the Circuit Court of Appeals of the 6th Circuit (U. S.) in the case of Bear River Paper & Bag Co. vs City of Petosky, 241 Fed. 53, used this language:

“It is not claimed that the taxes are unjust or in any way inequitable. Under these conditions, and even if it were to be assumed that the taxes had not become a lien against the property, or that through the mistake of the assessing officer no enforeible debt against the receivers had arisen, a due regard for the rightful burdens of all citizens and residents toward the state government and a due recognition of the benefits received should impel a federal court to direct its receiver to make payment. Such payment, in the absence of meritorious objection to the tax we regard as the receiver’s clear duty.”

Following the same line of thought, the Supreme Court of Missouri, in the case of Greely v. Provident Savings Bank et al, 98 Mo. 458-460, said:

“The amount of taxes was undisputed and the receiver had in his hands funds sufficient to pay them, and we think the order should have been made. It may be conceded that the state did not have an express lien upon the assets that-went into the hands of the receiver, but it had a right paramount to other creditors to be paid out of those assets, a right which it could have enforced through its revenue officers by the summary process of distress, but for the fact that the property and assets of its debtor had passed into the custody of its courts, whose duty it was in the administration and distribution of those assets to respect that paramount right, upon the untrammeled exercise of which depends the power to protect the very fund being distributed, and to maintain the existence of the tribunal engaged in distributing it; and to make no order for the distribution of assets in custodia legis except in subordination to that right. The ordinary revenue officers of the state being deprived of the ordinary means of securing the state’s revenue from the fund in the custody of the court, the duty devolved upon the court to be satisfied and upon tifie receiver to see that the taxes due the state were paid before the estate was distributed to other creditors and we can conceive of no scheme of administration that the court could properly adopt by which the state’s demand could be reduced to the level of an ordinary debt, and be cut off unless presented to the court for allowance within a given time.”

The last sentence of this opinion coincides with our views with respect to the necessity of the state presenting a claim to the receiver or seeking its relief through intervention.

A very well reasoned case on the exact-question before us is that of Commercial Mortgage Co. vs William H. Syfert, found in the 24 O. N. P, at page 157, and the authorities there quoted are adopted as part of this opinion.

Certain special sections of the Code have from time to time been passed by the Legislature of Ohio which directly recognize the priority of taxes with respect to other preferred claims on property and funds in the hands of a fiduciary officer or a receiver. One of these was before the Supreme Court of Ohio in the case of Adair, Assignee, etc. vs Blackburn, Treasurer, etc., 60 Ohio St. 575 the syllabus of which reads:

“Where personal property included in an assignment for the benefit of creditors is encumbered by a mortgage made by the assignor within two months next prior to the assignment to create a preference or to secure a pre-existing debt, taxes on the property charged agaist the assignor at the time of the assignment are entitled to priority on the distribution of the proceeds of the property by the assignee over the claim of such mortgage.”

In the case of H. Snowden Marshall, Receiver, vs People of the State of New York, decided by the Supreme Court of the United States in the 254 U. S. at page 380, Justice Brandeis, after a full discussion of the rights of the state with respect to the collections of taxes imposed, says:

“The state’s right to be paid out of the assets prior to other creditors does not, as pointed out In re Tyler, supra (quoting Greely vs Provident Sav. Bank, 98 Mo. 458) arise from an express lien on the assets existing at the time they passed into the receiver’s hands. State use of Phillips vs Rowse, 49 Mo. 586; George vs St. Louis Cable & W. R. Co., 44 Fed. 117; Hamilton vs David C. Beggs Co., 171 Fed. 157; Coy v. Title Guarantee & T. Co., 212 Fed. 520.
“The right of priority has been likened to an equitable lien. State use of Phillips v. Romse, supra. The analogous preference in payment given to claims for labor by state statutes, and to which the Bankruptcy Act gives priority, has been described as being tantamount to a lien. The priority is a lien in the broad sense of that term, which includes Those preferred or privileged claims given by statute or by admiralty law.’ 2 Bouvier’s Law Diet. 15th ed. 1888, 88. The prerogative right of the state resembles the privilege accorded by the civil law of Louisiana to certain classes of debts, which it was assumed in Burdon Cent. Sugar Ref. Co. vs Payne, 167 U. S. 127, 42 L. ed. 105. 17 Sup. Ct. Rep. 754, would be enforced against property in the custody of a receiver appointed by a Federal court,.”

We apply the authorities to which we have referred to all the taxes, penalties, and assessments imposed upon the property in the receiver’s hands as well as the unpaid excise tax.

So much for the taxes. As to the compensation of the receiver and of his counsel as well as the expense of operation, it has been universally held that commissions payable to a receiver are a part of the costs and expenses of the suit in which he is appointed and should be paid as such instead of being classed as a debt payable pro rata with other debts.

In the 95 Iowa at page 551-557 the court say:

“The fees of receivers and their attorneys were as properly a part of the costs as any other sum necessary to be expended under the order of the court in taking the property and in carrying on the business.”

And in the 76 W. Va., page 481, the court say:

“Proper attorneys’ fees, like other expenses of administration, take precedence over pre-existing liens on the funds, but they can be ascertained only by the court that appointed the receiver.”

And in the 81 Maryland, at page 559, the decision was:

“When the property of a private corporation has been placed in the hands of a receiver, all expenses for safe keeping and preservation are properly payable out of the income, or, if there be none, then out of the proceeds of the corpus of the estate when sold.”

The receiver, then, should distribute the funds in his hands, first, to the costs of this case, which include his own fee and the fees of his counsel, as well as operating expenses ; second, all taxes, assessments, and penalties; third, the unsatisfied mortgages and other liens; fourth, general creditors.  