Stokes v. Hoffman House

Van Brunt, P. J.: An action having been commenced by the Farmers’ Loan and Trust Company as trustee against the Hoffman House, a Hew Jersey corporation, to foreclose certain mortgages covering leases and chattels belonging to the defendant therein and which were in the possession of this defendant, and with and upon which it was carrying on a hotel and café business in the city of Hew York, on the 21st of December, 1893, an order was made appointing Edward S. Stokes receiver of the property covered by the mortgage to foreclose which the action was brought. The order provided that the said receiver “ be and he hereby is authorized and empowered to take possession of and carry on the several hotels and restaurants, the leases of and chattels in which are covered by the said mortgage, with authority to employ and pay such employees, agents and servants as may be necessary in carrying on said places, and to. purchase such supplies as may be necessary for the conduct of said hotels and restaurants, and with authority to do any and all other things which may be — 122 — necessary or proper to be done in the general and ordinary conduct of similar places of business.” The said Edw.ard S. Stokes, as receiver, entered into possession of the property mentioned in said foreclosure action and continued to •conduct the- business theretofore carried on upon and with said-property until the 25th of May, 1894. On the 24th of January, 1894, a judgment of foreclosure and sale was entered appointing a referee to sell. It appears that there were outstanding 425 bonds of $1,000 each which were secured by the mortgage to foreclose which, the action was brought; 300 of these bonds were in the possession and under the- control of Edward S. Stokes, the other 125 bonds were in the possession of one William E. D. Stokes, claiming to hold them as collateral security for an indebtedness of said Edward S. Stokes, - the latter, however, claiming that the said W. E. D. Stokes had converted them to his own use. On or about the 3d of February,. 1894, the present corporation was formed by said Edward S. Stokes, and James E>. Leary and E. Y. Foote, pursuant to the statute of New York known as “the Business Corporations Law” (Laws of 1892, chap. 691), with' •a capital of $200,000. On the 2d- of March, 1894, that part of the’ mortgaged property known as the Hoffman House was duly sold at •auction by the referee and purchased for the defendant herein for the sum of $120,000. The terms of sale provided that the property was to be subject to all liens of every kind and description, and that unpaid rent, if any, would be allowed to the purchaser. Said terms of sale, also, provided that the purchaser, upon payment of the. sum bid, was to receive the property free and clear from unpaid rent then due or taxes or counsel fees or other expenses -arising from the receivership;' all such claims, if assumed by the purchaser, were to be deducted from- the price the property brought. On the 12th of May, 1894, there was a meeting of the incorporators of the defendant at which by-laws were adopted. Edward S. Stokes was elected president, Mr. Foote, treasurer, and Mr. Cornish, secretary. Thereupon a resolution was adopted confirming the purchase made on March 2,1894, at said foreclosure sale.. Of the amount of the defendant’s bid, $5,000 having been paid in cash, and said Edward S. Stokes having delivered to the defendant herein the 300 bonds controlled by him in order that they might be used in completing — 123 — the purchase, and the state of the case with reference to the other 125 bonds having been reported to the court on the 15th of May, 1894, an order was entered whereby the referee was directed to deliver to the purchaser of the mortgaged property sold by him as •above mentioned, conveyances and transfers thereof upon receiving in cash the sum of $5,000 in addition to the sum of $5,000 in cash theretofore paid to him, and also 300 of .the bonds of the defendant to secure which the mortgage mentioned in the complaint in the •action was given, and also a bond in the penal sum of $35,000 with sufficient surety conditioned to pay to said referee upon demand the cash value of the remaining mortgage bonds of said defendant corporation as soon as their value could be ascertained, and any further •sum or sums which might be necessary to be paid under the decree in the action. On the 18th of May, 1894, a meeting of the directors •of the new Hoffman House corporation was held at which it was reported that arrangements had been made for the transfer of the property to the corporation on filing the bond directed by the court as aforesaid; and the officers of the corporation were authorized to issue the entire stock of the company, 2,000 shares, to Edward S. Stokes, save 5 shares issued to Mr. Foote and 5 shares issued to Mr. Leary. On the 25th of May, 1894, another meeting of the directors was held at which a resolution was passed for the execution of the $35,000 bond, and this bond was accordingly executed. Thereafter, and upon the same day, a deed was delivered by the referee to the New York corporation of the Hoffman House property so purchased by it, and said corporation went into possession. After this date, however, and until the latter. part of •June, 3894, the receiver kept the accounts of the receipts and disbursements of the new Hoffman House corporation in his own name and deposited the receipts in his own hank, drawing checks and making cash disbursements • therefrom on behalf of the new' corporation. On the 29th of June, 1894, said receiver, finding an apparent balance of $9,282.42 in his account, gave a •check for that sum to. the new Hoffman House corporation and closed his receivership hank account, and. thereafter all transactions were had through the bank account of the Hoffman House of New York. During all the time that the said receiver was in possession of the — 124 — leasehold property known as the Hoffman House, he paid no.rent, to the owners of the leases, nor was any application made to him by the landlord either for the possession- of the property or for the payment of rent. The landlord insisted, however, that in the terms-of sale under which the said leases were to be sold in the foreclosure -action, he should be protected so that the purchaser at said foreclosure sale might be required to pay the rent which had accrued from the 1st of December, 1893, no rent having been paid subsequent to that-daté. Accordingly the terms of sale were submitted to the landlord, and he was assured by Edward S. Stokes, one of the incorporators of the new corporation, the proposed purchaser, that the purchaser upon going into possession of the property would pay all the back rents. As soon as the Hoffman House corporation went into possession the landlord made a demand for the payment of the rent, and threatened that unless a substantial payment was made on account thereof,, he would take proceedings to recover the possession of the leased property. The Hoffman House of New York, having no money with which to pay this rent, in order that that company, of which- Edward S.> Stokes was president, might keep possession of the property, the said Stokes, as receiver, out of the moneys in his hands as receiver, wrongfully, as is claimed by the plaintiff, paid to the landlord the sum of $10,000 on account of ■rent, and subsequently the Hoffman House corporation of New York paid all the balance of the rents, amounting to many thousands of dollars. » In January, 1898, the receiver commenced an action against, the-defendant herein to, recover $16,223.27, money alleged to belong to him, which the defendant had collected from the customers who .were indebted to the hotel for accounts incurred during his possession as receiver, proceeding as upon an account stated. The answer denied the statement of. account and set up a counterclaim alleging that the defendant had paid oh behalf of the receiver certain of the receiver’s obligations amounting to $35,001.50.' In March, 1898,' said Stokes, as receiver, began a second action against the defendant, alleging that he had laid out and expended certain moneys for taxes on the Worth House property (a portion of the property covered by the mortgage foreclosed) which by the terms of the lease and under the terms of sale on the purchase of the property, the said defend — 125 — ant was obligated to pay. In this latter action the defendant interposed an answer substantially setting up a general denial and setting up the same facts by way of counterclaim and defense as in the first action. ' The two actions came on for trial in May, 1898, and thereupon an order was entered consolidating the actions and amending the complaint in action No. 1 from a cause of action on an account stated to a cause of action for money had and received. . The answer of the defendant was amended so as to meet these allegations, and the consolidated action was referred to a referee to hear and •determine. He having reported in favor of the plaintiff, a motion was subsequently made to return the referee’s report to him, which motion was denied. Appeals were taken from the judgment entered upon the referee’s report and from an order denying such motion. The claim represented by action No. 2 as. to the Worth House was withdrawn. The items in dispute upon the trial before the referee relate almost entirely to the $9,282.42 check turned over by the receiver on the 29th of June, 1894, to the Hoffman House, and to the question as to the liability of the receiver for the rent of the leased premises during the period of his occupation. It is claimed upon the part of the defendant that because of certain representations alleged to have been made by Edward S. Stokes' in selling certain. stock in the Hoffman House to one McDonald, he cannot now claim that there was any indebtedness due to him as receiver from the Hoffman House, because of moneys which he as receiver had paid over to the Hoffman House or on its account. We are unable to see how any transactions between Edward S. Stokes and McDonald could, in any way, affect the rights of Edward S. Stokes, as receiver, to recover money from the defendant which he was entitled to receive. If Stokes made any representations to McDonald in regard to the liens or claims against the property in which he was buying an interest, which were false, McDonald has his remedy against Stokes; but certainly representations as to incumbrances upon the Hoffman House property were no part of the ■duties of Edward S. Stokes as receiver, and even if such representations were made, they could in no manner affect the fund of which he was the guardian. It seems’to us, therefore, to be entirely imma — 126 — terial what the transaction between Stokes and McDonald was, inasmuch as it could in no manner affect the right of the receiver tereco ver any moneys which equitably belonged to him. . It appears from the evidence in this case that experts were employed upon both sides to examine the books of the receiver and of the corporation. These experts agreed as to the exact amounts-which the receiver had received from the defendant’s business and had paid out on its behalf for wages and supplies, and also the-amounts which the defendant had collected on the receiver’s account.. The experts agreed upon all disbursements made by the receiver for which vouchers were produced; and the remaining disbursements-were finally conceded to have been made. It will appear upon an examination of this evidence that no mention was made by the experts in their report of the check for $9,282.42, that being a payment which was conceded and not in dispute and was in no manner the subject of their investigation,, the payment- not coming under the head of moneys collected by the Hoffman House from guests, belonging to the receiver, which were the only items of receipts by' the Hoffman House which were in dispute. It, therefore, appears that the referee was. clearly right in holding that this amount was not included in the experts’ report,, and that the plaintiff was entitled to credit therefor. • The next question' necessary to'consider is the claim made by the receiver against the defendant for the $10,000 paid on account of rent; and it would seem that the solution of this contention depends-upon the question as to- whether there was any liability upon the part of the receiver, at the time of this payment, for the rent which had accrued during the period of his occupation of the premises-It is urged upon the part of the plaintiff that no such liability exists because he was not a statutory receiver but simply a custodian of the premises and of the business which was therein conducted, having no title to the leases of such premises. The defendant, however, claims that the receiver by taking possession of the leased premises and remaining in possession elected to accept the relation of tenant to the landlord and made himself personally liable for the rent; and in support of this proposition cites the cases of Woodruff v. Erie Ry. Co. (93 N. Y. 609); Frank v. N. Y., L. E. & W. R. R. Co. (122 id. 197); Wells v. Higgins — 127 — (132 id. 459), and U. S. Trust Co. v. Wabash Ry. Co. (150 U. S. 299), and other cases which it is not necessary to particularly, mention. In the case of Woodruff v. Erie Ry. Co. (supra) by the order appointing the receiver it is apparent that it was contemplated by the court that the receiver should pay the rent under the lease, as he was expressly given authority to continue the operation of the railroad of the company and to pay any rent then due or thereafter becoming due under the lease. It further appeared that rent was claimed of him by the landlord and that he refused to pay or to surrender possession of the premises, and the court held that under such circumstances, by continuing the use and occupation of the property acquired under the lease, a liability for the payment of rent under the lease was incurred. The case of Frank v. N. Y., L. E. & W. R. R. Co. (supra) related only to the case of an assignee of a term and not to a mere custodian. In the case of Wells v. Higgins (supra) executors and trustees were removed and a receiver appointed of the rents and profits of the real estate, freehold or leasehold, and of the personal property ; and he was expressly authorized to pay taxes and assessments and other lawful charges thereon. In pursuance of this authority the receiver paid rent to the landlord for a portion of the time and he was held liable for the balance of the time he occupied the premises. In the case of United States Trust Co. v. Wabash Railway (150 U. S. 299) the rule is laid down that under certain circumstances even a chancery receiver may be liable for rent of premises occupied by him. Before discussing this case, however, it will be necessary to call attention to the case of The Quincy, M. & P. R. R. Co. v. Humphreys (145 U. S. 82). In the latter case the receivers were appointed to take charge of and operate railroads composing the Wabash system. They operated the leased line for over a year, and the proceedings were brought by the lessor to compel the receivers to pay the rent. The court unanimously affirmed a denial of the application upon the ground that there was no liability upon the part of the receiver,- and used the following language: “It is not asserted that these receivers became the assignees of the unexpired — 128 — term of the leasehold estáte with the right to dispose of it,'but it is plaimed that because they took possession of the railroad of the Quincy Company and held and operated it until August 1,1885, they became liable to the extent of the rental up to that time. But the receivers were not statutory receivers, nor did they occupy identically, the same position as assignees in bankruptcy or insolvency,, and the like. They were ministerial officers appointed by the Court of Chancery to take possession of and preserve pendente lite the fund or property in litigation; mere custodians, coming within the rule stated in Chicago Union Bank v. Kansas City Bank (136 U. S. 223, 236), where this court said : “A receiver derives his authority from the .act of the court appointing him, and not from the act of the parties at whose suggestion or by whose consent lie is appointed; and the utmost effect of his appointment is to put the property from that time into his custody as an officer of the court, for the benefit of the party ultimately proved to be entitled, but not to change the- title or even the' right of possession in the property.” “As observed in relation to such a receiver, by the Supreme Court of Maryland, in Gaither v. Stockbridge (67 Maryland, 222, 224), cited by counsel for appellee: 1 It is manifest that the scope of his duties and powers are very much more restricted • than those of an assignee in bankruptcy or insolvency. In the case of an assignee in bankruptcy the law casts upon such assignee the legal, title to the unexpired term of the lease and he thus becomes assignee of the term by operation of the law, unless, from prudential considerations, he elects to reject the term as being without benefit to the creditors. But not so in the case of receivers, unless it be, as in New York and Some of the other States, where by statute, a certain class of receivers are invested with the insolvent’s estate, and with powers very similar to those vested in an assignee in bankruptcy. (Booth v. Clark, 17 How. 331.) The ordinary chancery receiver, such as we have in this case, is clothed with no estate in the property, but is a mere custodian of it for the court; and, by special authority, may become an officer of the court to effect a sale of the property, if that be deemed necessary, for the benefit of the parties concerned. If the order of the court, under which the receiver acts, embraces the lease — 129 — hold estate, it becomes his duty, of course, to take possession of it. . But he does not, by taking such possession, become assignee of the term in any proper sense" of the word. He holds that, as he would hold any other personal property involved, for and as the hand of the court, and not as assignee of the term.’ ” In the case of United States Trust Co. v. Wabash Railway (supra) the broad rule laid down in the case last, cited is modified by holding that where a chancery receiver under the express sanction of the court keeps the landlord out of possession who is ■endeavoring to obtain possession, he is equitably liable for the rent ■during the time during which he has thus kept such landlord out of possession. From an examination of these authorities it seems to us' that the ■principle which controls in cases of this character is that mere eccupation, undisturbed, and with the consent of the landlord by a •chancery receiver, in no maner renders the fund in his hands liable for rents accruing during such occupation; but that if such receiver u’emains in possession after a demand for the payment of rent by the .landlord, or keeps the landlord out of possession of the premises with the sanction of the court, the funds in his hands become equitably chargeable with the rent accruing during such occupation. In -other words, a chancery receiver-by merely remaining in possession of premises with the consent of the landlord cannot be held to have -adopted the lease so that there is any privity either of contract or •estate between himself and the landlord. Applying this rule to the case at bar, we find that no claim for rent was made by the landlord upon the receiver; that he remained in possession and continued the -business with the consent of the landlord; that the landlord did not look to him for the payment of -any rent, but that his solicitude was to be assured that the purchaser upon the foreclosure sale could be compelled to pay that rent, and that being satisfied with the terms of sale he made no claim what-ever for rent until after the deed in the foreclosure suit had been ■delivered and the purchaser let into possession. The landlord then demanded the rent of the purchaser, and the purchaser being unable to pay, and the receiver being substantially ■the corporation which was let into possession, wrongfully took the — 130 — money in his hands as receiver to pay the obligations due to the landlord which it was necessary to pay in order that his corporation, should remain in possession of the premises. The definition of the authority of a chancery receiver, as contained in the cases of Keeney v. Home Insurance Co. (71 N. Y. 396) and Davis v. Gray (16 Wall. 218), are in harmony with the above rule. In Keeney v. Home Ins. Co. it is said : “A receiver pendente lite is a person appointed to take ' charge of the fund or property towhieh the receivership extends while the case remains undecided. The title to the property is not changed by the appointment. The receiver acquires no title, but only the right of possession as the, officer of the court. The title remains in those in whom it was-vested when the appointment was made. The object of the appointment is to secure the property pending the litigation, so that it maybe appropriated in accordance with the rights of the parties, as they may be determined by the judgment in the action.” ■ In Davis v. Gray (supra) the following language is used : “ He is required to take possession of property as directed, because it is deemed more for the interests of justice that he should do so#than that the property should be in the possession of either of the parties in the litigation. He is not appointed for the benefit of either of the parties, but of all concerned. - Money or property in his hands; is in custodia legis. He has only such' power and authority as are given him by the court, and must not exceed the prescribed limits.” So, also, in Decker v. Gardner (124 N. Y. 338) it is said : “ Such receivers possessed no legal powers. They were officers of the court, merely, and their functions were limited to the care and preservation of the property committed to their charge, and they possessed no authority except such as the orders of' the court conferred.” It may be claimed, however, that under the terms of the order by which the receiver was appointed he was directed by the- court, to pay this rent as a necessary incidental expense towards the carrying, on of the business which he was authorized to conduct. It. seems to us that an examination of 'the language of that order shows that it will not bear any such interpretation. By the order appointing the receiver he was authorized and empowered to take, possession of and carry on the several hotels and restaurants, the leases of and — 131 — chattels in which were covered by the mortgage being foreclosed, with authority to employ and pay such employees, agents and servants as may be necessary in carrying on said places. There is not a word said in .this order in regard to the payment of any rent either due or to become due'. The receiver was to take possession of and carry bn the several hotels and restaurants. Then follows the authority to disburse moneys conferred upon him by the order; it is, “ with authority to employ and pay such employees, agents and servants as may be necessary in carrying on said places and to purchase such supplies,” etc. Under this part of the order it is clear that there was no right to pay rent. • It referred entirely to those things which were necessary in the conduct of the hotel business and not to the furnishing of premises in which such business should be carried on. He was to pay the employees and to purchase supplies. This was the class of disbursements he was authorized to make. The order proceeds “ with authority to do any and all other things which may be necessary or proper to be done in the general and ordinary conduct of similar places of business.” These words evidently refer to the incidental expenses necessary for the conduct of that business; and which in a particular manner had been previously mentioned in the order, namely, the wages of employees and the purchase of supplies. The general language used was not intended to confer authority to inake any and every disbursement which the receiver might think proper; but only disbursements of the character previously referred to in the order and which might not perhaps come within the exact language therein used. If it had been contemplated to cover the extraordinary expenditure of many thousands of dollars of rent upon these long leases which were the subject-matter of foreclosure, it would certainly have been designated by the.court, it being so particular to specify the nature of the expenditures which the receiver under the order was to be authorized to make. This is the rule recognized in the case of Quincy, etc., R. R. Co. v. Humphreys (145 U. S. 83) as well as the case of United States Trust Co. v. Wabash Railway (150 id. 287). It seems to be well established by authorities in this State that receivers such as the plaintiff possess no legal powers. ' They are officers of the court merely, and their functions are limited to the care and preservation of the property committed to their charge, and — 132 — they possess no authority except such as the orders of the court, confer. In the case of Wyckoff v. Scofield (103 N. Y. 630) it was held that the receiver- of rents and profits in a foreclosure suit had no power without -the order of the court to lessen the fund in his hands by expenditures for repairs even though such repairs might liave been necessary to preserve the property, the court holding that if necessary for the preservation of the property the court might direct-the expenditure, but that the receiver had no authority to make it without such direction. It, therefore, follows, in the case at bar that, without some direction from the court from which he derived his authority to which the receiver could point authorizing the expenditure thus made by him, the payment of the rent out of funds in his hands- was a misappropriation as he had no right to deplete the fund in his-hands in that way, he not being able to create such a liability. _ Therefore, there being no liability upon the part of the receiver for this rent, and it having been paid for the purposes of the defendant corporation by its president wrongfully applying fiinds in his hands as receiver therefor, it seems to us that he is entitled to recover it back in order to make the fund good to the extent of the wrongful expenditure made by him. In regard to the question of interest, without any lengthy discussion upon the subject, it would seem that it was the ordinary case, not of an unsettled or unliquidated account, but of an account which settled and liquidated' itself, and which would naturally bear the interest allowed by the referee. We are of opinion, therefore, that the judgment ana order shornd be affirmed, with costs. Babbett, Patterson and O’Brien, JJ., concurred; Eumsey, J., dissented.