Decker Bros. v. Berner's Bay Mining Co.

WICKERSHAM, District Judge. The principal issues of law in this case were determined, on February 11, 1907, by the Circuit Court of Appeals, on an appeal from a former decree of this court ordering the sale of the property in litigation. International Trust Co. v. Decker Bros. et al., 152 Fed. 78, 81 C. C. A. 302, 11 L. R. A. (N. S.) 152. The cause has now been fully heard on the merits, and, while the facts are now ampli-. fied and fully stated, the law announced on the former appeal is still fully applicable thereto and settles most of the contested issues. Objection's made to the jurisdiction of this court in the original case of Decker Bros. v. Berner’s Bay Co. et al. That objection is based, as it was on the former appeal, upon the want of a sufficient statement of facts in the original complaint, and also upon the failure of jurisdiction, even if the complaint was good, by the payment of the Decker Bros, claim and their withdrawal from the case. The complaint of Decker Bros., upon which the receivership was based, was filed in this court-on December 15, 1897, upon an open account for goods sold to and money paid for the use of the defendants. This account was fully paid and satisfied by Frederick D. Nowell on February 11, 1898, and never since that day did those plaintiffs have any interest in the suit. They did not again appear in the — 292 — case. No answér had then been made to their complaint, and no judgment was ever entered thereon. When the pioney was paid, a receipt in full was given for their demands, and from that moment there was no plaintiff in the case, hnd consequently no defendant — no parties litigant. The¡ case was closed, so far as the cause of action sued on was concerned, and the only duty remaining to the court was to settle the receiver’s accounts as they stood on that day and dismiss the suit. The Holladay Case (C. C.) 29 Fed. 226, 236. On the next day, February 12, 1898, however, Frederick D. Nowell was appointed receiver of the property by the court and entered upon that service, and continued to exercise the functions of a receiver thereof, without plaintiff or defendants, in the case where no issue of law or fact was involved, until May 13, 1904 — more than six years — when the nejxt litigant appeared by the filing of a petition by the First National Bank <oi Juneau and other receiver’s certificate holders. ^Thereafter other certificate holders and claimants of equities in the property intervened, and finally, on March 5, 1906, thp International Trust Company appeared in pursuance to proceedings to -make it a party, and prayed for the foreclosure of its mortgage. . Every receiver’s certificate in controversy ii^ this suit was issued prior to that date; the last beqjg issued on July 20, 1905. ¡ Jurisdiction is the power to hear and determine. Simmons v. Saul, 138 U. S. 454, 11 Sup. Ct. 369, 34 L. Ed. 1054. The Circuit Court of Appeals expressed grave doubt wliether this court had jurisdiction, under the allegations of the Decker Bros, complaint, while plaintiffs were before the court in a pending suit upon a legal cause of action. When the demand was, on February 11, 1898, paid in full by Frederick D.. No-well, for the defendants, and both plaintiffs and defendants had discontinued their litigation, what jurisdiction remained? A receiver is a mere agency of the court, appointed to ¡assist the — 293 — court within its jurisdiction, and when the court is without jurisdiction the receiver is without jurisdiction. A court has no jurisdiction to appoint a receiver for a corporation, either original or auxiliary, except in a pending suit. Sections 1060, 1061, Hill's Ann. Laws Or. 1S92; section 753, Code Civ. Proc. Alaska (Carter’s Codes, p. 300); Mercantile Trust Co. v. Kanawha Ry. Co. (C. C.) 39 Fed. 337; In re Brant (C. C.) 96 Fed, 257; Greene v. Star Cash Co. (C. C.) 99 Fed. 656; Merchants' Bank v. Kent Judge, 43 Mich. 292, 296, 5 N. W. 627; Jones v. Schall, 45 Mich. 379, 380, 8 N. W. 68; Jones v. Bank of Leadville, 10 Colo. 464, 17 Pac. 272, 276; Hottenstein v. Conrad, 9 Kan. 435, 438; High on Receivers, §§ 3, 5, 6, note 2, The dismissal of. the bill or the discontinuance of the suit operates to discharge the receiver. As between the parties to-the suit his functions are ended, though he continues to act until he accounts and turns over his trust property. 23 Am, &. Eng. Ency. of Law (2d Ed.) “Receivers,” p. 1131; 17 Ency7,. of PI. & Pr. 687, notes 1 and 2; Beach on Receivers' (Anderson’s Ed.) 796; The Holladay Case (C. C.) 29 Fed. 226;. 236, The real controversy on the trial of this cause has' restecP upon the plea of estoppel raised by the allegations of the former receiver, and the certificate holders against the'bondholders. The former receiver, Frederick D. Nowell, in his answer to the objections of the International Trust Company to the allowance of his claims as receiver, alleges: “That in issuing the receiver’s certificates mentioned in said objections, he acted with the knowledge, advice, and consent of the-bondholders, and with the knowledge and consent of the- International Trust Company, and used the proceeds thereof in paying the-expenses of the administration of said estate and in bettering, said-properties.” The present receiver makes practically the same or stronger allegations of consent and estoppel, while all the defendant corporations and all certificate holders who are not bondhold — 294 — ers join in that defense. The waiver of the priority of the bondholders’ lien filed by Wallace Hackett on Juné 13, 1904, is, of course, the principal ground of estoppel presented in evidence. The first and second issues of receiver’s certificates were authorized, issued, and sold long prior to the execution of that waiver, and under the well-known principles of estoppel the subsequent waiver was not a sufficient act of estoppel. The prior holders were not induced by that waiver to purchase the certificates, to part with their money, <pr to do or refrain from doing any act to their loss or damage. The .third issue — the MacDonald issue — was authorized subsequent to the filing of that waiver, and if the facts are sufficient to constitute an estoppel against the bondholders, this issue1 may claim the benefit thereof. ! That waiver was filed by Hackett, to use the words of the instrument “for myself and as trustee and holder of said bond's.” With it he filed a list of the bondholder’s and the number of bonds held by each, and thus his individual holding and the amount he represented as trustee was clearly disclosed on the face of the record. It appeared therefrom that he was-the owner of 27 bonds and the trustee for 4Í3. ' ■ An estoppel will not be predicated upon a portion of the record and facts, but upon the whole thereof. All the facts and agreements upon which that waiver was authorized must be considered in determining its character and the authority the trustee had to destroy the lien of the bondholders. The contract between the bondholders and Hackett and the NowTells, of February 26, 1903, was the basis for the ipreation of the Hackett trusteeship. That contract was sent to each bondholder with a copy of Hackett’s letter of explanation of March 31, 1903. At the same time the Nowells,j the other party to the agreement, sent out their circular letter of March 14, 1903. These communications invited the bondholders to deposit their bonds with Wallace Hackett as trustee for the — 295 — purpose of making a sale, and purported to give them the full and complete terms upon which they and all parties were to act in that matter. That contract provided that in the plan of sale and reorganization proposed thereby the Nowells “shall provide for the prompt payment of the receiver’s certificates,” and that they should obtain the discharge of the Berner’s Bay Company and allied corporations from the custody of the court. The contract further provided that it was the purpose and intention of the Nowells “to negotiate a contract for the sale of the above properties with a syndicate of substantial worth, and to receive in payment thereof enough money to discharge the receiver’s certificates and interest thereon now outstanding, also that the purchasing syndicate shall erect a mill of a capacity of one thousand (1,000) tons per day,” and that a general reorganization by the creation of a new purchasing corporation should be created to take over all the property. It was a scheme to sell the properties to new people with money sufficient to pay the receiver’s certificates and to put in a largely increased capital stock, and make the bonds outstanding good, instead of destroying them. No power was given to Wallace Hackett by that contract, or suggested in his or the Nowells’ circular letters of advice to the bondholders, to waive the priority of lien of the bondholders. He was not given any authority to consent to the issuance of receiver’s certificates having priority over the bonds; but a fair construction of the power, a full consideration of the whole arrangement, conclusively proves that his duty and power was to protect the bonds and their then present status. True, he was given “full authority to do and perform all things necessary for the purpose of carrying out this contract so far as it devolves upon him”; but that must be construed in connection with the clause providing that the Nowells “shall provide for the prompt payment of the receiver’s certificates.” The Nowells were a party to that contract, and át the same — 296 — time the representatives of the Berner’s Bay and allied mining-corporations, and all these were bound to know and did kno.w the limitation upon Hackett’s power. The first ánd second issues of receiver’s certificates had been issued and sold long prior thereto, and were therefore not aided by any estoppel created by the Blackett waiver.' In pursuance to the acquiescence of the bondholders by filing their bonds with Hackett and the Nowells, the latter, for the five allied mining corporations, entered into a contract with Joseph MacDonald to run the Kensington tunnel, etc., and then to elect whether he would, Or not, purchase the mines upon the terms mentioned in the contract dated May 13,1904. There is no provision in the MacDonald contract, nor in the order of this court of May 15, 1904 (Judge Brown), authorizing the receiver to enter into it by his signature, promising the MacDonald certificates after-wards issued under it any priority over the bonds of the former issues of receiver’s certificates. Upon all the facts and agreements upon which the MacDonald or “third issue” certificates were authorized and paid out, it is my judgment that Hackett had no power to make his 'waiver of priority and to subordinate the lien of the bonds to that of the MacDonald or any prior issue of certificates. It must be noticed, also, that while the MacDonald contract was signed by MacDonald and entered into on May 13, and authorized by this court on, May 15, 1904, the Blackett waiver was not signed and executed until June 13, 1904, a month later. It cannot, therefore^ be held to have been an inducement to that contract, or to the acceptance of the MacDonald issue of certificates under that contract. It was a gratuitous and unauthorized destruction of the trust imposed in Wallace Hackett by the bondholders, and, being without power, and that fact known to all those who £ook certificates under the MacDonald contract, it does not constitute an estoppel to the priority of the lien of the bonds [over the receiver’s certificates. The numerous letters from (Wallace — 297 — Hackett to the Nowells add nothing to the estoppel, since he had no authority from the bondholders to bind them in that way. The holder of receiver’s certificates is put upon inquiry as to all that has been done in the litigation in which the certificates were issued, and is charged with notice of all subsequent proceedings therein. The doctrine of lis pendens would charge any one who dealt with property of these corporations through the court, pending the litigation, with notice of the litigation, and the order thereof, and the whole of the proceedings therein. Mercantile Trust Co. v. Kanawha Ry. Co., 58 Fed. 17, 7 C. C. A. 3. It is my judgment, however, that the receiver’s certificates are not void, but are a valid obligation of the Berner’s Bay Mining & Milling Company, and their allied corporations, which then owned and now own the equity of redemption in the property of the Berner’s Bay Company. They were issued by Frederick D. Nowell, with the knowledge and consent of those corporations and their officers, and for the benefit of their property. Even if he had no authority as receiver, he had authority as the agent and representative of those corporations (The Holladay Case [C. C.] 29 Fed. 226, 236), and admittedly issued the certificates in payment for development and annual assessment work done on them. Then, too, those certificates were issued under the orders of this court entered at prior terms of this court years ago, and no attempt has been made to obtain relief against the same under the provisions of section 93 of the Code of Civil Procedure (Carter’s. Codes, p. 163), or at all. It is doubtful if this court may now vacate said orders, or even treat them as void. The first issue of $190,000 was sold upon the distinct agreement that it was a prior and paramount lien upon the corporation property. It was sought to put the second issue in the same rank — to displace the prior lien of the first issue by giving to the second an equal rank therewith. There was no attempt — 298 — in the final order authorizing the third issue to give the MacDonald certificates rank with the first and second issues. The takers of the second issue knew of the status given to the first issue, and must be held bound thereby. Union Trust Co. v. Illinois Midland Co., 117 U. S. 434, 436, 6 Sup. Ct. 809, 29 L. Ed. 963. The rights of the holders of these different issues of receiver’s certificates are analogous to those o'f prior and subsequent mortgages. In the last case cited the court quoted Mr. Justice Harlan with approval, as follows: “Those who take receiver’s certificates must he deemed to have taken them subject to the rights of parties who have prilor liens upon the property, and who have not, hut should have been, brought before the court. While the court, under some circumsta¡nces and for some purposes, and in advance of the prior lienholders being made parties, may have jurisdiction to charge the property with the amount of receiver’s certificates issued by its authority, it canhot, without giving such parties their day in court, deprive them of their priority of lien. When such prior lienholders are brought before the court, they become entitled, upon the plainest principles of j'ustjce and equity, to contest the necessity, validity, effect, and amount of all such certificates, as fully as if such questions wrere then, for the first time, presented for determination. If it appears that they ought not to have been made a charge upon the property, superior to the lien created by the mortgages, then the contract rights of the prior lien-holders must be protected. On the other hand, if it appears that the court did wfiot it ought to have done, even had the trustee and the bondholders been before it when the certificates were authorized’ to be issued, the property should not be relieved from the ¿barge made upon it, in good faith, for its protection and preservatiojn.” Evidence is offered and argument presented tcj the court seeking to erect an estoppel against Thomas Stokes, D. E. Webster, Henry Endicott, Wallace Hackett, E. E. Slade, F. S. Eandon, and Geo. K. McEeod, individually, because of the fact that they purchased certificates and waived the priority of their bond liens thereby. The answer to that is that noire of these persons are made parties to this suit, no issues are presented — 299 — in the pleadings upon which they were required to come before the court, they have not individually had their day in court, and no judgment ought to go against them without notice. Objections to the allowance of certain items in the receiver’s accounts of Frederick D. Nowell, former receiver, for salary and expenses, and for certificates issued by him to Nathan Greene, his bookkeeper, and other employés, and to Thomas S. Nowell and Willis E. Nowell, for moneys, expenses, salaries and claims, are made by the International Trust Company, and evidence produced to show that the receivership was conducted in the interest of the Nowells, and unnecessarily prolonged for ten years for speculative purposes, and that certificates were issued by the former receiver for carrying on the business of the corporations and prospecting and developing mines. All such objections are overruled and denied. The allegations are true in a general sense; but the trustee, the International Trust Company, and the bondholders, are quite as much or more to blame for the extraordinary length of the receivership in this case as the receiver. If that trustee had performed its plain duty to its bondholders, or if they had moved it to act, as they had the right to do, this suit would have ended ten years ago just where it must end now — by the foreclosure of the mortgage. It has been pressed upon the court by counsel for the International Trust Company that the law was well settled and well known prior to the appointment of the former receiver that he was without authority to carry on the trust for so long a period and under such circumstances. That contention is entirely correct, but that law affected the trust company with equal or greater force than it does Receiver Nowell. He had the interests of his own corporations and those of the equitable owners thereof, subject to the mortgage, in his keeping. He acted in open daylight, and neither the trust company nor the bondholders can claim that they were — 300 — without knowledge of his acts. Both sides, however, have this fair excuse for the long delay: That they were seeking a means of extracting this property from its insolvent condition and putting it into shape to work and pay the bondholders and all its obligations. In my judgment, all parties in interest are equally responsible for the long delay in! closing this trust. Neither the receiver, Nowell, nor those who own and represent the four original corporations, ought to be specially punished for what the bondholders and the International Trust Company could have prevented at any time. Sinc^ the Circuit Court of Appeals, in the former appeal in this ^se, has declared that the bonds constitute a prior lien upon the mortgaged property over the receiver’s certificates, the International Trust Company has no such interest as enables it to defeat the payment of the receiver’s certificates out of the surplus belonging to the mortgagors. The former receiver’s reports will be approved, and the objections to the payment of the certificates overruled. The report of the present receiver will also be approved, with this exception: Receiver McBride will be allowed $250 per month salary, and his attorney $250 per month salary, both to be paid as costs of litigation. The petition of John H. Cobb for an allowance'of $20,000 for services for the former receiver is denied. He acted as attorney for the receiver under a written contract Tor $1,500 per annum, and this court cannot increase the amount, though it might think the contract price insufficient. I The petition of Shackleford & Lyons and John J. Boyce to be allowed $5,000 by the present receiver for services in the Johnson suit is denied. They may file their lien on the judgment in that suit for the settlement of their claim for services therein. The present receiver has a sum of money in his hands, paid by the International Trust Company, to pay for anriual assess — 301 — ment work on unpatented mines. Pie will pay that money to Shackleford & Lyons, and they will pay for such annual assessment work therefrom. Thereupon the present receiver and all his employés will be discharged and his bond exonerated. A petition of the special master for compensation and payment of claims for publishing notices of sale is allowed. Each of the charges for publication of the notice of sale is allowed, and the master will be allowed the sum of $-, to be taxed as costs in this case. A decree may be prepared, adjudging the bonds, in the sum of $500,000, and the interest thereon to date, to be a prior and paramount lien upon all the mortgaged premises, which shall be sold by the marshal in accordance with the law to pay the same; but the accounts and salary of the present receiver, McBride, his attorney, Wm. A. Barnhill, and the costs of this case, shall be first paid. The receiver’s certificates shall be decreed to be a subsequent lien to the mortgage bonds and costs, on the property mortgaged, and there may be a decree that they be paid out of said property after the bonds and interest and costs are first paid. The first series of bonds and interest shall be first paid, the second series and interest shall then be paid, and the third series and interest shall then be paid. The said issues shall be paid in the order of issuance according to the contract of issue. All general indebtedness subsequent to the last issue of receiver’s certificates will be paid from any fund left after paying the said prior certificates, and in proportion and in equal rank. In so far as Receiver Frederick D. Nowell has received certificates, he will be paid as they are paid; for any general claim for salary and expenses, not covered by certificates, he will be paid after all certificates are paid; and the same rule will apply to any claims held by Thomas S. Nowell and Willis E. Nowell, Malony & Cobb, attorneys, or either of them, or any other general creditor. — 302 — The International Trust Company majr bid on the sale of the mortgaged property, and the bonds and interest ,to the full amount may be accepted in payment. If their bid exceeds the amount of the bonds and interest, the excess shall be paid into' court in cash, to be applied upon the receiver’s certificates and other subsequent indebtedness according to the contract of issue. If any other person or corporation shall bid 'the greater amount, the sum so bid and accepted shall .be paid into this-court, to be applied in payment as herein ordered. , The court will cover any matter not noticed in the decree. Let findings of fact, conclusions of law, and decree be, prepared in accordance with these suggestions. ¡