Diamond Match Co. v. Taylor

McSherry, C. J., delivered the opinion of the Court. On the second of June, eighteen hundred and ninety-three, Charles W. Lord filed a bill of complaint in Circuit Court No. 2, of Baltimore City, against his copartner, Thomas F. Sprigg, alleging that the firm composed of the plaintiff and defendant was hopelessly insolvent, unable to pay its debts or to continue its business longer without wronging its creditors and seriously diminishing its ’assets ; and praying that the partnership of “ C. W. Lord and Company ” might be dissolved and that a receiver might be appointed to take charge and possession of its assets. On the same day an order was passed appointing Winfield J. Taylor receiver. The following day the receiver obtained from the Court an order authorizing and directing him to continue the business^of the firm till the further order of the Court, though this order did not empower him to buy any other new goods than were necessary to complete the manufacture of the raw materials on hand and to enable him to sell the old stock. On November the twenty-eighth of the same year the receiver made report that he had continued the business by selling' in the usual course of business and by buying such new goods as were needed by the demands of the trade. Upon this petition an order bearing the same date was passed — 403 — ratifying what the receiver had done and directing him to continue the business of C. W. Lord and Company. In the meantime a meeting of the creditors of the firm had been held and it was agreed by most of them to accept forty cents on the dollar in settlement of their claims, the promissory notes of the firm at three, six, nine, and twelve months to be given, and the assets, or the money arising from the sale thereof, to remain in the hands of the receiver as security for the payment of the composition notes. The receiver, in continuing the business, purchased large amounts of materials and incurred a heavy indebtedness. Some of these goods and materials were bought by him from creditors of the firm and some from other persons who were not such creditors. Out of the proceeds of the sale of the old stock as augmented by the new purchases made from time to time by the receiver he paid, with the exception of eight thousand and eighty-seven dollars and eighty-nine cents, the forty per cent, composition notes above alluded to. On the fifth of June, or three days after the appointment of the receiver, certain creditors of C. W. Lord and Company sued out attachments which were levied on the firm’s assets and also on the individual property of C. W. Lord. These attaching creditors were restrained by injunction from interfering with the firm’s assets ; but the receiver believing that if they were permitted to pursue and to sell the individual property of C. W. Lord, as they threatened to do, a ruinous sacrifice would ensue, compromised with them for sums in excess of the forty per cent, accepted by the other creditors ; and this proceeding, upon being reported to the Court, was ratified by it on December the third, eighteen hundred and ninety-four. Some of the individual property of C. W. Lord was held as collateral by the firm’s creditors and the receiver was empowered to pay off these debts and liberate the collaterals for the benefit of the firm’s creditors. After the business had been carried on by the receiver up to January the fourteenth, eighteen hundred and ninety-five, it was ascertained that it was falling behind and that — 404 — the receiver owed for the purchase of new goods and materials a considerable sum ; and thereupon, at the instance of some of the creditors and without resistance by Winfield J. Taylor, a co-receiver was appointed, the business was ordered to be closed out and the assets were directed to be distributed. Auditor’s reports and accounts were subsequently made and stated wherein commissions were allowed the receiver, and wherein he was credited with the total sums paid by him in settlement of the attachment suits. Exceptions, which are not be found in the record, were filed to these accounts. The account showing the receipts and disbursements of the joint receivers was ratified and confirmed, whilst the exceptions to the other accounts were sustained, and on October the thirty-first, eighteen hundred and ninety-five, another order was passed referring the case back to the auditor with directions to make distribution of the funds in the receiver’s hands in the following manner: First. “ To the payment in full of those creditors of W. J. Taylor, sole receiver, who were not, as creditors of C. W. Lord and Company at the time of their failure, parties to the agreement of compromise under which said Taylor carried on the business of C. W. Lord and Company as receiver. Second. To the payment of any balance yet remaining due the original creditors of C. W. Lord and Company who agreed to accept, and have not yet received in full, the compromise settlement of forty per cent, of their claims, so as to give such creditors their full forty per cent, compromise. Such payments to be equalized as far as possible, if not paid in full. Third. To •the payment of those creditors ofW. J. Taylor, sole receiver, who were also creditors of C. W. Lord and Company, and parties to the agreement of compromise, under which said Taylor, ás receiver, carried on the business of said firm.” In this same order the allowance of commissions to Mr. Taylor and the allowance of a credit for the payments made by him in excess of forty per cent, upon the compromise of the attachment cases were expressly reserved for future consideration and were not passed upon at all. From this order — 405 — the appellants, all of whom were original creditors of C. W. Lord and Company as well as of the receiver, Taylor, and all of whom, except the Taunton Wire Nail Company, have received their forty per cent, in full, have appealed. Their contention is that the funds in the hands of the receivers, including the amount which Taylor claims to retain as commissions augmented by the sums paid by him in excess of forty per cent, in compromising the attachment proceedings, should be distributed ; first, to the payment of all the creditors of the receivership without distinction ; and secondly, to the payment of the forty per cent, compromise notes still unsettled. With the question as to whether Mr. Taylor should be allowed any commissions or not because of his alleged mismanagement of the business ; and with the other question as to whether he shall be credited with the sums which he paid in excess of forty per cent, to the attaching creditors, we have nothing to do on this appeal. The Court below having expressly and in terms reserved these questions for future action, and having made no disposition of them whatever, nothing has been decided or determined in respect to them from which an appeal could be taken. These questions are, therefore, not before us, and as they are not before us we are without authority to' express an opinion upon them. We proceed, then, to the consideration of the only matter which the record properly brings up, and that relates simply to a controversy between two classes of the receivership’s creditors. Now, we have said that there are altogether three classes of creditors. First, those who were creditors of C. W. Lord and Company when the receiver was appointed, and who subsequently accepted the forty per cent, composition and by whose sanction the receiver continued the business ; second, those who so being creditors of the firm, afterwards sold goods and materials to the receiver, and became, as to such goods and materials, his creditors; and third, those who not being creditors of C. W. Lord and Company be — 406 — came creditors of the receiver by selling to him after his appointment. The fund for distribution is sufficient to pay the last-named class in full, with a slight surplus over. The order appealed from directs and the audit stated in accordance therewith, allows the payment of these creditors in full, and to this allowance some of the creditors of the second class have objected, and upon their exceptions being overruled, have brought up this appeal. We discover no error in this allowance. There is no question involved as to the priority of the receiver’s certificates. This Court has recently held that a receiver of a private corporation has no authority, even under an order of Court, to create liens upon the property placed in his care by the issual of certificates which will take precedence over subsisting incumbrances, Hooper v. Central Trust Co., 81 Md. 559, and the same principle equally applies to a receiver of a firm or copartnership. The sole inquiry is as to the order in which, under the circumstances of this case, the fund in Court shall be distributed between these different classes of creditors. It was obviously not the design and purpose of the orders of June the third and November the twenty-eighth, eighteen hundred and ninety-three, to empower the receiver to purchase goods on credit and then to sell them again, and out of the proceeds of sale to pay the creditors of the firm in settlement of their composition notes, to the exclusion or even to the prejudice of the persons who, not being creditors of the firm, had become creditors of the receiver on account of these very purchases. Such a mode of dealing would have been simply applying the money of one set of individuals to the payment of the debts .due to another set, though the latter had no claim whatever upon the former. The business was continued by the receiver with the sanction of the firm’s creditors and solely for their benefit. They had no claim upon the goods bought by the receiver, nor upon the proceeds of the sale thereof, except to the extent that they were the vendors of those goods. The receiver’s power was limited strictly to the purchase of — 407 — such new materials as would enable him to convert into cash the assets he took into his possession at the time of his appointment. The proceeds derived by him from the sales of goods which he bought belonged, less the profits, to the persons from whom he purchased the goods. The profits arising from such sales and the money obtained from the sale of the old stock belonged to the firm’s creditors—those who were creditors when the receivership was created. It was manifestly, then, the duty of the receiver to pay to the creditors from whom he bought goods the amounts he contracted to pay, and if he neglected to do this and applied the money to the settlement of the composition notes and now has in hand funds with which to pay the creditors who are solely the receiver’s creditors, the Court below was right in directing payments to be made to that class of creditors, and the composition creditors for whom the receiver was acting and to whom he paid money which ought to have been paid, not in settlement of the composition notes, but in satisfaction of the debts which he, as receiver, contracted, have no just ground to complain, if, in consequence of their wrongful receipt of money on their notes, they are required to wait for the payment of their claims against the receiver until the receiver’s other creditors, not so situated, are paid in full. These composition creditors were the persons for whom the receiver was acting in continuing the business, and though all of them (except one) who are now appellants, accepted the forty per cent, paid out of the sales of the commingled old and new goods, they ask not only that as to the new goods sold by them they shall be put upon an equality with the class of creditors who are only creditors of the receiver, but that as the receiver ought to have first paid for all goods bought by him before paying out of the proceeds of their sale any of the forty per cent, composition notes, he should be charged personally with, and made to account for, the very sums received by these objecting creditors and others similarly situated, notwithstanding their allegation that these identical sums thus paid — 408 — to them were wrongfully paid, and therefore improperly received. They accepted these payments knowing the facts, and they insist that, as the receiver wrongfully paid them their forty per cent, compositions, and as they wrongfully received and still wrongfully retain these sums, he must be made to pay these same individuals out of his own pocket the debts contracted with them by him for their benefit. There is no principle of equity that we are aware of which will warrant such a contention. Upon the very theory on which these appellants allege that the receiver’s payment of the forty per cent, to them was wrongful, payments in full to the other creditors were right, because as respects new goods bought by the receiver nothing but the profits derived from their-sale belonged to the firm’s creditors, and consequently sums of money which ought to have been paid for the new goods ought not to have been paid to or received by the appellants in settlements or partial settlement of their composition notes. If the firm’s creditors, who are also the receiver’s creditors, accepted and retain payments wrongfully made to them by'the receiver, they cannot be permitted to hold on to that which they have thus received, it being that which they ought not to have received at all, and yet to stand upon terms of equality with those who confessedly participated in no wrongful act whatever. He who seeks equity must do equity. This maxim expresses the governing principle that every action of a Court of Equity, in determining rights and awarding remedies, must be in accordance with conscience and good faith, 1 Pom. Eq. sec. 385. (Decided June 16th, 1896). In our opinion the Court below was right in postponing these appellant creditors and in giving to the composition creditors yet unpaid a preference after the payment in full of those persons who-were creditors only of the receiver. Finding no error in the order appealed from it will be affirmed with costs. Order affirmed with costs above and below.