Brown v. Erb-Harper-Rigney Co.

MR. CHIEF JUSTICE BRANTLY delivered the opinion of the court. Action to foreclose a chattel mortgage. This appeal is from an order of the district court refusing to appoint a receiver [1] pendente lite. On February 3, 1912, the defendant Erb-Harper-Rigney Company, a mercantile corporation doing business at Laurel, Yellowstone county, being financially embarrassed, made an assignment of all its property, real and personal, to George F. Clawson for the benefit of its creditors. Clawson immediately qualified as such assignee and entered upon the discharge of his duties. On June 8, 1912, under an order of the district court of Yellowstone county, the creditors of the corporation consenting thereto, the assignee sold and conveyed all the property to the defendant Erb, a stockholder and the manager of the corporation. The consideration of the sale was the assumption by Erb of the indebtedness of the corporation, amounting in all to $24,450.87. Thereupon Erb executed and delivered to the plaintiff, as trustee for the benefit of the creditors and to secure the indebtedness due them, a mortgage upon certain real estate, including all owned by the corporation at the date of the assignment, and certain other belonging to Erb in his own right. He also, and for the same purpose, executed a chattel mortgage upon the stock of merchandise theretofore owned by the corporation, consisting of hardware, farming im — 23 — plements, etc., together with the bills receivable and accounts due it from its customers. The real estate mortgage, it seems, was to run for the period of two years, though this fact does not distinctly appear. The chattel mortgage contained this provision: “That said mortgagor shall remain in possession of and sell and dispose of the above-described goods and chattels in the regular course of business for the benefit of the mortgagee and that an accounting shall be made by the mortgagor to said trustee on the first of each and every month during the time this mortgage is in force, and the proceeds of the sales, after deducting the expenses of the business not to exceed $150 per month together with taxes, insurance and the interest on a real estate mortgage held by E. Vaughn, of Laurel, Montana, for $2,400, shall be turned over to said trustee by said mortgagor and shall be held by said trustee and shall be applied on said indebtedness by said trustee whenever the sums in his hands shall amount to 10 per cent of the total indebtedness. ’ ’ It describes the debts secured as evidenced in part by promissory notes, and in part by open accounts due and payable at different dates. It further provides: “In case of default in the payment of the aforesaid principal sums of money, or any part thereof, then it shall be optional with said party of the second part, the mortgagee, and obligatory on him at the request of a majority (in number and amount) of the creditors to consider the whole of said principal sums immediately due and payable, and immediately to enter in and sell all and singular the premises hereby granted, and to sell and dispose of the same and all benefit and equity of redemption of the said mortgagor according to law. * # * It is further agreed by the parties hereto that at the expiration of this mortgage it shall be renewed for the period of one year from the date of expiration.” Upon the execution of the mortgages the defendant Erb took possession of the property and proceeded to sell the merchandise in the regular course of business. He continued to do so until June 22, 1912. On this date he sold to Fred. Darrow 51 per cent of his equity under the mortgages, and to defendant Rig — 24 — ney 33 per cent, who, having assumed to discharge the debts secured thereby in proportion to the amounts of their respective shares, thereafter conducted the business under the firm name of Darrow & Erb. This arrangement was continued until October 1, when Rigney sold his interest to defendant Steele, who assumed Rigney’s obligation. On January 22, 1913, Erb repurchased the interest theretofore sold to Darrow, and thereafter, on February 19, sold his entire interest to defendant Harris. •This action was brought on April 11. At that time Steele and Harris owned and were in possession of the entire property subject to the mortgage. The complaint, after making a statement substantially as above, alleges that from and after the transfer to Harris on February 19, Erb ceased to have any further interest in the business; that he has not been in the possession of the property, and has not rendered any accounting to plaintiff; that he has not paid the debts secured by the mortgage, or any part of them,.except the sum of $1,517.72; that the balance with interest is wholly due and unpaid, and that by virtue of the option contained in the mortgage, and upon request by a majority of the creditors, to whom is due the greater portion of the indebtedness, the plaintiff has elected to declare the whole thereof immediately due and payable. The prayer is for the usual decree in foreclosure, and for costs, including attorneys’ fees. The material allegations of the petition for the appointment of the receiver are substantially the following: That it was the understanding by the creditors, and it was part of the arrangement whereby the mortgage was given, that the defendant Erb was to give the business his personal attention.and supervision; that the obligation assumed by him was personal to the creditors ; that he has not continued in possession of the property as in the mortgage provided, but has sold it in bulk, and has ceased to have any interest therein or in the business; that the property has gone into the possession of defendants Steele and Harris; that through the sales made by him, Erb received a valuable consideration, for which he has failed to account to plaintiff; — 25 — that Steele is a resident of the state of Colorado; that neither he nor Harris is personally conducting said business; that these defendants are selling said property in the usual course of business, and will continue to do so unless a receiver is appointed; that by reason of said sales the mortgaged property will be materially injured; and that it is therefore necessary for the protection of the creditors that a receiver be appointed pending the action. The hearing was had after notice, upon affidavits and oral testimony. While there was some controversy upon the question whether the dealings had by Erb with Darrow, Steele, Rigney and Harris were consented to by the plaintiff, the evidence shows clearly that Erb was never in the active conduct of the business, but that it was conducted by Rigney prior to the date of the assignment, and that it has been conducted by him since the execution of the mortgage, and this wich full knowledge by the plaintiff and the creditors. Since Erb took charge under the mortgage, Rigney has been making sales in the usual way. Prior to Erb’s sale to Steele and Harris, Rigney kept strict account of all transactions. He deposited the proceeds of sales to the credit of the plaintiff and Erb in strict accordance with their instructions, and they have been devoted by the plaintiff to the discharge oro tanto of the claims of the creditors. So, also, the evidence discloses that he was in charge for Harris and Steele, and was pursuing this course at the time this action was commenced. There has been no diversion or misappropriation of any of the property or proceeds of sale. The sales of the different interests by Erb were in fact all subject to the rights of plain; iff and the creditors, and were understood to be so both by himself and the plaintiff; the purpose in each ease being to substitute the purchasers in Erb’s place to carry out the terms of th< mortgage contract. In none of the transactions did Erb receive any money, but merely exchanged his equity in the property for equities in real estate which was also subject to encumbrances. In short, Erb and the other defendants have faitl fully observed all the terms of the mortgage, except that — 26 — Erb has not been at all times actually in physical possession of the mortgaged property and in personal management of the business. It is true that the net result to the creditors has not been large, only one small dividend having been paid to them during the year of 1912. This fact is explained by the statement of Rigney that when the mortgage was executed and he resumed charge under Erb, the season for the sale of farm implements for the year 1912 had passed, and hence that sales were limited exclusively to other portions of the stock. He expressed the opinion, however, that if the business should be allowed to go on without interference, the sales for the season of 1913 would produce funds enough to make substantial payment to the creditors. It will be observed that it is not alleged, either in the complaint or in the petition,' that Erb is not entirely solvent and able to meet all the demands of the creditors, or that the real estate held under the other mortgages is not amply sufficient to secure them. The evidence does not disclose what the facts in this connection- are. The breach of the contract alleged as the ground upon which foreclosure is sought is that the obligation assumed thereunder was personal to the creditors, and that Erb has failed to continue in possession of the property and give the business his personal supervision. Assuming that the plaintiff may, on this ground, maintain his action for foreclosure prior to the maturity of the mortgage, do the facts disclosed warrant the appointment of‘ the receiver? The statute itself (Rev. Codes, sec. 6698), in our opinion, answers this inquiry in the-negative. It requires a showing that the property is in danger of being lost, removed or materially injured. It will be noticed that the ground of the application is that by reason of sales being made by defendants, the mortgaged property may be materially injured unless a receiver is appointed. This statement is a mere bald conclusion, and is without support in the facts proved. The mortgage itself provides for the sales just as they are being made. It was 'well known and understood at the time the mortgage was executed that the stock was not of sufficient value to secure all the inaebt — 27 — edness. The very purpose of it was to have the business continue, and thus to preserve the value of the security. While the defendant Erb is not personally in charge of the business, sales are being made, and the proceeds are being devoted to the discharge of the claims of the creditors in strict conformity with the terms of the mortgage. Hence the creditors are not suffering any injury, nor is their security being impaired further than as a consequence of the depletion of the stock, a result which must necessarily follow from an observance of the terms of the mortgage; for it is provided therein that Erb shall sell the property and account for the proceeds. If this provision is observed, the creditors cannot suffer injury. The remedy of a receivership, drastic and violent as it is in [2] effect, because it deprives the defendant in limine of the possession of his property, should not be allowed in any case except upon a statement of facts showing that it is necessary to prevent injury to the rights of the plaintiff pending the action. “The power to appoint a receiver is to be exercised sparingly and not as of course. A strong showing should be made, and even then the authority must be exercised with conservatism and caution.” (Hickey v. Parrot Silver & Copper Co., 25 Mont. 164, 64 Pac. 330.) “The appointment of a receiver is an extraordinary remedy, to be resorted to only in cases of emergency.” (Benepe-Owenhouse Co. v. Scheidegger, 32 Mont. 424, 80 Pac. 1024.) The exercise of the power is lodged in the discretion of the court, but the discretion is not arbitrary. It must be exercised in conformity with the rule that a receiver is necessary as an auxiliary to the attainment of the ends of justice, by the preservation of the property in controversy pending an adjustment of the ultimate rights of the parties. (High on Receivers, 3d ed., sec. 19.) Since it appears that the property involved here is being devoted to the purposes for which it was set apart by the parties, and that the creditors are not suffering, nor are liable to suffer, any substantial injury before final decree, we do not think the district court abused its discretion in denying the application. — 28 — The appointment of a receiver would serve no useful purpose, but would tend rather to impair the value of the security by subjecting it to the expense which is always a necessary incident of a receivership. The order is affirmed. Affirmed. Mr. Justice Holloway and Mr. Justice Sanner concur.