Haines v. Buckeye Wheel Co.

SESSIONS, District Judge (after stating the facts as above). [1] Was the receiver authorized to purchase goods and merchandise on credit and thereby to incur indebtedness in excess of $5,000 expressly authorized by the orders of the court? This is the controlling question in the case, and the answer thereto will make the solution of the other problems either easy or unnecessary. All parties concede that the authority of the receiver must be found in the orders of the court or it did not exist. The receiver contends that the court’s order directing him to “continue the" business” impliedly conferred upon him the power to incur debts for goods and material reasonably necessary in the conduct of such business and that the express authority to borrow not to exceed the sum of $5,000 was an addition to- and not a limitation upon his power to bind the estate in his hands for merchandise debts. Appellees insist, and the court found, that: — 294 — “The receiver was authorized to carry on the business, and, for the purpose of doing so, was expressly authorized to borrow a sum of money; (and) this was not only a limitation of the-amount of money he might borrow for the purpose but was a negation of any authority to involve the receiver, as such, in any expense in running the business greater than the amount authorized to be borrowed for that purpose.” A naked order of court requiring affirmative action of any kind by a receiver carries with it, by implication, the power to do whatever is reasonably necessary in its performance. But, in a plainly doubtful case, involving transactions of magnitude and not matters of minor detail, authority to act cannot be predicated upon mere inference or uncertain implication, because, in such case, it is not only the right but the duty of the receiver to inform the court fully as to the facts and to ask for instructions. As was said in Re Angell, 131 Mich. 345, 350, 351, 91 N. W. 611, 612: “A receiver is an officer of court, and amenable to it for a proper discharge of the trust confided to him. When he is in doubt as to what he ought to do, hé should take the advice of the court.” By so doing he can at all times protect himself, and if he neglects or refuses to avail himself of the ample and effective shield which the law thus provides and places in his hands, he acts upon his own responsibility and at his own risk and peril. In the instant case, the receiver, in his petition for authority to continue the business and to borrow money for that purpose, did not inform the court that it would be necessary to buy additional material. On the contrary, the language used fairly imports that the material on hand, stated to be of the value of between forty and fifty thousand dollars, was all that would be needed at least until moneys could bei realized from the sales of finished buggies. His statement was that it would be for the best interests of the estate to reopen the factory and manufacture the stock and material on hand into finished product, and his prayer-was for authority to continue the business and for that purpose to borrow not to exceed $3,000 in the first instance and later an additional $2,000. The order of the court was: “That said receiver be and be is hereby authorized and empowered to borrow money for the purpose of continuing Said business in a sum not to exceed $3,000.” If the purchase of additional material was necessary, it was an essential part of the continuance of the business for which the receiver had been authorized to. borrow money. Buying goods on credit is the equivalent of borrowing money to pay for such goods. There is no legal difference or distinction between an indebtedness for merchandise purchased and one for money borrowed. In either case, if the receiver acts within his authority, the receivership property is in effect pledged for the payment of the debt. The record shows that the receiver’s outstanding indebtedness for goods purchased has at all times been more than $5,000, and at the end of the active operation of the factory was more than $13,000. During the seven or eight months while he was creating this larg-e indebtedness, he made no mention thereof to the court. His first report, was filed in April, 1910, after he had con — 295 — verted all of the property into money and more than two years after he had ceased to operate the plant. In that report he stated that he had paid out $28,015.70 for merchandise, but he was strangely silent upon the subject of his having purchased such merchandise on credit. He was then seeking compensation for his services as receiver and represented that he had “a balance of cash on hand for distribution of $8,683.81,” an amount more than sufficient to meet his debt to the bank and to- pay for the services of himself and his attorneys. He carefully concealed the fact that he was still owing to his merchandise creditors nearly $6,000, an amount considerably larger than the balance of money on hand after payment of the principal, to say nothing of interest, of his authorized debt to the bank. That the court would not have awarded him compensation for his services if the true condition of the estate had been revealed is evidenced by the subsequent decree requiring and commanding him to repay the amount which had been allowed upon a showing which was nothing less than a misrepresentation of the facts. It .may be true that the failure of the receiver to inform the court of earlier conditions, his concealment of later conditions, and the final filing of a misleading report are not in themselves a sufficient negation of authority to buy goods and material on credit. Nevertheless, his whole course o f conduct has an important and legitimate bearing upon the question of his authority to incur debts of that kind and upon the ultimate question of whether,his account should be surcharged so as to provide for the payment of such debts. We conclude that the original order of the court, construed and interpreted in connection with the petition upon which it was based and viewed in the light of the subsequent conduct of the receiver, did not authorize him to make purchases on credit and to bind the estate in his hands for the payment of the debts so created. The language of the order is quite certain and definite. He was authorized to borrow a fixed sum of money for the specific purpose of continuing the business. In other words, with a working capital consisting at most of the money borrowed from the bank and the funds of the estate derived from the sale of its products or otherwise, he was required to do a cash business. There are few, if any, reported decisions of the courts' upon the precise question here presented. Analogous cases brought to our attention support and sustain, directly or indirectly, the findings and decree of the District Court. State Central Savings Bank v. Fanning Ball-Bearing Chain Co., 118 Iowa, 698, 92 N. W. 712; Kirker v. Owings; 98 Fed. 499, 39 C. C. A. 132, and cases there cited; Gutterson & Gould v. Lebanon Iron & Steel Co. (C. C.) 151 Fed. 72; Hitner v. Diamond State Steel Co. (D. C.) 207 Fed. 616. No case to the contrary has been cited, and, so far as we are aware, none has been found. The case of Cake v. Mohun, 164 U. S. 311, 17 Sup. Ct. 100, 41 L. Ed. 447, cited and relied upon by appellant, is not an authority in his favor. There the receiver was expressly authorized by the order of the court “to carry on and manage the business of keeping said hotel in substantially the same manner as it has heretofore been carried on.” No other restriction or limitation was placed upon his power do in — 296 — cur debts in the conduct of the business which he was directed to continue. As said by the court: “Under such circumstances, the power of the receiver to incur obligations for supplies and materials incidental to the business follows as a necessary incident to the receivership.” In the instant case, the authority of the receiver to incur debts in continuing the .business was positively and specifically limited and restricted. The difference between the two cases is marked and vital. In the one the authority conferred was general and practically unlimited, in the other special and definitely restricted. [2] Counsel for appellant further urge with much earnestness and insistence that, if the receiver acted without authority, no damages are shown to have resulted to the trust estate from his unauthorized purchases of goods and material and hence no charge against him can be made; that, in such case, interveners have no right to participate in the funds in the receiver’s hands, and therefore no right to compel him personally to increase the receivership funds; and that persons dealing with the receiver were bound to know the extent of his authority and had no more right to sell than he had to buy and in these transactions the receiver and his merchandise creditors were in pari delicto, and therefore the latter are not entitled to the relief which they seek. In these contentions, counsel misapprehend the nature and lose sight of the" primary object and purpose of this 'proceeding. This controversy is not between the receiver and the general creditors of the New Decatur Buggy Company, nor between the creditors of the receiver and the creditors of the defunct corporation, but strictly and solely between the receiver individually and his own creditors. The general creditors of the insolvent estate are neither active parties to this proceeding nor interested in the moneys sought to be recovered. The entire property of the estate and the goods and material sold to the receiver have been lost. The fund now on hand is insufficient to pay the claim of the bank, and, if the receiver be compelled to restore the $2,000 mistakenly allowed him as compensation, the fund will still be barely sufficient to pay that claim. The bank is the owner and holder of the notes of the receiver which he was expressly authorized to make and, as such, claims the entire fund now in the possession of the receiver. The other appellees are seeking to compel the receiver personally to pay the balance of the purchase price of goods which were sold to him in good' faith and have gone into the estate, but which he had no authority to buy. The right of the bank to priority of payment is conceded by the merchandise creditors and as to all others has been adjudicated in the former suit. It follows that whatever moneys he personally is compelled to pay into court must be used to satisfy the claims of his merchandise creditors. The trust estate will be neither increased nor diminished thereby. This is as it should be, because, even if it were true, as urged by the receiver, that the trust estate has not been injured financially by his purchases of goods on credit, his own creditors have been injured and the exact measure of the damages resulting directly to them from his unauthorized action is the amount of their unpaid — 297 — claims. They and not the general creditors of the estate have suffered the injuries which they .seek to have redressed. [3] It is possible that appellees could have brought independent suits against the receiver and the surety upon his bond (In re Eric Lumber Co. [D. C.] ISO Fed. 817), but they were not confined to that remedy. They also had the undoubted right to intervene in the case wherein the receiver was appointed and to pursue their remedy in the court whose officer, by his unauthorized acts, has caused the losses which they have sustained. The receiver has "not been discharged. He is still accountable to the court of his appointment, not only for his authorized acts, but for whatever he has done in the name of the court and under color of his office although outside the scope of his authority. As was said by the Supreme Court of Minnesota in the case of State ex rel. Pope v. Germania Bank of St. Paul, 103 Minn. 129, 143, 114 N. W. 651, 652: “It is elementary that the court appointing a receiver or assignee in insolvency proceedings has and retains exclusive jurisdiction over the proceedings and the receiver or assignee for all purposes, settling and adjusting, in the same proceeding, all conflicting interests, all controversies, and all matters arising out of or connected with the trust, all questions respecting the accounts of the receiver, allowances for his compensation, the compensation of his attorneys, agents, and necessary clerics.” See, also, the cases hereinbefore cited. Upon principle, as well as authority, this must be so. It is unthinkable that a court of equity can be powerless either to protect the integrity of its own faith and credit or to grant relief to those, who, without active fault on their part, have been wronged by its accredited officer, by surcharging his account with the loss so occasioned. [4] The receiver ought not to be required personally to pay any part of the bank’s claim. He was authorized to borrow the money. All charges of waste, negligence, and mismanagement have been waived and withdrawn. It does not appear that his unauthorized purchases of goods and merchandise resulted in the depletion or diminution of the trust estate and trust funds available for the payment of his authorized debts. Neither in its intervening petition nor in its present motion does the bank ask for a personal decree against the receiver. The decree in its favor, affirmed by this court, declared that the bank “has a valid and subsisting lien upon the funds and assets now in the hands of said H. FI. Haines, receiver of the New Decatur Buggy Company, in the stun of .$4,000 with interest,” and ordered and directed him “to forthwith pay to said bank the said sum and interest out o f said funds and assets now in his hands as such receiver.” It follows that the bank is entitled to recover no more than the balance of the trust funds which will be in the hands of the receiver after the restoration of the $2,000 formerly allowed to him as compensation and after the payment of the expenses of the receivership including the costs and expenses of the litigation prior to the present proceedings. [5] Nor should the receiver personally be compelled to pay for the services of the attorneys of the Buckeye Wheel Company in addition to the payment in full of the claims of his merchandise creditors. Fie has no claim to be satisfied, in whole or in part, from the money which — 298 — he must pay into court. He will receive no benefit therefrom. The payment of his unauthorized debts is all that equity can demand of him. Those who will share the benefits of the fund so created must also share the expense of its creation. The case will be remanded to the District Court, with directions to modify and to recast its decree so- as to require the receiver: (1) To repay and restore to the trust fund the sum of $2,000 heretofore allowed to him as compensation. (2) To pay from the fund then in his hands the expenses of the receivérship, including the costs and expenses of the former suit' with the bank, as the same shall be fixed and adjusted by the court, but not including the expenses of the present proceeding. (3) To pay to the bank the balance of the fund in his hands, or so much thereof as may be necessary to satisfy its claim with interest. (4) Personally to pay into court a sum of money equal to the aggregate amount of the claims of his merchandise creditors with interest thereon at the legal rate. (5) To .pay from the fund so created the expenses (other than taxable costs) of the Buckeye Wheel Company in this proceeding, including fair and reasonable compensation to its attorneys, as the same shall be fixed and determined by the court. And (6) To distribute the balance of the fund ratably among his merchandise creditors in satisfaction of their claims. So modified, the decree of the District Court is affirmed, with costs of both courts to be taxed against appellant personally.