Bosworth v. Terminal Railroad Association of St. Louis/Opinion of the Court

Upon the record as it was filed in the court of appeals, and independently of other considerations, its decision was manifestly erroneous. A claim was presented against the estate in the hands of the receiver, which he disputed. A part of his contention, as appears from the exceptions, was, specifically, that the debt, whatever its amount, was due from the Jacksonville Southeastern Line, and not from the mortgagor, the Chicago, Peoria & St. Louis Railway Company. After reference to a master, and his report stating the facts, an order was entered directing the receiver to pay the claim. The reference, the findings, the report of the master, the exceptions of the receiver, were all set forth. So that in the record, as it came to the court of appeals, there was a denial on the part of the receiver of any liability of the estate in his possession to the petitioner, and a decree adversely thereto. That alleged liability he was the proper person to contest, and to contest both in the court which had appointed him receiver and on appeal in the appellate court. But the court of appeals, in its opinion directing the dismissal, makes this statement of facts:

'The contention of the receiver is thus stated in the brief of his counsel: 'The question thus presented to this court for determination is one as to the displacement of vested contract liens by unsecured creditors. There is no controversy as to the labor having been performed or the materials furnished within the six months next prior to the appointment of the receiver of the insolvent corporation, nor as to the value of the same. The only controversy is as to whether or not the appellee is entitled on its petition and proof made thereunder to have the vested lien of the mortgagee displaced to the extent of his claim.' He insists that the provision in the decree appointing a receiver providing for the payment of certain claims as preferential created no vested right, and that within our ruling in Transportation Co. v. Anderson, 46 U.S. App. 138, 22 C. C. A. 109, and 76 Fed. 164, the decree in that regard was interlocutory, and is not controlling of the subsequent action of the court; and that within the doctrine declared in Turner v. Railway Co., 8 Biss. 315, Fed. Cas. No. 14,258; Fosdick v. Schall, 99 U.S. 235; Union Trust Co. v. Souther, 107 U.S. 591, 2 Sup. Ct. 295; Burnham v. Bowen, 111 U.S. 776, 4 Sup. Ct. 675; Union Trust Co. v. Illinois M. R. Co., 117 U.S. 434, 6 Sup. Ct. 809; Wood v. Deposit Co., 128 U.S. 416, 9 Sup. Ct. 131; Kneeland v. Trust Co., 138 U.S. 509, 11 Sup. Ct. 426; Thomas v. Car Co., 149 U.S. 111, 13 Sup. Ct. 824; Farmers' Loan & Trust Co. v. Green Bay, W. & St. P. R. Co., 45 Fed. 664,-before a claim can be deemed to be preferential to the mortgage debt, there must be first established a diversion of income from the payment of operating expenses to the payment of interest, and that, failing diversion, there can be no restoration. The broad ground is taken that a court of equity, assuming at the request of a trustee the operation of a railway, has not the right to provide for the payment out of the income or the corpus of the road, of operating expenses incurred within a limited time prior to the suit, unless there has been diversion of income, and then only to the extent of such diversion.'

'The record here is not complete. There has been brought to this court only so much of the record as is thought to bear upon the particular question which the receiver desired to present. It was, however, conceded at the argument that prior to the decree appealed from the railway had been sold under decree of sale, and had passed out of the possession of the receiver, and into the possession of the purchaser, and that the receiver had not in hand any moneys with which to pay the debt adjudged.'

Even with the change made in the condition of the case by these admissions, we are of opinion that the proper entry should have been an affirmance of the decree, rather than a dismissal. A dismissal implies that the receiver had no right to appeal, whereas we are of opinion that he was the proper party to take such appeal, was entitled to a hearing in the court of appeals, and also bound the estate in his possession as receiver by any admission of facts. Such admission in this case went so far as to relieve the appellate court from any necessity of inquiry as to the merits of the claim; but it was made after the case had been taken to the appellate court, and did not affect the rightfulness of the appeal.

It becomes important to consider what are the rights and duties of a receiver in respect to claims made against the estate in his possession. It is often said that he is merely the hand of the court which has appointed him; and for certain purposes that is not an inapt expression. He is charged with the duty of carrying into execution the orders of that court, but he is also a custodian of property, and has, by virtue of such custody, certain obligations to the parties owning or interested therein.

First. A receiver may defend, both in the court appointing him and by appeal, the estate in his possession against all claims which are antagonistic to the rights of both parties to the suit. For instance, he may thus contest a claim for taxes, because, if valid, they are superior to the rights of both parties; in a case like the present, superior to the rights of mortgagor and mortgagee.

Second. He may likewise defend the estate against all claims which are antagonistic to the rights of either party to the suit, subject to the limitation that he may not, in such defense, question any order or decree of the court distributing burdens or apportioning rights between the parties to the suit, or any order or decree resting upon the discretion of the court appointing him. As this is a matter specially pertinent to the present controversy, it may be well to consider briefly the scope of this proposition. A suit is brought by a mortgagee to foreclose his mortgage, and a receiver is appointed to take possession of the mortgaged property. The right to have a decree of foreclosure and sale is an absolute right on the part of the mortgagee, flowing from a breach of the conditions in the mortgage. But the appointment of a receiver is a matter resting largely in the discretion of the court,-not of course, an arbitrary, but a legal, discretion,-and depending, not simply upon the breach of condition in the mortgage, but also upon the question of relative injury and benefit to the parties and the public by the taking of the property out of the possession of the mortgagor, and placing it in the hands of a receiver. In appointing a receiver the court has a right, within certain recognized limits, to prescribe the terms and conditions of the appointment. A receivership is not essential to a foreclosure and sale, and the court is charged, when an application therefor is made, with the duty of inquiring whether, under all the circumstances, considering the interests of the parties and the public, it is wise and proper to take possession of the property. It may, in its judgment, be necessary to appoint a receiver without prescribing any terms. It may be that the interests of the parties or the public require that the appointment shall be made subject to certain conditions. Now, these conditions, whatever they may be, are beyond the challenge of the receiver. He may not say, directly or indirectly, 'I accept the appointment; I take charge of the property; but I repudiate the terms and conditions imposed on the receivership.' Whether, under the present state of the statutory law in reference to appeals, any review can be had of the terms of such an order, it is clear that a receiver, whose rights spring from the appointment, cannot be heard to question them.

Third. Neither can he question any subsequent order or decree of the court distributing the estate in his hands between the parties to the suit. It is nothing to him whether all of the property is given to the mortgagee or all returned to he mortgagor. He is to stand indifferent between the parties, and may not be heard, either in the court which appointed him or in the appellate court, as to the rightfulness of any order which is a mere order of distribution between the parties. In this connection it must be noticed that an intervener, although for certain purposes recognized as a party to the litigation, is not such a party as comes within the scope of the limitation just announced. He is one who comes into the litigation asserting a right antagonistic or superior to that of one or both of the parties thereto, and a receiver, who represents, so far as the property is concerned, the interests of the parties, may rightfully challenge his claim, provided that in such challenge he does not question any orders of the court heretofore referred to. Let us take some illustrations: A suit is brought to foreclose a mortgage, a receiver is appointed, and the mortgaged property taken possession of. A party intervenes, asserting that he has a claim against the mortgagor and the property, but conceding that it is subordinate to the claim of the plaintiff mortgagee. With that concession, the mortgagee stands perfectly indifferent to the question whether the claim be allowed or not. Still it cannot be doubted that in such a case the receiver, holding the property against which a claim is made, can defend; and defend not only in the court appointing him, but also by appeal. In that defense he not only represents, it may be said, the mortgagor's interests, but also protects the property in his possession.

Take another case: An intervener presents a claim against the mortgaged property, which the mortgagor admits. There is, therefore, no defense to be interposed in behalf of the defendant mortgagor, no protection to be sought for the property, and the only question is whether such claim, admitted by the mortgagor, is to be satisfied out of the mortgaged property prior to the claim of the mortgagee. The latter is the only party who has an antagonistic relation to the intervener. Now, the receiver, who represents both mortgagee and mortgagor, both plaintiff and defendant, so far as the custody of the property is concerned is entitled to defend against this claim of priority made by the intervener, and may defend both in the court appointing him and also by appeal. It is true, in such defense he may not be heard to say that the terms and conditions imposed in the order of his appointment were improper, but he may defend on the proposition that the claim presented does not come within those terms and conditions. Whatever right, if any, the mortgagee plaintiff may have to question, in resisting such claim, the validity of the terms of the appointment, the receiver cannot do so, and the only defense he can make is that the claimed priority has no foundation in the terms of the order; or, if it be a matter entirely outside of those terms, that it has no foundation in any recognized legal or equitable principle.

In the case at bar, on defense, as shown by the exceptions taken to the report of the master, was that the claim of the intervener was not against the estate, but against some third party. That defense the receiver had a right to make. We do not mean that he alone can act. We do not stop to inquire what rights either party to the suit may have in this respect. All we now decide is that the receiver is a proper party to make the defense. And when he alone makes it, when he carries on the litigation in his own name as receiver, then, as the representative and custodian of the estate, he can, subject to the supervision of the court, bind it by admissions made in good faith in the progress of the litigation. And as, in the appellate court, after the appeal had been perfected, he, being the only party to the appeal, admitted that it was a just claim against the mortgagor, and within the priority over the mortgage prescribed in the order of appointment, his admission showed that the allowance was right and that the decree ought to be affirmed. But still, untill that admission was made, there was a pending dispute, and he was a proper person to appeal from the allowance.

Fourth. He may appeal from an order or decree which affects his personal rights, provided it is not an order resting in the discretion of the court. Thus he may not appeal from an order discharging or removing him, or one directing him in the administration of the estate; as, for instance, to issue receiver's certificates, to make improvements, or matters of that kind, all of which depend on the sound discretion of the trial court. He may appeal from an order disallowing him commissions or fees, because that affects him personally, is not a matter purely of discretion, and does not delay or interfere with the orderly administration of the estate.

Fifth. His right to appeal from an allowance of a claim against the estate does not necessarily fail when the receivership is terminated to the extent of surrendering the property in the possession of the receiver. It is a common practice in courts of equity, anxious as they are to be relieved of the care of property, to turn it over to the parties held entitled thereto, even before the final settlement of all claims against it, and at the same time to leave to the receiver the further defense of such claims, the party receiving the property giving security to abide by any decrees which may finally be entered against the estate. An admission that the railway property had been turned over to the purchaser is not, therefore, of itself conclusive against the right of the receiver to appeal. And the fact that the trial court allowed the appeal must, in the appellate court, be taken, in the absence of other evidence, as sufficient authentication that such reservation of authority had been made in the order directing the surrender of the property.

It seems unnecessary to say more. We have indicated, so far as it can safely be done by general propositions, the powers of a receiver in respect to appellate proceedings. We are of opinion that the decree of the court of appeals should have been one of affirmance, and to that extent it is modified. Under the admissions of the receiver, the cost of the appellate proceedings should be paid by him, and this notwithstanding, in our judgment, the formal order of the court of appeals dismissing the case was incorrect. The judgment of the circuit court is affirmed at the cost of the appellant.