Chicago Deposit Vault Company v. McNulta/Opinion of the Court

The proof fails to show, as said in the opinion of the court below, that the lease was ever reported to, or confirmed by, the court. The receiver's reports, which were approved by the court, did not disclose the fact of the existence of the lease, or its terms and provisions, in such manner as to make the court's approval of the reports a confirmation of the lease.

The question then remains whether the order appointing the receiver conferred upon him the requisite authority to enter into a contract of lease, involving a large annual expenditure, and extending beyond the receivership, so as to make the contract a proper charge against the trust property under the administration of the court.

While there is some want of harmony in the authorities upon the question as to how far a receiver may make and enter into contracts without the previous approval or subsequent ratification of the court, which shall be binding upon the trust, we are of opinion that the order appointing he receiver in this case was not broad enough in its terms to authorize him to enter into the lease in question, so as to give it validity, without the approval or confirmation of the court.

It is undoubtedly true that a receiver, without the previous sanction of the court, manifested by special orders, may incur ordinary expenses or liabilities for supplies, material, or labor needed in the daily administration of railroad property committed to his care as an officer of the court; but it seems equally well settled that the courts decline to sanction the exercise of this discretion on the part of receivers in respect to large outlays, or contracts extending beyond the receivership, and intended to be binding upon the trust. The receiver being an officer of the court, and acting under the court's direction and instructions, his powers are derived from and defined by the court under which he acts. He is not such a general agent as to have any implied power, and his authority to make expenditures and incur liabilities like the one in question must be either found in the order of his appointment, or be approved by the court, before they acquire validity, and have any binding force upon the trust.

In Cowdrey v. Railroad Co., 93 U.S. 352, it was held that a receiver is not authorized, without the previous direction of the court, to incur any expenses, on account of property in his hands, beyond what is absolutely essential to its preservaion and use, as contemplated by his appointment. Accordingly, the expenditures of a receiver to defeat a proposed subsidy from a city, to aid in the construction of a railroad parallel with the one in his hands, were properly disallowed in the settlement of his final account, although such road, if constructed, might have diminished the future earnings of the road in his charge.

This same general principle is recognized in Union Trust Co. v. Illinois M. Ry. Co., 117 U.S. 434, 479, 6 Sup. Ct. 809, where debts for considerable sums of money, borrowed by the receiver without previous authority from the court, were not allowed any priority out of the trust fund, although the moneys borrowed were applied to pay expenses of the receivership, such as supplies, repairs, and pay rolls, and to replace moneys which had been so applied, for the reason that no order of the court had been obtained to borrow funds for those purposes.

In Lehigh Coal & Navigation Co. v. Central R. Co., 35 N. J. Eq. 426, it was said that 'the receiver may undoubtedly appropriate moneys in his hands, belonging to the trust, to such purposes connected with the trust as he may think proper, always taking the risk that the court will finally approve his action; but he has no authority to bind the trust by contract without the authority of the court. Until his contracts are approved and ratified by the court, the court is at liberty to deal with them as to it shall appear just, and may either modify them, or disregard them entirely. * *  * All persons dealing with receivers do so at their peril, and are bound to take notice of their incapacity to conclude a binding contract without the sanction of the court.'

This states the correct rule upon the subject, especially in respect to contracts involving large outlays, and which may extend beyond the life of the receivership. The same general rule is stated in Beach on Receivers (section 257) as follows: 'But a receiver is not allowed to exercise his discretion in applying the funds in his hands. These he holds strictly subject to the direction of the court, and only to be disposed of upon its order. Neither can he enter into contracts without the approval of the court. Although, as receiver, he may enter into negotiations and make such agreements as would be binding upon him as an individual, yet, in order to affect the fund in his hands, his acts must be ratified by the court. This rule is so well established that it has been decided that all persons contracting with a receiver are chargeable with knowledge of his inability to contract, and enter into contracts with him at their own peril, and that the court has unquestioned power to modify, or even vacate, his agreements.' To the like effect is a statement of the rule made in section 186 of High on Receivers.

What was said by Mr. Justice Bradley in Cowdrey v. Railroad Co., 1 Woods, 336, Fed. Cas. No. 3,293, and by the court in Vanderbilt v. Railroad Co., 43 N. J. Eq. 669, 12 Atl. 188, cited and relied on by the appellant, does not conflict with the general principle laid down in the authorities above referred to.

In respect to contracts which have been completely performed by a party dealing with a receiver, and when the claim is merely for compensation, equitable relief is often granted, although there was no previous approval or subsequent ratification of the receiver's act. This is pointed out by the chancellor in Vanderbilt v. Railroad Co., ubi supra.

In the case under consideration the intervening petitioner has been fully paid for the time that its premises were occupied for the benefit of the trust. The receiver not only had no authority to contract beyond that time, but, by the order of his appointment, his expenditure of the funds was limited and confined to designated objects and purposes. Under these circumstances the court was not bound to recognize any equitable right of the intervening petitioner to be paid for the unexpired term of a lease which had no legal validity.

The position taken on behalf of the appellant that there was a confirmation of the lease, growing out of the fact that the receiver's expenditures in the way of rental for general offices were approved, cannot be sustained. If the doctrine of ratification could be invoked, it would have no application in the present case, because there was no knowledge on the part of the court prior to the filing of the intervening petition that such a lease had been entered into by its receiver. And in respect to the remaining contention of the appellant, that the court and the purchasers under the foreclosure sale were estopped from denying the lease, there in nothing in the record on which to predicate such a proposition, even conceding that the doctrine of estoppel could be applied to courts.

Under the order of June 20, 1889, directing the receiver to turn over the property to the purchasers at the foreclosure sale, the court undoubtedly had the authority to charge the property with such claims against the receiver as it might thereafter allow, but that reservation of power did not make it the duty of the court to allow the claim of the intervening petitioner.

The lease having no legal validity without the sanction of the court, the equitable considerations in favor of the purchasers of the trust property at the foreclosure sale are stronger that those of the appellant.

We are therefore of opinion that there was no error in the decree of the court below, and the same is accordingly affirmed.