T. S. FAULK & CO. v. STEINER, LOBMAN & FRANK et al.; DAVIS WAGON CO. v. SAME, 165 F. 861

SHELBY, Circuit Judge (after stating the facts as above). 1. When the involuntary petition was filed, the petition to appoint a receiver was also filed, and the receiver was appointed immediately, without notice to the alleged bankrupts. No fact is alleged or shown by the record to authorize the appointment without notice.

The bankruptcy act does not expressly provide that notice shall be given before the appointment shall be made, but it is a general rule that, from the institution of a suit until final judgment, every step that immediately affects the rights of a defendant should be preceded by notice, and, with few and well-defined exceptions, no court is justified in appointing a receiver and seizing- the property of a defendant without giving him notice and an opportunity to be heard.

It is necessary to fairness and justice in all legal procedure that judicial action should be taken in open court on issue between the parties, or after an opportunity for such issue; and a regard for this rule “will not only insure the rights of litigants, but will also protect from the unjust criticisms so often made, and, what is of more importance, will secure the courts themselves against hasty and ill-considered action.” Hutchinson v. American Palace-Car Company (C. C.) 104 Fed. 182, 185. The twenty-third general order in bankruptcy (89 Fed. xi, 32 C. C.

A. xxvi) provides that: “In all orders made by a referee, it sliall be rec-itecl, according as tbe fact may be, that notice was given and. the manner thereof; or that the order was made by consent; or that no adverse interest was represented at the hearing; or that the order was made after hearing adverse interests.” The referee, in the appointment, disregarded this order. This rule is prescribed by the Supreme Court by authority of

section 30 of the act (Act July 1, 1898, c. 541, 30 Stat. 554 [U. S. Comp. St. 1901, p. 3434]), and it is the duty of referees to make their orders conform to it. It lias been doubted if a referee is ever justified in appointing a receiver without notice before adjudication. Ross-Meeham Fdry. Co. v. Sou. Car & Fdry. Co. (D. C.) 124 Fed. 403. No principle is more essential to the administration of justice, whether by a referee or a judge, than that no man should be deprived of his property without notice and an opportunity to make his defense.

A mistaken notion seems to have grown up in reference to bankruptcy proceedings that they are in some way an exception to this principle. It constantly occurs that applications are made for

summary action by referees without any notice whatever to the parties who are in possession of the property sought to be seized. Alderson on Receivers, § 280. The courts should stand firmly against this tendency, and not hesitate to vacate any order of a referee that is violative of this vital principle. If it. be conceded that a case may occur where a re feree could lawfully appoint a receiver without notice — -a question it is not necessary now to decide — he is certainly not authorized to disregard the rule of equity procedure as to notice which controls a chancellor when appointing receivers.

Linder the well-established rule, a chancellor will not appoint a receiver without notice except in a case of imperious necessity, when the rights of the petitioner can be secured and protected in no other way. It sometimes becomes necessary for the court to act without notice to the defendant, when he has absconded, or is beyond the jurisdiction of the court, or cannot be found, or when there is imminent danger of irreparable injury, or when, by giving notice, the very purpose of the appointment ¿nay be rendered nugatory. The rule on the subject is found in many cases, and lias often been enforced by this court.

These limitations upon the authority to appoint a receiver without notice, to say the least, are controlling when an application to make the appointment is decided by a re feree in bankruptcy. 3. We are also required to consider the question whether there is .anything in the record, as matter of law, to justify the appointment of a receiver. Aside from the bankruptcy act, the appointment of a receiver is an extraordinary remedy, and is granted with great caution and only in cases of necessity.

The court acts with extreme caution, and requires a clear case of right and pressing necessity to induce it to make an appointment. Is the rule less strict as to the appointment o£ receivers in bankruptcy? The bankruptcy act was framed with the purpose of securing to the creditors a distribution of the bankrupt’s estate at a minimum cost. The policy of the act is one of economy, and, to promote this policy, Congress sought to provide against the improvident and unnecessary appointment of receivers. The authority to make the appointment is conferred and limited by the act.

There is but one ground stated for the appointment. The act authorizes the appointment of receivers “upon the application of parties in interest, in case the courts shall find it absolutely necessary, for the preservation of estates, to take charge of the property of bankrupts after the filing of the petition and until it is dismissed or the trustee is qualified.” Act July 1, 1898, c. 541, § 2 (3), 30 Stat. 545 (U. S. Comp. St. 1901, p. 3421).

The petition to appoint the receiver should allege that the appointment is absolutely necessary for the preservation of the estate, and the facts should be staled either in the sworn petition, or in accompanyíng affidavits- showing the necessity. The record falls far short of this rule, both as to averment and proof. Neither the petition, the affidavit accompanying it, the order of appointment, nor other parts of the record show that the appointment was absolutely necessary for the preservation of the estate.

In a replication filed in a subsequent proceeding, it is alleged that Faulk & Co. agreed with Steiner and others that the involuntary petition should be filed and a receiver appointed. This feature of tire case will be referred to later. It is sufficient at this point to say that the order appointing the receiver does not purport to have been made by consent, and the record nowhere shows such agreement to have been made. We think it appears from the record that the appointment was improvident, and in opposition not only to the form but to the substance of the law.

We are of opinion that the District Court erred in refusing to discharge the receiver. A deci-ee will be entered reversing the order of the District Court of December 23, 1901', and vacating the order of the referee appointing the receiver, and the petitioning' creditors, on whose motion he was appointed, will be taxed with all the costs and fees of the receivership, When ascertained by the District Court. 3. We come' now to consider the decree of the District Court of August 11, 1908.

The involuntary petition had been filed; Faulk & Co., the alleged bankrupts, had filed pleas denying- insolvency- and denying alleged acts of bankruptcy; creditors had been allowed to intervene to oppose the involuntary petition, and they had also filed ■pleas denying the insolvency of the alleged bankrupts and denying the alleged acts of bankruptcy. A trial by jury had been demanded.

To these pleas, the original petitioning creditors, Steiner and others, presented several replications, to the effect, in brief, that, before the involuntary petition was filed, Faulk & Co. had agreed with Steiner and others that it should be filed, that the alleged' bankrupts were insolvent, and that a receiver should be appointed. Faulk & Co. demurred to these replications. On the trial, the court made the order in question. The effect of the order was to stop the trial, so that a special referee might inquire into the question whether or not Faulk & Co. had made the1 agreement alleged in the replications.

The referee is also directed to' ascertain the costs and expenses of the petitioning creditors- in prosecuting the involuntaiy petition and in having the receiver appointed. This order is attacked by both Faulk & Co., the alleged bankrupts, and the Davis Wagon Company, a creditor intervening in opposition to the involuntary petition. The important question presented by the objections to this order of reference relates to the effect of the alleged agreement that the involuntary petition should be filed and the receiver appointed.

If the effect of such agreement— if shown to be made — is not to deprive Faulk & Co., or the creditors intervening in opposition, of the right to object to the appointment of a receiver and to resist the adjudication, then the reference and investigation- is uselesg. The bankruptc}*- act makes no provision for the appointment of ,a receiver in bankruptcy by the consent of the alleged bankrupt.

The appointment, by the terms of the act, is only authorized when it is absolutely necessary for the preservation of the estate. 'The involuntary petition is filed on the theory that the alleged bankrupt is insolvent; that he has creditors to whom his estate is to he distributed. If this be not true, there is no reason for the appointment of a receiver or for the adjudication. The creditors, therefore, are the parties chiefly interested in avoiding the expenses of an unnecessary receivership.

It was not intended, we think, that the bankrupt, by his consent, could remove the limitation of the statute, and authorize the appointment of a receiver where it was not necessary for the preservation of the estate, provisions of the act for the protection of the bankrupt cannot he waived by him if such provisions also serve to protect the bankrupt’s creditors In re Sarsar (D. C.) 9 Am. Bankr. Rep. 576, 120 Fed. 40. In Whelpley v. Erie Ry. Co., 6 Blatchf. 271, Fed. Cas. No. 17,504, it was claimed that a party was estopped by consenting to the appointment of a receiver.

Nelson, Circuit Justice, held: “I do not assent to Hits view. The company waived the notice which is required by the rules and practice of this court before an injunction can he issued: but, the order for the injunction, and for [he appointment of a receiver, depended upon the judgment, of the judge who granted them.

Indeed, I am not prepared to admit, that an orden1 for an injunction, or a receiver, can be made in an improper case, even with the consent of botli parties, more especially where the rights of third persons may be concerned.” The agreement of the alleged bankrupt that a receiver should he appointed — if such agreement has been made — should not, under the circumstances, he permitted to affect the rights of opposing creditors (Scott v.

Hotchkiss, 115 Cal. 89, 47 Pac. 45: Beach on Receivers, § 49; Alderson on Receivers, § 51); nor should such appointment, when not authorized by law, be permitted to delay or affect the trial of the issues between the creditors filing the involuntary petition and the intervening and opposing creditors. That part of the order of August 11, 1908, which sustains the demurrer of T. S. Faulk & Co. to certain replications is affirmed; the remainder of said order is reversed.