DAYTON HYDRAULIC CO. v. FELSENTHALL, 116 F. 961

BURTON, Circuit Judge, after making the foregoing statement of the case, delivered the opinion of the court as follows: The learned trial judge denied all relief to the lessor because he was of opinion that the receiver had neither adopted the lease, and thereby assumed the burden of the lessee's covenants, nor made the receivership responsible for the reasonable value of the rentals accruing after the receivership, because he had never, in fact, taken actual possession of the premises.

A receiver appointed by a court of equity does not become the assignee of a leasehold merely because he is placed in possession of such a term. Such a receiver is the mere custodian of the court, and no change of title occurs by reason of his appointment. His possession is not by act of the parties nor under any assignment, for he holds under and for the court appointing him. The property in his custody is in custodia legis.

In the absence of some statute casting the title upon the receiver, or some assignment made by the lessee, it is difficult to see how a judicial receiver can in any accurate sense be said to be the assignee of the term.. There is no privity of estate between such a receiver and the lessor, as the appointment neither changed the title nor created any lien on the property. These principles are well settled. Carswell v. Trust Co., 20 C. C. A. 282-285, 74 Fed. 88; Farmers’ Loan & Trust Co. v. Northern Pac. R. Co. (C. C.) 58 Fed. 257; Bell v. Protective League, 163 Mass. 558, 40 N. E. 857, 28 L. R. A. 452, 47 Am. St.

Rep. 481; Oil Co. v. Wilson, 142 U. S. 313-322, 12 Sup. Ct. 235, 35 L. Ed. 1025; Railroad Co. v. Humphreys, 145 U. S. 82, 12 Sup. Ct. 787, 36 L. Ed. 632; Gaither v. Stockbridge, 67 Md. 222, 9 Atl. 632, 10 Atl. 309; High, Rec. p. 273; Stokes v. Hoffman House, 167 N. Y. 554, 60 N. E. 667, 53 L. R. A. 870; Tradesman Pub. Co. v. Knoxville Car-Wheel Co., 95 Tenn. 634, 32 S. W. 1097, 31 L. R. A. 593, 49 Am. St. Rep. 943. Cases have been cited from the New York court of appeals in which it is asserted that there is no difference between an assignee and a receiver who takes possession of leased premises.

But the cases cited are based upon a construction of a statute of that state which the court construed as vesting title in receivers of insolvent companies. Attorney General v. Atlantic Mut. Life Ins. Co., 100 N. Y. 280, 3 N. E. 193; Woodruff v. Railroad Co., 93 N. Y. 609. That a chancery receiver is not an assignee of a term is thoroughly settled in New York. Stokes v. Hoffman House, 174 N. Y. 554, 60 N. E. 667, where the New York cases are reviewed.

The mere fact that a judicial receiver has taken possession of a leased line of railroad or a leased railroad equipment, and has used same for the benefit of his trust, has not, without other circumstances, been regarded as amounting to an adoption of the lease, or an assumption of the covenants of the term.

The doctrine that a receiver may take possession of a leasehold, and use the premises for a reasonable time to enable him to elect whether he would adopt the contract and make it his own, or surrender the property to the lessor, so far as he is able to do so without affecting the term as between lessor and lessee, has become the settled rule in courts of the United States. Oil Co. v. Wilson, 142 U. S. 313-322, 12 Sup. Ct. 235, 35 L. Ed. 1025; Railroad Co. v. Humphreys, 145 U. S. 82-101, 12 Sup. Ct. 787, 36 L. Ed. 632; Carswell v. Trust Co., 20 C. C. A. 282-285, 74 Fed. 88; Platt v. Railroad Co., 28 C. C.

A. 488, 84 Fed. 535. In Oil Co. v. Wilson, cited above, the court said: “The receiver did not simply, by virtue of his appointment, become liable upon the covenants and agreements of the railway company. High, Rec. p. 273; Hoyt v. Stoddard, 2 Allen, 442. Upon taking possession of the property, he was entitled to a reasonable time to elect whether he would adopt this contract, and make it his own, or whether he would insist upon the inability of the company to pay, and return the property in good order and condition, paying, of course, the stipulated rental for it so long as he used it. Turner v.

Richardson, 7 East, 335; Com. v. Franklin Ins. Co., 115 Mass. 278; Sparhawk v. Yerkes, 12 Sup. Ct. 104, 35 L. Ed. 915.” In Carswell v.

Trust Co., cited above, this court said: “Whatever the doubt at one time entertained as to the effect of a receiver taking possession of leasehold property under an order of a court of equity, 1t is now well settled that such a receiver may take and retain possession of leasehold interests for such reasonable time as will enable him to intelligently elect whether the interest of his trust will be best subserved by adopting the lease, and making it his own, or by returning the property to the lessor.” The liability of the receivership for rentals during the time a receiver has actually used the leased premises has in general not been disputed.

In such cases, the controversy has turned mainly upon whether rent should be paid according to the stipulations of the contract between lessor and lessee, or upon the basis of a reasonable compensation to the lessor. But it is said that this case is to be distinguished from all of the cases cited because the receiver neither adopted the lease, nor agreed to pay rents for the premises, and never took any actual possession.

It must be conceded that the record is barren of any facts which would authorize us to hold that 'the receiver has either intentionally or impliedly adopted the lease, or that he has ever expressly agreed to pay rent for the premises, or that he ever had any actual physical possession of the leasehold estate.

Notwithstanding these concessions, it is entirely agreeable to the equitable principles regulating the relation of such officers to leasehold estates, that, by acts and conduct not involving an actual occupation of the premises, a receiver may come under an equitable obligation to a lessor for rents accruing during the receivership. A court of equity will not suffer an injustice to be done a lessor by acts or conduct which amount equitably to an exclusion of the lessor from the premises, and an appropriation of them to the supposed benefit of the trust.

The legal relation of a statutory liquidator under the English company’s act of 1862 seems to be identical with that of a chancery receiver, inasmuch as no change of title occurs upon such an appointment. The question as to when such a liquidator has made himself liable for rents accruing after his appointment, on account of leasehold interests belonging to the insolvent company, so as to make it equitable that the landlord should be allowed to distrain or have his debt paid in full, has frequently arisen in winding up cases arising under the company’s act.

The result of the decisions in respect to the liability of the assets-in such a liquidator’s custody for -rents accruing after the commencement of winding-up proceedings is well summarized by. Lindley, L. J., in Re Oak Pits Colliery Co., 21 Ch. Div. 322, 330, where it is said: “If the liquidator had retained possession for the purposes of the winding-up, or if he has used the property for carrying on the company’s business, or has kept the property in order to sell it, or to do the best he can with it, the landlord will be allowed to distrain for rent which has become due since the winding-up.

In re Lundy Granite Co., L. R. 6 Ch. 462; In re North Yorkshire Iron Co., 7 Ch. Div. 661; In re Silkstone & Dodworth Coal & Iron Co., 17 Ch. Div. 158; In re South Kensington Co-operative Stores, 17 Ch. Div. 161; and see In re Brown, Bayley & Dixon, 18 Ch. Div. 649, per Fry, J. “2. But if he has kept possession by arrangement with the landlord, and for his benefit as well as for the benefit of the company, and there is no agreement with the liquidator that he shall pay rent, the landlord is not allowed to distrain. In re Progress Assurance Co., L. R. 9 Eq. 370; In re Bridgewater Engineering Co., 32 Ch. Div. 181.

When the liquidator retains the property for the purpose of advantageously disposing of it, or when he continues to use it, the rent of it ought to be regarded as a debt contracted for the purpose of winding up the company, and ought to be paid in full like any other debt or expense properly incurred by the liquidator for the same purpose; and in such a case it appears to us that the rent for the whole period during which the property is so retained or used ought to be paid in full, without reference to the amount which could be realized by a distress.

This was the view taken by Lord Justice James in the Case of Lundy Granite Company, and by Mr. Justice Fry in Re Brown, Bayley & Dixon, and by Mr. Justice Kay in the present case. But no authority has yet gone the length of deciding that a landlord is entitled to distrain for, or be paid in full, rent accruing since the commencement of the winding-up, where the liquidator has done nothing except abstain from trying to get rid of the property which the company holds as lessee.

If the landlord had endeavored to re-enter, and the liquidator had objected, the case might be different, but, having regard to the provisions .of the company’s act of 1862, we are of opinion that, in the case now supposed, the landlord must rely upon his right, if any, to re-enter and prove for the arrears due to him, and that he is not entitled to anything more.” That the receiver was not in the actual possession of the leased premises is not necessarily conclusive against liability.

He was constructively in possession, for the decree appointing him described this leasehold by reference, and directed him to take possession. More than that, all persons were enjoined from interfering with the property thus placed in his care and custody. If the lessor had without leave of the court, or consent of the receiver, intruded upon the premises, by re-entering, it would have been a plain contempt of court.

It is very plain, from the facts heretofore stated, that the value of this Dayton mill and water power to the Columbia Straw Paper Company was not in its operation as a going concern, for it was closed down and dismantled so soon as it was acquired, and was kept closed, together with 8 other mills, although the rents were paid until just before a receiver was appointed. That this was done for the benefit of the 30 mills which were operated, we may fairly and justly infer. It is a case where the facts speak for themselves.

Under such conditions, a receiver might well continue the policy of the mortgagor company by simply holding onto the leasehold. If he could do this without paying rents, so much the better. If he incurred liability by endeavoring to keep it, the return was in the benefit to the other mills. So long as the mill site and water power was in his constructive possession, it could not be operated in competition, and to the disadvantage of the other mills in his charge.

Actual occupancy was, therefore, not necessary to continue to the receivership the same value which the Dayton mill had had to the Columbia Straw Paper Company. That the receiver desired to keep these premises with a view of thus using it in the continuation of the Straw Paper Company business, and of doing the best he could do with it as a part of the great combination of mills upon which the mortgage under foreclosure rested, would seem to be inferable from his general conduct toward the lessor as shown by the facts we have heretofore stated. To briefly restate the substance of these facts: First.

When the first installment of rent accrued after his appointment, he responded to a demand for the rent by a request for time to look into the matter. This was early in 1895. Second. We pass over the negotiations which followed, between the mortgagees and an agent of the Dayton Company, looking to a surrender of the lease, and which came to no result, as possibly not closely affecting the question of the receiver’s liability, though indicative of the unwillingness of the foreclosing mortgagees to surrender. Third.

We find that when the lessor applied to him in July, 1896, to either have an order entered declining to adopt the lease, or provide for the rent, he did neither, but turned the application over to the attorneys representing the foreclosure proceedings, who replied by expressing the opinion “that the lease could be surrendered, so far as the bondholders and the two receivers are concerned, by orders entered upon condition that all rent claims be released, and that the lessor assume all back taxes.” Fourth.

To the petition of the lessor filed in July, 1898, the receiver defended by denying liability, but did not propose to surrender the property, or ask any instruction from the court in respect to the matter. Fifth. Still later, the receiver’s attorney, when urged to some conclusion, “disclaimed any knowledge of the value of the leasehold to his clients, and requested time to look into it, and to correspond with them.” The proposition to accept a surrender of the property from the receiver, not waiving the claim “to past taxes and rents,” was taken under consideration, without any result.

The application rocked along from July, 1896, to July, 1901, without a proposal to surrender the lease, when the court finally denied all rents, but ordered the receiver to surrender the premises to the lessor. Under the circumstances of this case, we conclude that the receiver, to use the words of Findley, F. J., in Re Oak Pits Colliery Co., 21 Ch. Div. 322, 331, has done much more than to merely “abstain from trying to get rid of the property which the company held as lessee.” His whole conduct was that of one who was neither willing to give up the premises, nor to make the lease his own.

Neither can the Dayton Company wholly escape criticism for its inaction and uncertain attitude. It had reserved a right to re-enter for default in rents, and this right it might have exercised by notice and proper application to the court below. True, it was under no legal obligation to avail itself of this right, though its failure to do so deprives it of some of the equitable consideration which might otherwise add to the weight of its present claim. That it did not do so is most probably accounted for by its reluctance to forfeit the lease so long as there was any hope that the receiver would adopt it.

The delay requested by the receiver in response to the first rent account sent him was calculated to lull the lessor into a belief that the receiver might make the lease his own. Such an opinion was also strengthened by the nonaction of the mortgagor company and of the mortgagees, although both had under consideration a surrender of the lease.

But in July, 1896, the patience of the lessor seems to have reached a limit; for the letter of its attorneys, under date of July 8, 1896, can be but regarded as calling upon the receiver to either have an order entered declining the lease for his trust, or to provide for rents. This endeavor to re-enter was prevented by the conduct of the receiver in referring the matter to the attorneys representing the foreclosure proceedings for answer.

This answer must be regarded as the answer of both the receiver and the mortgagees, who were alone interested, for, having submitted this communication to the attorneys of the mortgagees for answer, the receiver must be regarded as bound by the answer. In effect, the reasonable demand for a surrender of the leased premises was rejected, for it involved as a condition that all demands for past rents and taxes should be released. The proposition to surrender the property, reserving all question of liability for past rents and taxes, was renewed after the petition of the appellant was filed.

This, though most reasonable and beneficial to the receivership, unless the purpose of the receiver was to maintain control of the term and of the premises for the general benefit of his trust, was taken under consideration, and, so far as this record discloses, was never answered; for no effort was ever made by the receiver to obtain an order surrendering the premises, and no such order was in fact made until made as a part of the decree herein under review.

These considerations lead us to the conclusion that the receiver has appropriated the premises to the use of the other properties committed to his charge, in the way in which it was most useful, by retaining his hold upon the term, and his constructive possession of the premises; and that from July 16, 1896, he ought to compensate the lessor by paying the rents stipulated in the lease and the taxes, both limited to rents and taxes accruing thereafter, and up to the date of the decree restoring possession to the lessor, but without interest.

We fix the date of July 16, 1896, as the date when the receiver must be regarded as coming under an obligation to pay the accruing rentals, because we must regard the answer to the request for a surrender as a definite objection to a re-entry by the lessor except upon conditions which the receiver had no right to impose. The mortgagees who must suffer by this decree have no possible ground for complaint, for they seem to have guided the conduct of the receiver which has involved the receivership in this burden. The decree will be reversed, and a decree entered in accordance with this opinion.