In re METALS EXTRACTION & REFINING CO. STERN v. AMERICAN TRUST & SAVINGS BANK et al; CLARK v. SAME, 195 F. 226

KOHLSAAT, Circuit Judge (after stating the facts as above). The question now presented is:' Was the conduct of the petitioning creditor such in the premises as to justify the order of the District Court requiring the petitioning creditor to pay to the American Trust & Savings Bank, trustee, the said sum of $700.55?

Section 3e of the act of 1898’reads as follows: “Whenever a petition is filed by any person for the purpose of having another adjudged a bankrupt, and an application is made to take charge of and hold the property of the alleged bankrupt, or any part of the same, prior to the adjudication and pending a hearing on the petition, the petitioner or applicant shall file in the same court a bond with at least two good and sufficient sureties who shall reside within the jurisdiction of said court, to be approved by the court or a judge thereof, in such sum as the court shall direct, conditioned for the payment, in ease such petition is dismissed, to the respondent, his or her personal representatives, alt costs, expenses, and damages occasioned by such seizure, taking, and detention of the property of the alleged bankrupt.

If such petition tie dismissed by the court or withdrawn by the petitioner, the respondent or respondents shall tie allowed all costs, counsel fees, expenses, and damages occasioned by such seizure, taking, or detention of such property. Counsel fees, costs, expenses, and damages shall be fixed and allowed by the court, and paid by the obligors in such bond.” This seems to be the only provision of the act providing for the protection of a receiver for his outlay in excess of the amount collected by him. In Atlantic Trust Company v. Chapman, etc., 208 U. S. 360, 28 Sup. Ct. 406, 52 L. Ed. 528, 13 Ann.

Cas. 1155, it is held that the receiver is the arm, and subject only to the control of the court; that the parties are without power to direct; him; that ‘‘the court in the exercise of a sound judicial discretion, and looking to the interests of all who might be affected by its action, could, at the outset, have made it a condition of the appointment of a receiver that the plaintiff and those whom it represented should be liable for any deficiency in the funds required for the expenses of the receivership.” In the same case, it is further said: “It is true that cases are cited in which the party bringing a suit, in which a receiver is appointed, has been held liable for expenses incurred by the receiver in excess of the processes arising from the sale of the property.

But in most, if not in all, of those cases the circumstances were peculiar and were such as to make it right and equitable, in the opinion of the court, that that should he done” —citing Ephraim v.

Pacific Bank, 129 Cal. 589, 62 Pac. 177, where the court held that if the receiver— “lias taken property into his custody .under an irregular, unauthorized appointment, he must look for his compensation to the parties at whose instance he was appointed, and the same rule applied if the property of which, he fakes possession is determined to belong to persons who are not parties to the action, and is taken from his possession by paramount authority. As to such property his appointment as receiver was unauthorized and conferred uiion him no right to charge it with any expenses.” On page 375 of 208 U. S., 28 Sup.

Ct. 406, 52 L. Ed. 528, 13 Ann. Cas. 1155 of said Chapman Case, it is stated by the Supreme r\mrt that the mere insufficiency of the property or fund to meet the expenses of a receivership does not entitle a receiver to hold the plaintiff m the suit personally liable, if all that could be said was that lie instituted the suit and moved for the appointment of the receiver to take charge of the property and maintain and operate it pending the suit. In Cutter v. Pollock, 7 N. D. 631, 76 N.

W. 235, the court says: “V>'e do not believe that any case can be found to uphold the palpably unjust rule that one who is shown to have had no right to maintain the action, and no interest whatever in the property which he claims, can require that the defendant who had paid out of his own pocket the expenses of a receivership, shall not call upon him (the plaintiff in the action) for reimbursement.” To the same effect are High on Receivers (3d Ed.) § 796, and Beach on Receivers, § 774, and a number of other authorities having reference to cases where the receivership was wrongfully procured in the first place.

Knickerbocker v. McKindley Co., 67 Ill. App. 291, relied on by the Dakota court, is a case in which the receiver was appointed in a suit to settle up a partnership. The partners had previously given a mortgage which was foreclosed, leaving nothing in the receiver’s hands. Whereupon the court ordered the complainant, the representative of one of the' partners, to pay the costs. The Illinois cases cited in support of this latter decision, i. e., Einstein et al. v. Lewis et al., 54 Ill. App. 520, and Myres v. Frankenthal et al., 55 Ill.

App. 390, both deal with the appoir'ment of receivers appointed without lawful authority, and are not deemed in point. In re Lacov, 142 Fed. 960, 74 C. C. A. 130, cited by petitioner, is not authority for the proposition claimed by petitioner. There the petition was dismissed as having been brought without cause.

The foregoing authorities, we think, lay down the law with sufficient clarity that only in cases where the proceedings resulting in a receivership have been instituted improvidently or without reasonable cause, or without good faith, or the like, can the moving party be held liable for the payment of the excess of the costs of the receivership over and above the assets of the same. Here there is no claim that there was any want of good faith or care in instituting the proceedings. The mortgage was justly under suspicion, having been given within the four months’ period.

The value of the property covered by it was estimated to be largely in excess of the sum secured by the incumbrance. The facts of the case are such as would lead any reasonably careful person to feel justified in acting as the petitioning creditor did. The

summary of debts and assets shows $4,000 secured claims and some $15,500 assets. The appraisement placed the value of the mortgaged property at $1,000 in excess of' the mortgage. In the original and supplemental inventories, other property is scheduled at a valuation of something like $2,500. Neither may we overlook the fact that the special master, on his first essay to place the blame for the deficiency, lighted upon the trustee. That he afterwards, upon suggestion, changed his mind upon the same evidence, detracts little from the weight to be given his first impression.

A creditor might well decline to pursue a bankrupt were he to be held, under circumstances such as are here shown, to have instituted proceedings improvidently. That part of said order which decrees that H. Stern, the petitioning creditor and petitioner herein, pay to the trustee the said sum of $700.55, is therefore vacated and held for naught. It •follows that the trustee has no funds in his hands belonging to said bankrupt’s estate, and therefore nothing wherewith to comply with the order of the court in the payment of the $523.35 found to be due said cross-petitioner herein.

From the first report of the referee above referred to, it appears that at the time of the appointment of the receiver, inquiry was made of it by the landlord in regard to whether it would be responsible for rent and whether it would be willing to surrender the possession speedily, as the landlord was negotiating for a new tenant, etc.

The receiver made reply on December 19, 1908, to the agents of the landlord as follows: ‘•Referring to yóurs of the 18th instant, wo advise that this bank was appointed receiver in bankruptcy in the above matter on December 12th and the receiver's liability for rental commenced on that date.

We cannot give you any definite information as to when we will vacate the premises, or how much time we would require, but we assure you that we shall he pleased to do all that lies in our power to accommodate you as far as this matter is concerned.” It further appears from the petition of cross-petitioner filed with referee, upon which the said order of the referee was based, that cross-petitioner had actually closed a contract with a new tenant for said premises, who was ready and anxious to take possession at once, and that cross-petitioner’s agents made repeated inquiries of the receiver and later the trustee as to when possession would be surrendered, but could get no definite answer.

As between the cross-petitioner and the trustee, the latter is, under the facts of this case, liable to the former for the amount of his said claim, whether it has funds in its hands to reimburse itself or not. It was consequently error on the part of the District Court to limit the trustee’s liability to pay said claim to the funds of the bankrupt’s estate in its hands.

That part of said order, therefore, which does so limit the trustee’s liability, to wit, the words “out of the funds in his hands,” and also that portion of said order which approves and affirms the report of the referee, in so far as the same is inconsistent with the foregoing opinion, are also vacated and held for naught.