Franklin Trust Co. v. Northern Adirondack Railroad

Parker, P. J.:

The claim is made upon this appeal, on behalf of the employees, that, under well-settled principles of equity jurisprudence, the debts due to the employees of a railroad company, existing at the time a receiver is appointed of all its property, upon the application of the mortgagee in an action to foreclose his mortgage, have a preference in equity over any claim of the mortgagee as against the earnings which come to the receiver while he is operating the road. Applying this principle to the circumstances of this case, they claim :

First. That the several sums which the receiver took from the earnings of the road and applied upon the purchase price of cars, and to the building of a bridge and the replacement of old by new ties, were in fact diverted from those who had an equitable right to the same, to the advantage of the mortgagee; that, therefore, they were not proper credits to allow the receiver upon his final accounting ; that he must be deemed to have them still in his custody, and that he should be directed to pay such amount over to the employees.

Second. That, if such claim is not correct, then, inasmuch as such betterments added just so much to the value of the mortgaged prop *254 erty, and the purchase price upon the sale was increased by just that amount, these employees have an equity in so much of the purchase money as is still in court, and that it should Lave been distributed to them instead of to the mortgagee.

They argue that, if the condition of the road was so unsafe that it should not have been run without these repairs, the receiver should be reimbursed by the mortgagee for the expense of these repairs, because it was run for the purpose of maintaining the value of the mortgagee’s security, and in pursuance of an order of court obtained by it.

In the Federal courts, it is not unusual to provide, in the order appointing such a receiver, that all such debts as these appellants represent be paid by him from the earnings of the road. And from the decisions below cited it would seem as if, so far as the earnings of the road are concerned, these appellants are in equity entitled to a preference over the claims of the mortgagee. And possibly it would be held in those courts that, under the circumstances, an equity exists in favor of such creditors that, even though the receiver be allowed the several amounts applied to the repairs and improvements above stated, as expenditures properly made by him ; yet that they have so plainly operated to increase the mortgagee’s security that such mortgagee should be required to reimburse such outlay from the purchase money. (See Fosdick v. Schall, 99 U. S. 235, 256 ; Burnham, v. Bowen, 111 id. 776, 783; Union Trust Co. v. Illinois Midland Railway Co., 117 id. 434, 481.) Whether the tendency of decisions in our own courts would authorize us to so hold is not so clear. (Met. Trust Co. v. T. V. & C. R. R. Co., 103 N. Y. 245 .)

But the first question which is forced upon our attention is whether the appellants are here in a position which entitles them to fully raise that question or aslc from us any such relief.

In the court below the appellants asked for an order requiring the receimer to pay their several claims. They thereby sought to reach the funds which came into his hands. They sought to impeach his accounts, so far as he had disbursed moneys for betterments, and to that extent to claim them from him, as if still under his control. No direct order was ever made upon that motion. The hearing was postponed until an accounting (which was ordered *255 before a referee upon the petition of the receiver), and the appellants attending upon that accounting there made the same claim and sought to secure a report in conformity with it. The referee, however, allowed to the receiver all those disputed items as proper credits and charged him only with the actual balance found in his hands. The court confirmed this report and directed such balance only to be paid over to the employees. Such order is one of those from which the appeal before us is taken.

If it was error to allow such disbursements to the receiver, if the receiver should be held personally to pay over to the employees the amounts so expended, then it will be our duty to reverse that order, for the employees were in fact parties to that accounting. By mutual consent their motion and the accounting under it were practically merged in the one instituted by the receiver, and they were received and recognized as parties to that proceeding, and were affected by the order made therein.

But it will be noticed that the question, whether the mortgagee should, under any circumstances, be required to reimburse the receiver for such expenditures, was not raised, either in the motion made by the employees against the receiver or in the proceedings in which the actual accounting was had. I cannot discover from the record before us that there has ever, at any time, been any claim made to the court below that it should order any of the purchase money derived from the foreclosure sale to be applied to the payment of the appellants’ debts. Certainly, the motion made by the employees, above mentioned, did not refer to any such fund and did not ask for any such relief. True, the notice and papers on which it was founded were served on the mortgagee, but there was no intimation in the notice that the proceeds of the sale or any fund in which the mortgagee was interested were sought to be affected by that application. And in the proceedings upon the receiver’s petition, in which the accounting was had before the referee, even if we should consider the mortgagee as having any notice of it, evidently no claim was there made which would affect the mortgagee’s right to any part of the proceeds of the sale of the mortgaged property. The appeal from that order, therefore, does not bring up any question as to the liability of the mortgagee to reimburse the employees for any expenditure made by the receiver to its use or benefit.

*256 After the receiver had accounted, the mortgagee, on its own motion, and apparently ex parte, applied for an order directing the payment to it of so much of the purchase money as the referee had been directed by the judgment of foreclosure to pay into court, and which was then in its custody; and an order was made to that effect. The employees were not parties to the action of foreclosure; they had never made. any move in court to reach the money so directed to be paid over ; they have never yet given any notice to the mortgagee that they had any interest or equity in that fund, or made any objection to the order directing its payment to the mortgagee.

They have appealed from that order, and now ask us to reverse it, and to hold that such fund should have been paid over to them instead of to the mortgagee. They take such appeal, however, without ever having asked the court below to so hold, and without ever having given the mortgagee an opportunity to contest the genuineness of their debts, or the validity of this claim. We think that, so far as this last order is concerned, the appellants are not in a position to appeal therefrom.

The question before us, therefore, is narrowed down to this: Should the court below have charged against the receiver the several sums which he disbursed for repairs and in payment for cars and taxes ?

The order appointing the receiver made no provision whatever for the payment of the outstanding debts incurred for current expenses of the road. It did, however, require the receiver to continue the operation of the road; “ to keep the same and the equipment thereof in repair, to keeji up to a jiroper standard of efficiency,” etc., “ and to j>ay out of the rents, income and profits thereof,” etc., “ for all supplies necessary for that purpose.” It also, on his application for instructions, directed him to construct the new steel bridge and pay the balance due on the cars. As to the new ties, it is conceded as a fact that the expenditure of $2,500 for purchasing and laying them was necessary for the safe operation of the road. As a matter of fact, no claim was made to the receiver for payment of any of the debts which the appellants now present, until after all those disbursements had been made, nor did he until then have knowledge of the amounts or persons to whom they were due.' Manifestly *257 there is no equity in. charging against a receiver personally disbursements made under such circumstances as these. Even though it be conceded that the appellants had an equity which would authorize a court to award them a preference in such earnings, over the mortgage debt, yet they had no such fixed and certain lien upon or right to them as required the receiver to take notice of such lien, and - provide for the payment of such debts. He was not required to advertise for such claims and retain from the earnings sufficient to provide for them. The decisions above cited do not sustain any such claim. They merely decide that the court may direct the receiver to pay them; but, in the absence of such directions, they impose no active duty upon the receiver to do so. Nor was any such obligation imposed upon the receiver by the provisions of chapter 376 of the Laws of 1885. That statute cannot, in our opinion, be made applicable to a receiver who has no other powers than to take charge of and manage the corporate property pending the foreclosure of a mortgage. It is not within the scope of such a receiver’s authority, or the purpose of his appointment, to in any way dispose of corporate property. He is “ a mere temporary officer of the court.” (Decker v. Gardner, 124 N. Y. 338 .) His sole duties are to preserve it during the litigation. Even though he he is, for the purpose of such preservation, required to continue its operation, he is not thereby invested with any power or duty to ascertain who are its creditors and to provide for their payment. A statute that requires a receiver to give preference to certain creditors of a corporation manifestly can only refer to a receiver who is appointed for the purpose, and who is given the authority to dispose of its property and discharge its debts. One who has no authority to do either of these things (except by special order of court) cannot be affected by the provisions of that statute.

The receiver in this matter, therefore, did riot owe to these appellants the active duty of providing for the payment of their debts from the .earnings that came into his hands, and hence he should not be held personally liable to them as having misapplied funds to which they were entitled.

These considerations lead to an affirmance of the order auditing and allowing the receiver’s account, and to a dismissal of the appeal *258 from the order directing the payment to the mortgagee of so much of the purchase money as was still in the custody of the court.

No proceeding having been taken in the court below to enforce the claim that the mortgagee should reimburse these employees for so much of the earnings of the road as were diverted to its benefit, the appellants are not in a position to ask from us a consideration of that question.

The order confirming the referee’s report and discharging the receiver and his bonds from all matters relating to his receivership is affirmed, with ten dollars costs and disbursements; and the appeal from the order directing the payment to the mortgagee of so much of the purchase money as was still in the custody of the court is dismissed, with ten dollars costs and disbursements.

All concurred, except Landos and Herbick, JJ., dissenting.