Case ID: nys_20/html/0772-01.html
Source: Caselaw Access Project
Author: {"author": "O’Brien, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Ettlinger v. Persian Rug & Carpet Co. et al.
    
    
      (Supreme Court, General Term, First Department.
    
    November 18, 1892.)
    1. Trust Deed—Inability of Trustee to Act—Foreclosure by Bondholder.
    A holder of bonds of a corporation, secured by a mortgage to a trustee for the benefit of the bondholders, may, without a demand on the trustee, sue in his own name to forclose the mortgage, where his complaint shows that the trustee is, incurably insane, that the corporation is insolvent, and that an immediate foreclo- • sure is necessary to protect the interests of the bondholders.
    2. Insolvent Corporation—Appointment of Receiver.
    Where it appears that a corporation is insolvent, and unable to pay its current, expenses;, that its landlord had obtained judgment for rent, and levied execution on its property,—the court had jurisdiction to appoint a receiver on notice "to the-corporation and the attorney general.
    
      3. Same—Notice to Trustee.
    It is not necessary to serve a notice of the appointment of a receiver on the defendant trustee, who is insane, and confined in an asylum in a foreign country.
    4. Same—Notice by Publication.
    Code Civil Proc. § 714, providing that a temporary receiver shall only he appointed without notice in a case where an order of publication for the purpose of acquiring jurisdiction over the defendant has been published, does not prevent the appointment of a receiver for an insolvent corporation without notice, where the court has acquired jurisdiction of the corporation by service on it, and its appearance by attorney.
    6. Same—Collusive Foreclosure of Mortgage.
    In an action by the holder of bonds of an insolvent corporation to foreclose a mortgage to a trustee, securing them, where a receiver has been appointed, who has sold the assets of the company, and third persons have acquired rights, the court should not dismiss the complaint on finding that the suit is collusive on the part of plaintiff and subversive of the rights of other bondholders, and require plaintiff to relinquish what he has obtained by the proceedings, but should retain the suit, and by an interlocutory reference and decree protect the rights of such third persons and the other bondholders, and distribute the fund in the receiver’s hands
    Appeal from special term, Hew York county.
    Action by Louis Ettlinger against the Persian Bug & Carpet Company, Paul M. Krause, and Theodore Schumacher, to foreclose a chattel mortgage. From a judgment dismissing the complaint, and an order denying a motion to introduce further testimony, plaintiff appeals. Modified.
    Argued before Van Brunt, P. J., and O’Brien and Lawrence, JJ.
    
      Thomas W. Peyton, (Thomas P. Wickes, of counsel,) for appellant. Francis B. Chedney, for respondents.
   O’Brien, J.

This action was brought by the plaintiff to foreclose a chattel mortgage executed by the Persian Bug & Carpet Company, a domestic corporation. to defendant Krause, as trustee for the holders of a series of 25 $1,000 bonds, of which there were issued 21,14 of which were held by the plaintiff, and 7 by the defendant Schumacher. There is no dispute but that at the time of the commencement of the action the interest upon the bonds was due and unpaid, and a cause of action for the foreclosure of the mortgage existed. The questions most seriously litigated upon the trial and determined by the judgment appealed from were that the plaintiff had no status to maintain the action; that the court was without jurisdiction to appoint a receiver, or direct the sale of the property; that the sale under the order was improper, as being one step in a collusive action to obtain by plaintiff possession of the corporate property. If the view taken by the learned trial judge, that the court was without jurisdiction to entertain the action by reason of the plaintiff not having a legal status to bring such suit, be correct, then we agree with him that the orders made upon the assumption of such jurisdiction would be void. It must be conceded that the complaint alleges every allegation essential to a complete cause of action to foreclose a mortgage, and the legal status of the plaintiff to maintain the action is alone involved in determining the question of the court’s jurisdiction. The complaint, in addition to a cause of action in favor of some one, alleges the insolvency of the defendant company, the necessity for immediate proceedings to foreclose, by reason of the character of the assets, consisting principally of heavy machinery, which could not be removed without great expense, and the imminent danger of its being removed from the premises by summary proceedings because of inability to pay rent, and the damage and injury that would result to the bondholders if the machinery and other property were removed from the premises before a sale thereof could be had. The complaint also alleges that the trustee, Krause, did, while in Germany, become violently and incurably insane, and that he is now confined in a lunatic asylum at Frankfort, in the empire of Germany, and cannot act under said mortgage as trustee to preserve and sell said property for the benefit of said bondholders. The question thus presented at the outset is as to whether the court had jurisdiction to entertain this action; and in thus considering it we are to take, not the proof given upon the trial, (upon which it was proper, according to the weight given thereto, to either grant or refuse the relief,) but the complaint itself. In other words, we think that this question should be disposed of as a question of law, just as though it was raised upon a demurrer to the complaint. We recognize the well-settled doctrine that a trustee for bondholders, holding the legal title for the benefit of all concerned, should sue; and in cases where it is made to appear that he is competent and willing to institute an action, this right cannot be assumed by a cestui que trust or beneficiary or other person; and it is only where it is made to appear that the trustee is unwilling, or, by reason of his relations to the grievance of cestui que trust or beneficiary, he should not be permitted to maintain the action, that it can be maintained by such cestui que trust or beneficiary. It will not be seriously disputed that upon a proper case, showing unwillingness on the part of a trustee to bring a proper action, such may be maintained by a beneficiary or cestui que trust. Most of the cases to which we have been referred by the respondents wherein a bill or complaint by a beneficiary has been dismissed will show that it is because of failure to prove a proper ease, and not by reason of lack of jurisdiction, that the bill or complaint has been dismissed; that whether the beneficiary asserts his right in his own name or through the trustee is more a matter of form than of substantial right; and that the beneficiary will be allowed to sue whenever the wrongs complained of must otherwise go without redress. The position of a trustee under a mortgage given to secure bondholders is similar: in principle to that of a corporation with respect to rights inuring to stockholders, and for the redress of which an action would lie in favor of the corporation. With regard to these cases, we have the rule clearly laid down that, although an action to recover such losses should, in general, be brought in the name of the corporation, where it refuses, or where the wrongs complained of would otherwise go without redress, the stockholders, who are the real parties in interest, will be permitted to sue in their own names, making the corporation a defendant. Brinckerhoff v. Bostwick, 88 N. Y. 52; Hawes v. Oakland, 104 U. S. 450. We think that here the facts alleged in the complaint show that it would have been futile, if not physically impossible, to have made a demand upon the trustee in time to prevent what was feared, namely, injury to the property of the corporation by its removal; that such allegations supplied a reason for the failure of the trustee to begin the suit, and satisfied the requirement that, before the right of the trustee to maintain the action in the first instance is taken away, some statement must be furnished upon which the court can see that the injury sought to be remedied, or the complaint made, would otherwise go unredressed. In this action we do not think that any distinction can be made between an unwilling and an incompetent trustee, because, as illustrated in this very case, while it is true that the trustee’s misfortune, and not his misconduct, is the reason why he could not respond to bring the action, this" would not alter the fact that, by reason of his not doing so, plaintiff’s substantial rights were in jeopardy;"and it might well be that delay might result in a given case in a substantial denial of justice to all persons interested in the fund.

It will not do in considering this question to take account here that upon the proof the learned trial judge reached the conclusion that the action itself was collusive. We must take the complaint as it stood at the commencement of the action, and its allegations, for the purpose of determining whether a cause of action in favor of a beneficiary was stated which, in the absence of a demand on the trustee, the failure of which was explained, could be maintained. The court could not assume on the complaint, nor could it see, that the action was collusive. And if we indulge in an opposite assumption to that found by proof upon the trial, viz., that the suit itself was in good faith intended to protect the interests of the plaintiff and the defendant and all other persons interested in the company, we can better reach a conclusion as to whether the court was wanting in jurisdiction to entertain the action or not. Many cases could be referred to wherein, either by the refusal of the trustee to begin the action, or for reasons stated, showing the impropriety of his bringing the action, it has been maintained in the name of a beneficiary or cestui que trust; and we have been referred to no case which goes to the length of holding that, where proper reasons are assigned, showing that, in consequence of removal from the jurisdiction, or incompetency, through' mental trouble, of the trustee, the beneficiary or cestui que trust could not maintain the action, where such action was necessary to protect the rights of the cestui que trust and others interested in the trust property. The conclusion we have reached on this point leads us to the view that the court had jurisdiction of the action, and upon a proper showing could have granted the relief prayed for at the suit of the plaintiff.

We think, also, in an action wherein the court has jurisdiction, that, upon notice to the corporation and attorney general, under circumstances here appearing, the court was not without jurisdiction to appoint a receiver. Upon such application it was shown that the corporation was insolvent, and unable to pay its current expenses; that the landlord had recovered a judgment against it for rent due August 1st, and levied execution upon the property of the company; and that the company was unable to pay the rent which would fall due on the 1st of the month following, and anticipated being evicted from the premises in which it was carrying on business. This situation of affairs would certainly justify the appointment of a receiver, in a proper action; and the objection that notice thereof was not served upon the defendant trustee, where the difficulty or impossibility of giving such notice was fully shown, cannot affect the validity of the order appointing the receiver. It is insisted that the authority of the court to appoint'a receiver without giving such notice is limited by section 714 of the Code, which, in effect, provides that a temporary receiver shall only be appointed without notice in a case where an order of publication for the purpose of acquiring jurisdiction over the defendant has been published. We think, however, that this section has no application to this case, for the reason that the court, by virtue of service upon and appearance by the corporation through its attorneys, acquired jurisdiction over the defendant corporation, and, upon a proper showing, in appointing a receiver, it but exercised the power which has been regarded as inherent in the supreme court. Though not entirely in point, the case of Attorney General v. Insurance Co., 77 N. Y. 272, is instructive as to the power of the court in respect to the appointment of receivers. There the order to show cause why a receiver should not be appointed was served neither on the president nor other officer of the company, but on the return the company appeared by attorneys, who admitted service of the order to show cause. The learned judge writing the opinion in that case says: “The supreme court acquired jurisdiction of the proceeding for the appointment of a receiver of the Guardian Life Insurance Company by the presentation of the petition of the attorney general, setting forth that the superintendent of the insurance department had communicated to him that he had made an examination of the affairs of the company, and that it appeared to the superintendent from such examination that the assets of the company were insufficient to reinsure its outstanding risks. The court, having acquired jurisdiction of the subject-matter by the presentation of the petition, acquired jurisdiction of the corporation by its voluntary appearance by its attorneys on the return of the order to show cause, service of which had previously been admitted by them. This service, followed by the appearance of the attorneys on the return of the order to show cause, bound the corporation, and dispensed with the necessity of the actual service of the order'on the president or other officers of the company. . There is no proof that the appearance by the attorneys was unauthorized, and the presumption is that they appeared by authority of the corporation. A corporation, like a natural person, may appear voluntarily by attorney, and such appearance gives jurisdiction to the same extent as if there was actual service of process. The court therefore had jurisdiction to make thé decree dissolving the corporation, and appointing a receiver. If the decree was improvidently granted, or it for any reason it should be set aside or modiBed, relief can be had upon application, by any party interested, to the court by which it was made; but the regularity of the appointment of the receiver cannot be questioned by any other tribunal.” The receiver here, upon his appointment, showed in his application to the court, thereafter immediately made, for leave to sell the property, that the situation described in the motion papers leading up to his appointment was correct, and that there was reason to believe that it would be for the best interests of all parties that the property should be sold. With regard to the power of tlie court to appoint a receiver and direct a sale of the property by the receiver pendente lite, the recent cases in this court and in the court of appeals growing out of the failure of Levy Bros, so fully discuss these questions that a reference thereto alone is sufficient; and, among the others, see Bank v. Goddard, (Sup.) 16 N. Y. Supp. 343. The receiver, under the order to sell, disposed of the property, some to third parties, and the bulk thereof to the plaintiff; and, the parties who purchased on such sale having taken possession of the property so purchased by them,' which has been removed, and some of which may no longer be in existence, it would be impossible to have it restored to the corporation in its original condition. This order of sale was subsequently modified, upon the application of one John Morgan, a judgment creditor, who had obtained a judgment and made a levy, by directing that the property should be sold “subject to any lien upon the proceeds of such sale that may be established by the said Morgan.” As the result of such sale, a fund has been obtained by the receiver, of which, in view of the judgment appealed from, it is difficult to see what disposition is to be made.

We have thus at some length referred to the situation, for the reason that, while we are not disposed to interfere with the conclusion reached by the learned trial judge in refusing relief to the plaintiff, we think that the court, having the. power to determi ne the rights of the parties, should have proceeded in such a way as to do complete justice.- While, therefore, our opinion is in this case that the court had jurisdiction of the action, we think the learned trial judge was right in refusing to give any relief to the plaintiff, upon his conclusion that “the suit was, upon all the facts adduced at the trial, in a legal sense, collusive, and * * * subversive, as conducted, of Mr. Schumacher’s rights;” and “that the plaintiff and all concerned should be required to relinquish what they have obtained through these proceedings, and in some form to restore the status quo,” To accomplish this, however, we think the complaint should not have been dismissed, but that, to protect the rights of all parties,—namely, the rights of persons who, other than the plaintiff, purchased upon the sale, ánd the judgment creditor Morgan, who released his levy upon the property on condition that he should be allowed to have his lien attach to the proceeds of the sale, and, above all, to give to the defendant Schumacher relief, to which, in view of the conclusions reached by the learned trial judge, we think he was entitled,—it would have been the proper course to have directed an interlocutory reference, to the end, first, that an account might be taken of the value of the property which the plaintiff had thus succeeded in getting into his possession, and, that ascertained, that the property be placed in the receiver’s hands for the purpose of securing a fund equal-to the value of the assets thus appropriated by the plaintiff, for distribution among those entitled thereto. Unless some such interlocutory reference be had in the action, we fail to see how the court is to restore the status quo, or to protect its own receiver, whose appointment was not a void one, and against whose disinterestedness and good faith throughout no suggestion is made. As the case now stands, he has a fund in his hands resulting from a sale of the property, which has not been, nor do we see, with the judgment standing in its present form, how it can be, distributed and disposed of. We think that the result of the interlocutory judgment ordering a reference such as suggested will be to have the questions as to the value of the property determined, and that, upon the coming in of such referee’s report, the question of the amount which should be paid by the plaintiff to the receiver can be ascertained, and thus the rights of all the parties can be fixed and determined in this action. Should the judgment stand, the questions which could be thus settled will be the unquestioned source of numerous suits and motions, which, by following the suggestion indicated, can be settled and adjusted in this one action. We are of opinion, therefore, that the judgment should be modified in the manner pointed out, by an interlocutory judgment directing a reference for the disposition of the questions indicated, with costs to abide the event.

In regard to the appeal taken from the order of the learned trial judge, refusing to reopen the case for further testimony, but little need be said. The granting or refusing of such a motion was one resting in the discretion of the court, and we do not find that there was an unjustifiable refusal to exercise it in plaintiff’s favor. The order appealed from should therefore be affirmed, with costs and disbursements. All concur.