Source: https://supreme.justia.com/cases/federal/us/322/408/
Timestamp: 2019-04-24 00:07:04+00:00

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Justia › US Law › US Case Law › US Supreme Court › Volume 322 › Crites, Inc. v. Prudential Ins. Co.
Crites, Inc. v. Prudential Insurance Co.
1. A federal court receiver who, through a private agreement made prior to the foreclosure sale of the properties, derived a profit from their subsequent resale held accountable to the receivership estate for such profit notwithstanding that he had been appointed to collect rents and operate the properties and was without authority in respect of any sale thereof. P. 322 U. S. 416.
2. The fee-splitting arrangement entered into by the receiver in this case, together with the fact that he engaged in other misconduct incompatible with his position as an officer of the court, require that he be denied all fees and compensation as receiver. P. 322 U. S. 418.
Certiorari, 320 U.S. 728, to review a judgment which modified and affirmed an order of the District Court approving and confirming receivers' accounts and overruling exceptions thereto.
We granted certiorari in this case to determine certain important questions concerning the proper administration of federal receiverships.
Madison and Pickaway Counties, Ohio. Each mortgage, being in default, was matured by acceleration on December 30, 1931. On February 17, 1932, Prudential began 22 separate foreclosure proceedings against the Crites and Crites, Inc., the petitioner. Only the 11 proceedings relating to the 11 contiguous farms in Madison County, on which the mortgages aggregated $192,000, are now before us.
"to collect the rents and proceeds of the real estate . . . , to operate and manage said real estate through tenants, lessees, or otherwise, to rent and lease said real estate, to pay delinquent taxes and assessments and insurance premiums, to make such repairs as may be necessary to preserve the value of the premises and to produce normal income therefrom, and to do such other acts as may be from time to time ordered by the court."
Subsequent orders authorized them to borrow money from Prudential and from the local bank to pay necessary expenses relating to the farms, and to execute leases of the farms upon a share or crop rental basis.
individually on July 1, 1933, at a public sale for cash at not less than two-thirds of the appraised value. The appraisers set the value of the 11 Madison County farms at $244,080, making $162,720 the minimum price at which they could be sold. The decree indebtedness in the 11 cases was $223,742.32. Prudential made the sole bids at the public sale on July 1, and secured title to the 11 farms for $163,900, slightly more than the upset price. The District Court confirmed this sale on July 18.
Prudential subsequently objected to the allowance of the receivers' claims on the ground that they were excessive. Petitioner also filed objections. Hearings were held before a special master. The District Court overruled petitioner's exceptions to the special master's report and its counterclaim, amended and approved the receivers' accounts, and affirmed the special master's report. Petitioner alone appealed, the court below affirming the action of the District Court with a slight modification as to additional fees for the receivers' attorneys. 134 F.2d 925.
Petitioner's first contention is that Simkins' actions in connection with the foreclosure sales constituted a breach of his duty as a receiver and rendered him accountable for certain profits made by him and others.
"we are in no position to offer it right now, not in position until after the foreclosure proceedings and the Prudential Insurance Company acquires title for it, then they will be in position to offer it to anybody else trying to buy it."
enclosed in a letter which was addressed to one of Prudential's representatives and which was signed by Simkins. In this letter, Simkins vouched for the responsibility of "Mr. Jones' buyer." Jones also enclosed a $3000 certified check in support of his offer. Simkins by this time clearly was aware of the identity of Jones' principal and of the terms of the offer to Prudential. But he made no effort to inform either the district judge or petitioner of these facts prior to or at the sale.
At the public sale held by the marshal on July 1, Prudential made the sole bids and secured title to the 11 farms for a total sum of $163,900. Jones attended the sale, but Col. Proctor had not authorized Jones to bid, since he desired to buy only when he could be assured of securing all the 11 farms at once and when title to them was supported by a warranty deed from Prudential. Two days later, on July 3, Prudential accepted Jones' offer of $249,106.
Simkins received a total of $2,797 from Jones, nearly all of which was in payment for his aid in consummating the purchase of the farms from Prudential.
On the basis of these facts, petitioner seeks to have Simkins surcharged with (a) all payments received by him from Jones for his assistance in consummating the resale of the farms to Col. Proctor; (b) the commission or profit received by Jones, and (c) the amount received by Prudential in excess of the decree indebtedness or, in the alternative, the amount by which the appraised value of the farms exceeded the decree indebtedness. Petitioner claims that Simkins must be surcharged with these amounts because he breached his duty as co-receiver by accepting employment from Jones in advance of the foreclosure sales to help bring about a resale of the farms from Prudential to Col. Proctor. Respondents, on the other hand, resist this claim on the ground that Simkins was appointed co-receiver only to collect the rents and to operate the farms, and had no fiduciary duty with respect to the foreclosure sales.
is obvious, moreover, that Simkins was bound to perform his delegated duties with the high degree of care demanded of a trustee or other similar fiduciary. He was not free to deal with the property under his control as co-receiver in such a way as to benefit himself or his associates. Any profits that might have resulted from a breach of these high standards, including the profits of others who knowingly joined him in pursuing an illegal course of action, would have to be disgorged and applied to the estate. Michoud v. Girod, 4 How. 503; Magruder v. Drury, 235 U. S. 106; Jackson v. Smith, 254 U. S. 586.
pertinent information, or use their official position for their own profit or to further the interests of themselves or any associates.
Prudential, after Prudential had accepted the resale offer, or by any subsequent knowledge obtained by petitioner. The information was most valuable prior to the foreclosure sales, when the prospects were greater for successful bargaining, and it should have been divulged at that time.
Moreover it was inconsistent with his position as an officer of the court for Simkins to make a secret arrangement with Jones to bring about, by active intervention, a resale of the properties in the custody of the court. The fact that he was not a liquidating receiver did not absolve him of the duty to act openly at all times with respect to the subject matter of the proceedings. Due regard for his official position demanded that he at least notify and obtain the approval of the court and of the interested parties before entering into an employment contract with a third party wherein his compensation was dependent upon a particular bidder's being successful at the foreclosure sales. This arrangement brought out in even bolder relief the reprehensibleness of Simkins' failure to disclose all the facts regarding Col. Proctor's interest in purchasing the farms. Had such facts been revealed prior to the public foreclosure sales, Prudential might not have obtained title to the farms, and Simkins would not have earned any compensation under his contract with Jones. It was thus to Simkins' personal benefit not to disclose all the pertinent facts.
Under the circumstances of this case, however, Simkins was not surchargeable with the commission received by Jones, with any amount received by Prudential, or with the amount by which the appraised value of the farms exceeded the decree indebtedness. We perceive no basis in this record for holding Simkins responsible for any possible misconduct on the part of Jones or Prudential, or for any profits that they may have obtained thereby. We do not, of course, determine in this proceeding whether petitioner could recover any such profits in a direct action against either Jones or Prudential.
them by the District Court and to divide them equally, although this arrangement apparently was not completely carried out.
Petitioner excepted to all credits in the receivers' accounts for fees to either Simkins or Ingalls because of this arrangement. The court below allowed credit to the receivers for the $250 fees received by Harrison and Ingalls from the court as preliminary compensation and for all out-of-pocket expenses incurred by the two attorneys on behalf of the estate. But all credits were denied for additional attorney fees paid to them. Petitioner objects to the failure to disallow the $250 fee allowed Simkins by the District Court and the additional $1,800 fee which he paid to himself on account of his services as co-receiver.
A fee-splitting arrangement of this nature is clearly unenforceable and void as against public policy. Weil v. Neary, 278 U. S. 160. But whether the parties to such a contract should be allowed any fees at all, and if so the amount thereof, are normally matters within the sound discretion of the District Court and are not reviewable except where a clear abuse of discretion is apparent. In this case, however, the fact that Simkins entered into a fee-splitting contract so patently illegal, plus the fact that he engaged in other misconduct and indiscretions incompatible with his position as an officer of the court, compel the conclusion that all fees and compensation as co-receiver should have been denied him. Cf. Woods v. City National Bank & Trust Co., supra, 312 U. S. 268.
The judgment of the court below is reversed, and the cause is remanded for further proceedings consistent with this opinion.
Jones was familiar with the 11 Madison County farms, having made an offer of $500,000 for them "a year or more" prior to 1933 on behalf of a New York principal. Crites rejected this offer, however.
Simkins testified that the fact of his employment by Jones "was no secret," and that "I may have told Judge Hough. I would not have hesitated in telling him."
Petitioner claims that the stamps indicate that Col. Proctor paid approximately $281,000, "presumably, $249,106 net to Prudential . . . and the difference of $31,894 to Jones." There was no proof, however, that Jones received that amount. He testified merely that he received $15,000 and an additional amount that he did not remember, from which amounts he paid Simkins.
The special master and the court below found that Col. Proctor was interested in purchasing the 11 farms as a unit only if he could obtain a warranty deed from Prudential. But there was no evidence that petitioner could not have furnished muniments of title equally satisfactory to Col. Proctor or that he would not have been satisfied with a warranty deed from petitioner. According to Jones, Col. Proctor "said a general warranty deed from the Prudential Insurance Company was good enough for him."
It is unnecessary to consider petitioner's argument relating to the sale to Prudential of the growing crops on the farm lands, inasmuch as petitioner seeks to surcharge Simkins with the same amounts as in connection with the sale of the lands, and no different considerations are present. Respondents' claim that petitioner is barred from relief because of laches is without merit. Nothing in the record indicates that petitioner discovered the full facts concerning Simkins' activities until several years after the foreclosure sales. Petitioner then made timely exceptions to the receivers' accounts.
I am of the opinion that certiorari should not have been granted in this case, and that the writ should be dismissed.
The Circuit Court of Appeals recognized established principles in determining to what extent the respondent Simkins should be denied compensation for services by reason of his acting in inconsistent relations. That court canvassed the authorities which this court cites in its opinion and not only did not refuse to follow and apply them but, as I think, in perfect good faith, proceeded to examine and appraise the facts and circumstances in order to apply the relevant legal principles.
There is not a suggestion of any conflict amongst the federal courts respecting the law which should govern decision, nor is there any suggestion that, on an identical set of facts, any federal court has reached a result contrary to that reached by the court below. In essence, the case presents the question whether the action taken by the Circuit Court of Appeals was sufficiently drastic in the circumstances disclosed.
I think it plain that this case falls within the category to which I referred in Bailey v. Central Vermont R. Co., 319 U. S. 350, 319 U. S. 354. All the considerations there mentioned apply equally here. If this court is to spend its time correcting mistakes in the appraisal of facts in individual cases by courts below the performance of its essential functions, necessarily will suffer.

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