Case Name: KENNEBEC BOX CO., Inc., v. O. S. RICHARDS CORPORATION; RICHARDS v. BATE et al.
Court: United States Court of Appeals for the Second Circuit
Jurisdiction: United States
Decision Date: 1925-03-16
Citations: 7 F.2d 290
Docket Number: No. 238
Parties: KENNEBEC BOX CO., Inc., v. O. S. RICHARDS CORPORATION. RICHARDS v. BATE et al.
Judges: 
Reporter: Federal Reporter 2d Series
Volume: 7
Pages: 290–293

Head Matter:
KENNEBEC BOX CO., Inc., v. O. S. RICHARDS CORPORATION. RICHARDS v. BATE et al.
Circuit Court of Appeals, Second Circuit.
March 16, 1925.
No. 238.
See, also, 299 F. 871, 5 F.(2d) 951.
Bassett, Thompson & Gilpa.trie,' of New York City (Walter H. Gilpa.trie, of New York City, of counsel), for appellant L. S. Richards.
Myron Butler, of New York City, for J. Herbert Bate and other objecting creditors.
Before HOUGH, MANTON, and HAND, Circuit Judges.

Opinion:
HOUGH, Circuit Judge
(after stating the facts as above).
As a basis for the consideration of this appeal, it is to he remembered that any receiver is but the arm of the court, that the court can only be in formed concerning the property in its charge by evidence, .and that, in the appointment of Mr. Richards as receiver, the court yielded to> the insistence (not too strong a word) of an overwhelming majority of the creditors.
The principal piece of evidence at hand when any receivership began was that the complaining creditors averred, and the defendant agreed, that its assets in early December, 1922, exceeded its liabilities by upwards of $40,000, and that this piece of evidence was to say the least grossly mistaken did not appear until after Mr. Richards ceased to be receiver.
It is evident from the record that defendant's creditors believed that they had this substantial margin of assets to rely upon, and desired the receiver of their own choice to maintain a going business and if possible increase it for their own ultimate benefit. And Mr. Richards was almost in terms authorized by the order appointing him to> do these things so much desired by the parties most deeply interested, the creditors.
It is not possible to lay down in advance any code descending into particulars for the conduct of a receivership. Any effort so to do could only be founded on observation of the conduct of past receiverships; and the business part of a receiver's duties covers the whole range of the business wprld, where experience is of course a guide, hut can never furnish a code.
A receiver's method of discharging his duty must always vary with the terms of his appointment — which may be broad or narrow; and the terms of Mr. Richards' appointment were about as broad as possible. He had the amplest authority to buy on credit, and to employ assistants .of skill appropriate to the business in hand, not mere clerks.
There has been no attack made upon Mr. Richards' business experience, which was the reason for the creditors choosing him; and none upon his good faith in undertaking the work he was asked to perform. That the business had not been wholly successful was known by the mere filing of this bill in equity; and that it continued to show an operating loss was demonstrated by the efforts of the first receiver. The ease therefore does not resemble one wherein losses began suddenly 'to appear. The very purpose of choosing Mr. Richards was to endeavor to turn a losing into a going business.
Such very general legal rules as exist in matters of this kind are well and sufficiently set forth in Pusey et al. v. Pennsylvania, etc., Mills (C. C.) 173 F. 629, and Gutterson et al. v. Lebanon, etc., Co. (C. C.) 151 F. 72. It was there held that a receiver is. not chargeable with a loss resulting from his conduct of a business when it was done under the direction of the court at the instance of parties in interest, and the loss was not due to any fault of his, and when the unprofitable business was discontinued as soon as its lack of profit became apparent.
We have stated the facts about this receivership, supra. The result is, it was always known that there was an operating loss; the reasons for it were being studied by Mr. Richards; that was the very reason for appointing him. If business was to stop as soon as an operating loss was discovered, bankruptcy might just as well have been declared instead of asking for a receivership of conservation. By approximately April 12th Mr. Richards had discovered and announced that owing to disproportionate overhead expenses the business could not be profitable.
In the court below this receiver has been surcharged substantially because he did not immediately cease all business, stop every expense, and lock every door. We think it is asking too much to impose so extreme a duty upon an arm of the court. He was entitled to the direction of the- court, and it was a reasonable prelude to obtaining that direction to notify the creditors who had sought his appointment of what he thought the court ought to do. He had been appointed to conduct a losing business, because the creditors themselves wished it conducted, and the propriety of abandoning the effort would not reasonably become apparent until the creditors were given an opportunity to meet and discuss the matter with the court as well as with receiver. For these reasons we hold that it wns error to surcharge Mr. Richards with the losses thought by accountants to have been incurred during a period reasonably necessary to notify creditors of his desire to quit operations.
With respect to the so-called preferential payments made to certain creditors of his own receivership, the appellees rely upon the Gutterson Case, supra, holding that it is .the' duty of receivers, on ascertaining that the business of a receivership is being conducted at a loss, to make no payments to its creditors except pro rata and for preferences given after that they should he held personally responsible. • This is true, but it is a matter of degree; it is not a point upon which any absolute rule can be laid down applicable to all business cases. It is always to be remembered here that court, creditors, and receiver were entitled to rely upon the assertion and agreement that lay at the foundation of this case, viz. that behind any receivership was a capital (so to speak) of about $40,000. That the receivership could not pay as it went was not only known, but was (as above pointed out), the very foundation for this litigation. We are convinced that, no one supposed for a moment in April, 1923, that when all the assets of the defendant were reduced _to cash there would not he enough to pay the going losses incurred by a receivership of four months and a half. Under such circumstances we do' not think that this business was showing such a loss as to- make payment of receivership creditors proper o-n a pro rata system. There was no- basis for such system. Every one supposed that they at all events would be paid in full. We are therefore of opinion that what will ultimately turn out to have been overpayment to a few of the receivership creditor's were not proper matters of surcharge as against this appellant.
As appellant should have been exonerated in the court below, he is also relieved from the payment of the special master's costs, and the order against him is reversed, with costs against the excepting creditors, appellees.