Court Opinion

ID: 3986965
Source: CourtListenerOpinion
Date Created: 2016-07-06 10:43:03.914362+00
Date Added: 2024-06-11T14:21:44.765252
License: Public Domain

Words inadequately express the vigor of my disagreement with my brethren of the court, not so much upon the grounds stated, but upon matters as they appear to me more fundamental and portentous.
Dissenting opinions do not express what the law is, but what the dissenter thinks it should be. They are seldom read. Generally they are written only when the application of a principle creates a difference of judicial opinion.
In the present instance, I entertain a hope that some one interested in securing title to the property in question will read this dissenting opinion. If he does and at some future time he finds uncertainty in his title or other difficulties more alarming, he may not be able to say there was no warning. The shield of an innocent purchaser for value will at least have some holes through which warnings cannot be said to have missed the mark entirely.
The opinion of the court confirms an order that to me cuts across all the fundamental rights and relationships of a valid contract. The authority of the court to appoint a receiver is one thing. That authority is found in Sec. 104-20-1, R.S.U. 1933. The power and authority of receivers under the direction of the court is quite another. The powers of receivers are enumerated in Sec. 104-20-5, R.S.U. 1933. It is there said:
"A receiver has, under the direction of the court, power to bring and defend actions in his own name as receiver; to take and keep possession of the property, to receive rents, to collect debts, to compound for and compromise the same, to make transfers and generally to do such acts respecting the property as the court may authorize." *Page 530 
There are only six sections in the R.S.U. 1933 under the heading of "Receivers." In many respects they are delightfully indefinite and sweepingly general in their provisions. The last of the six sections contains one of the limitations. It reads:
"Funds in the hands of a receiver may be invested upon interest, by order of the court; but no such order can be made, except upon the consent of all parties to the action." R.S.U. 104-20-6, 1933.
About February 1, 1933, in an action brought by Crowley-Anderson Company against the Bamberger Electric Railroad Co., upon an unsecured debt, the defendants, Bamberger and Bower, were duly appointed receivers for the purpose of operating the Bamberger Electric Railroad Company. The application for the appointment of the receivers was made by the creditor, but the Railroad Company admitted its inability to pay its debts and consented to the receivership. Since then the receivers have operated the railroad under order of the court.
After about five years of operation, the receivers asked for an order authorizing the sale of the property constituting the railroad and all of its assets as a single unit, free of liensand without right of redemption.
All of the property of the Railroad Company is subject to the liens of two deeds of trust, or mortgages, executed in 1909 and 1927, respectively, to secure the payment of bonds. The first mortgage or deed of trust was dated February 1, 1909, and ran to the Harris Trust  Savings Bank of Chicago, Illinois, as trustee to secure an authorized issue of $2,000,000 of twenty-five year 5% first mortgage bonds, due February 1, 1934. Bonds aggregating $1,500,000 par value were issued and sold under this trust deed and are now outstanding. The plaintiff is the owner of $3,000 of such bonds with interest coupons due February 1, 1933, and subsequent. These bonds are in default as to principal and interest. It does not appear that any proceeding has been initiated to foreclose or in any way determine rights of mortgagees *Page 531 
or bondholders under this mortgage. The contract lien against the property is apparently still subsisting and is definitely recognized, except as the order of the trial court attempts to set it aside.
In 1927 a second mortgage and deed of trust covering all the property of the Railroad Company and to secure a contemplated issue of second mortgage six per cent bonds of the Railroad Company, was executed to the Tracy Loan  Trust Company, of Salt Lake City, Utah, as trustee. One hundred and fifty thousand dollars ($150,000) par value of these bonds, known as Series B. Gold Bonds, are outstanding, of which the plaintiff owns $2,000 with interest coupons due January 6, 1930, and subsequent. These bonds are likewise in default. No foreclosure of this mortgage has been initiated.
Thus, all of the property and assets of the Railroad Company were at the date of the receivership, and still are, subject to the first lien of $1,500,000 first mortgage bonds with accrued and unpaid interest, and to the second lien of the $150,000 of Series B Gold Bonds, outstanding with the accrued and unpaid interest.
Upon the filing of the petition asking authority to sell the assets, the defendant, Judge Schiller, entered an ordered directing that notice of the filing of the petition be given by serving notice upon the parties to the action, by mailing notice to certain non-resident creditors whose claims were listed, and by publishing notice in the Salt Lake Tribune once a week for six consecutive weeks prior to the hearing. The bondholders as such, were not served with notice and received none, except such constructive notice as was given to the trustees under the deeds of trust.
Subsequently, and before the hearing upon the petition of the receivers, the Harris Trust  Savings Bank, trustee under the first mortgage deed of trust, and the Tracy Loan  Trust Company, trustee under the second mortgage deed of trust, filed petitions in the receivership court and asked that the property be sold as prayed by the receivers, and *Page 532 
that the liens of the respective bonds be transferred to the proceeds of the sale. By what authority the trustees assumed to waive the mortgagees' or bondholders' liens does not appear. A trustee under the ordinary deed of trust has authority only to foreclose the mortgage or cancel or reconvey the mortgaged or trust property upon payment.
On March 23, 1938, the day set for the hearing, the court heard testimony on behalf of the petitioners and made findings of fact in which he found, inter alia, that (a) All of the assets of the railroad were used in connection with its railroad operation and were necessary parts of an operating unit; (b) An emergency existed requiring a speedy sale of the property and assets without appraisal as a single unit, without right of redemption and free and clear of all liens and encumbrances; displacing all existing liens (including the liens of the first and second mortgage bonds) and transferring the same to the proceeds of sale in order of their respective priorities, subject only to the compensation for the receivers and the fees of their attorneys. The order also contained other provisions as to bidders, payments, etc., at the proposed sale. The plaintiff here was not a party to the receivership suit and did not participate in the hearing on the petition.
The question involved in this case, as stated by plaintiff, is:
"Does the court, in receivership cases of public utility properties, have the power to displace existing liens, and to sell the property through the receivers, free and clear of all right of redemption, in the absence of or lacking notice to and consent of the bondholders?"
It is argued that the power and jurisdiction of the court to give validity to the order made is sought to be justified by Section 104-20-5 of R.S.U. 1933:
"A receiver has, under the direction of the court, power to bring and defend actions in his own name as receiver; to take and keep possession of the property, to receive rents, to collect debts, to compound for and compromise the same, to make transfers and generally to do such acts respecting the property as the court may authorize." *Page 533 
What has this to do with determination of contract relationship properly established, priority of liens, secured or non-secured claims? These power given to receivers must relate to property free from mortgage liens, or other contractual ties or priority rights. No mention is made of encumbered property or property subject to mortgage or other liens. The question involved here is not the power of a receiver, it is the authority of the court.
A receiver takes possession of the property, in the place of the owner as an agent of the court for the purpose of administering the estate in the interest of creditors. We find nothing in the statute or elsewhere that brings about a cancellation or obliteration of valid existing liens on the specific property by contract subjected thereto in the event of the appointment of a receiver. A receivership proceeding in many of its aspects is analagous to a proceeding in bankruptcy. 8 C.J.S., Bankruptcy, § 242, page 866, reads as follows:
"The rights of the valid lienholder remain unimpaired, he does not become a party to the bankruptcy proceedings by reason of the bankruptcy court taking possession of the property subject to his lien, and he is entitled to enforce his lien according to the terms of the agreement under which it was acquired, and to be paid the full amount secured by such lien out of the property or its proceeds before any part thereof is applied to the payment of the claims of general creditors, and if there is not enough to pay the full amount of the lien he is entitled to the entire proceeds or fund."
In the case of Ritter v. Arizona Cattle Co., 34 Ariz. 278,271 P. 25, the court had before it a request on the part of a receiver for an allowance of expenses for carrying on and preserving the property, and, seeking to defeat a mortgage lien, an action had been brought by leave of court to foreclose the mortgage. The mortgagee is the appellant. In denying the receiver these expenses, the court used the following language [page 26]:
"In other words, the receiver used the mortgagee's property to preserve it and used the mortgagee's property in an effort to show that *Page 534 
it was not the mortgagee. The former was permissible but hardly the latter. * * * It was no part of his duty to take sides as between these [secured and unsecured creditors] any more than it would have been the duty of the debtor, in the absence of a receivership, to take sides between them. * * * There was never any question as to the legality of the mortgage as between the mortgagor and the mortgagee or its assigns * * * and since the receiver stepped into the mortgagor's shoes he was as duty bond to acknowledge its validity and binding effect as the mortgagor was."
From a full page of cited cases from the federal courts and from between 30 and 40 other jurisdictions, 53 Corpus Juris 102 has deduced the following rule:
"The general rule is that the appointment of a receiver does not divest valid pre-existing liens, but that the receiver takes the property in the same plight and condition and subject to the same equities and liens as existed against it in the hands of the person or corporation out of whose possession it was taken."
Following the text just quoted, there seems to be a limitation as to when the rule might be invoked to the prejudice of the insolvent's creditors. A Michigan case is cited, which, however, does not seem to support the exception suggested.
In the instant case the application alleges, and it is admitted by the defendant, that plaintiff is the holder of first and second mortgage bonds, secured by valid liens imposed by mortgage or trust deeds against the entire property of the railroad company. These bonds are subsisting and valid obligations, and, through the medium of a trust deed, the plaintiff is in effect a holder of negotiable, contractual instruments secured by first and second mortgages respectively against the property described as that of the corporation. When these mortgages or deeds of trust were executed and the bonds issued, they were made to secure bond purchasers for the money paid to the corporation. Those purchasers are mortgagees and acquired all the rights granted by the laws of Utah to a mortgagee of property. One of the acquired rights was the right to have the property held as security sold as provided by law and have the proceeds applied to the *Page 535 
payment of the secured obligations. Section 104-57-7 of the Revised Statutes of Utah, 1933, provides:
"A mortgage of real property shall not be deemed a conveyance, whatever its terms, so as to enable the owner of the mortgage to recover possession of the real property without a foreclosure and sale."
It is difficult to comprehend how a mortgage lien, created by a valid contract, can be set at naught through the medium of a receivership. This matter is still further emphasized by the provisions of Sec. 104-55-1, R.S.U., 1933, which has been many times referred to by this court. It is there provided that:
"There can be but one action for the recovery of any debt or the enforcement of any right secured by mortgage upon real estate or personal property, which action must be in accordance with the provisions of this chapter. Judgment shall be given adjudging the amount due, with costs and disbursements, and the sale of the mortgaged property, or some part thereof, to satisfy said amount and accruing costs, and directing the sheriff to proceed and sell the same according to the provisions of law relating to sales on execution, and a special execution or order of sale shall be issued for that purpose."
And under the provisions of Section 104-55-2, R.S.U., 1933, after the entry of judgment of foreclosure, the issuance of order of sale and a sale made by a sheriff who is required to make his return to the court, it is provided that:
"If it appears from the return of the officer making the sale that the proceeds are insufficient and a balance still remains due, judgment therefor must then be docketed by the clerk and execution may be issued for such balance as in other cases; but no general execution shall issue until after the sale of the mortgaged property and the application of the amount realized as aforesaid."
Where no foreclosure of the mortgage lien has been had, no deficiency judgment can be entered, — there being no pending suit nor judgment of foreclosure upon the mortgage. What becomes of the principle that upon any secured debt the security must be first exhausted or accounted *Page 536 
worthless without fault of the mortgage holder before he may secure a judgment upon the debt?
The procedure in "Redemption on Sales Under Trust Deeds" is outlined in R.S.U., 1933, Section 104-37-40, and reads as follows:
"Upon a deed of trust made to secure the payment of money, all real estate, including shares of corporate stock evidencing title to a water right used, or intended to be used, or suitable for use, on the land covered by such trust deed, which may be sold by the trustee according to the terms of such deed of trust, and which shall be bought in at such sale by the cestui que trust or his assignee, or by any other person, shall be subject toredemption by the grantor in the deed of trust, or his executors, administrators or assigns, or any legalredemptioner, at any time within six months from the date of the sale, on payment of the debt and interest secured by such deed of trust, and all legal charges and costs incurred in making the sale up to the time of redemption; and on such sale the trustee shall issue to the purchaser a certificate setting forth the property sold and the amount of purchase money received, and, at the expiration of said six months, such trustee shall issue a deed to the legal holder of such certificate. Upon the death, resignation or removal from the state of such a trustee, or his refusal or inability to act from any cause, the sheriff of the county in which the real estate is situated shall become the successor in trust of such trustee." (Italics added.)
What purpose can there be in discussing the rights of a redemptioner or quoting statutes relating thereto, if none of the statutes relating to foreclosure are considered, but are cast aside by a mere order of the court to sell all the property and transfer the lien to the proceeds of the sale?
The provisions of the laws of the state of Utah relating to mortgages become a part of the contract between the railroad company issuing the bonds, the trustee and the bondholders, as much as between any other mortgagor and mortgagee, there being no exception under the statute.
In so far as these proceedings are concerned, the two trust deeds are not before the court and we are not advised as to the terms and conditions thereof. The demurrer, however, admits that the Railroad Company had issued to the Harris Trust  Savings Bank, and the Tracy Loan  Trust Company, *Page 537 
as trustees, first and second mortgages or deeds of trust. The order of sale made by the court, which is a part of the petition, also indicates that there are first and second mortgage bonds which are liens created prior to the receivership.
In view of the provisions of the law and the admissions made in the pleadings, it is inconsistent with the very fundamentals of the contractual provisions and rights of the mortgagees thereunder, if not of the mortgagor, to attempt to pass a clear and unincumbered title to a purchaser without a proper procedure by which the contract provisions are made effective and the liens so created extinguished. Can it be said that by the mere interposition of a receiver, a mortgagee of public utility or other property can, by an order of court, be left empty-handed, with his mortgage and debt still possessed, and unable to proceed against the property given to secure the obligation? By what authority, over the objection of a mortgagee, may a court transfer his lien from whiteacre to blackacre or any other acre?
The order transferring the lien from the mortgaged property itself to the proceeds of a sale, with no pending action in foreclosure, seems too arbitrary to merit discussion. These two obligations, the trust deeds or mortgages, whichever they may be denominated, were obligations given to secure a bond issue, and constitute an obligation binding the company and its property.
Federal and state constitutions forbid the impairment of the obligations of contracts, hence the terms thereof must be respected. The rights of the bondholders under the obligations, cannot, without their consent, be altered by subsequent legislation or decrees of the courts. Article 1, Sec. 10 of the Federal Constitution, U.S.C.A. Const. art. 1 § 10, and Article 1, Sec. 18 of the Constitution of the State of Utah, forbidding the impairment of the obligations of contracts, emphasize not only their application to the legislative department of the government, but also their application to the judicial department when a principle like that herein involved *Page 538 
is in issue. Whence comes the authority, common law or statutory or equitable, which empowers courts to exercise functions prohibited by the constitutions or falling within constitutional inhibitions?
In the case of Philadelphia Trust Co. v. NorthumberlandCounty Traction Co., 258 Pa. 152, 101 A. 970, the court had a similar question before it, in which, however, there was involved a merger of three prior existing companies, each of which had, during its separate existence, secured bond issues by a mortgage or deed of trust upon all of its properties then or thereafter to be acquired. The three trustees filed petitions in the receivership court asking leave to foreclose their mortgages upon the separate property given as security upon each property. The receivers resisted and asked authority to sell the property as a unit divested of existing liens. The Pennsylvania court in considering the question put the matter interrogatively as follows [page 973]:
"Can the court decree a sale of the merged road as a unit by the receivers, divested of the lien of the underlying mortgages of the constituent companies?"
The court then held that such a sale would defeat the contractual rights of the bondholders, since the receivers simply stood in the shoes of the owners and took the property and handled it subject to all existing liens. The Pennsylvania case, supra, cites and quotes the case of Kneeland v. American Loan Trust Co., 136 U.S. 89, 10 S. Ct. 950, 34 L. Ed. 379. That case involved, among other things, the right of appeal by a purchaser at a foreclosure sale, and considered generally the question of the effect of the appointment of a receiver. The court said [page 953]:
"The appointment of a receiver vests in the court no absolute control over the property, and no general authority to displace vested contract liens. * * * One holding a mortgage debt upon a railroad has the same right to demand and expect of the court respect for his vested and contracted priority as the holder of a mortgage on a farm or lot. * * * We emphasize this fact of the sacredness of contract *Page 539 
liens for the reason that there seems to be growing an idea that the chancellor, in the exercise of his equitable powers, has unlimited discretion in this matter of the displacement of vested liens."
In the proceeding before the district court, neither the trustees under the deeds of trust nor the bondholders were actual parties. It is true that the trustees joined in the application of the receivers for the order of sale which is here sought to be prevented. The interposition of a trustee in a mortgage or deed of trust is a convenient way in which the mortgagee or mortgagees may be represented. The trustee has no vested interest in the property or the debt secured thereby. His agency and functions are prescribed in the mortgage or trust instrument. It would be an astonishing provision and one that would prevent totally a recovery by the mortgagee or beneficiary, if a trustee were authorized to cancel the mortgage or trust deed or release the same without payment and over the protest of such mortgagees or beneficiaries under the trust deed or mortgage. If such could be done, as well say the trustee could sell the security, waive the lien, or so dispose of the rights of bondholders as to deprive them of the right to have their mortgages foreclosed upon default, and without payment. In view of the admitted priority of liens in the instant case, until the documents creating those liens have been disposed of in a proper judicial proceedings for that purpose, those priorities and liens subsist against the property, according to the terms of the contract between the parties. If the trustees chose to petition the court to make the receiver a defendant in a foreclosure proceeding, it would clearly be the duty of the court to permit such action and to preserve the priority of liens and other claims, and the receiver would stand in no better position as to that matter than the mortgagor.
We are aware that there are cases holding differently, and many of them hold that the ordinary and usual redemption statutes do not apply to judicial sales of railroad properties. The case of Hammock v. Farmers' Loan  T. Co., 105 U.S. 77,26 L. Ed. 1111, and other cases to be found in the notes *Page 540 
and elsewhere, present that side of the situation. An examination of the cases reveals that in many of them the mortgages were either being foreclosed or were brought into the actions. It is unnecessary here to either cite or distinguish and classify the cases. The contract of the parties relating to the mortgage of property, reading into the contract the statutory provisions, warrants no such action as is proposed in the instant case.
"There can be but one action for the recovery of any debt or the enforcement of any right secured by mortgage upon real estate or personal property, which action must be in accordance with the provisions of this chapter." (Section 104-55-1, R.S.U. 1933).
The mortgages or trust deeds should be properly foreclosed by the mortgagees, or trustees on their behalf, and proper recognition of the claims of secured and unsecured creditors should be given without attempting any short cut by selling the property as a whole. The declaration of the court that such a sale shall clear the property of the mortgagor of all liens and encumbrances, in my opinion, does not make it so.
The case of Oldroyd v. McCrea, 65 Utah 142, 235 P. 580, 40 A.L.R. 230, is different in its facts from the case at bar. In that case an order was entered ex parte and the mortgagees or trustees did not consent. The case also involved the question of receivers' certificates — this court indicating that such a sale could not be permitted, in that it had the effect of displacing the mortgage and security.
The bondholders are entitled to their day in court and the right to have their liens enforced and have the property sold pursuant to the law and their mortgages considered as provided by the statute.
The writ should be made permanent. *Page 541