County Corporation v. Semmes

Parke, J., delivered the opinion of the Court. The problems on this appeal are of fact and of law. They arise on an appeal from an order overruling ex ⁵⁰⁶ ceptions to an account stated by the receivers of a carrier of freight for hire in motor vehicles on specified routes between terminals on highways. The operation of the utility by the receivers was at a loss, and all the property, except some real estate and choses in action, were sold by the receivers, and the holder of a mortgage on all the tangible personal property and franchise was distributed, after an allowance of costs, expenses, and charges, the sum of $1,493.21 in part payment of the principal and interest of a mortgage debt which amounted to $10,480.85.

The chief question of fact was what were the terms of an agreement between the receivers and the owner of the mortgage indebtedness, under which the owner agreed that the receivers might operate the lines of the utility and sell the mortgage property free of the mortgage lien. After the determination of this issue of fact, the main questions of law are: (1) What effect shall be given in this cause to the agreement as so found; (2) whether the exceptions are too indefinite in respect of one objection to be considered with reference to that objection; (3) whether the receivers are to be surcharged with the loss in operation, and, if so, for what period of control; (4) whether the commissions allowed to the receivers were excessive; and (5) whether the fee of counsel was not too large. The Tidewater Lines, Inc., an incorporation of the State of Delaware, had been engaged for some years in carrying on in the State of Maryland, in the District of Columbia, and in certain adjoining sections of other states, the business of operating for hire motor trucks for the transportation of goods on the highways, between terminals which had been specified in the franchises which had been obtained from the several sovereignties. On May 2nd, 1933, a bill of complaint was filed, which alleged that, although the assets of the corporation exceeded its liabilities, it was unable to meet its debts as they became due in the usual course of its business.

It was further averred that it was necessary for the protection of creditors that a receiver be appointed to take ⁵⁰⁷ charge of the assets, and administer and dispose of them under the jurisdiction of a court of equity. The defendant answered, admitting the allegations, and receivers were at once appointed to administer the corporate affairs under the supervision and direction of the court. The receivers qualified, and filed a petition which stated that it would be in the interests of the public and creditors to continue the operation of the corporation. The court thereupon authorized and directed the receivers to continue the operation of the business, subject to the further direction of the court.

All these proceedings were had on the day that the suit was begun. On the date of these proceedings, the corporation was indebted unfo the County Corporation of Maryland, a banking corporation, in the principal sum of $9,550, which was secured by a mortgage deed of the debtor that was executed on the 1st day of June, 1928, and later duly assigned to the County Corporation of Maryland, which, for convenience, will hereafter be called, “mortgagee.” By this mortgage deed, the corporation granted and transferred as security (a) all of its real estate; (b) its good will, and its franchises, licenses, routes, and privileges which it had acquired or might subsequently acquire during the life of the mortgage deed; (c) its rolling stock of busses, trucks, and automobiles, together with all the accessories, tools, machinery, supplies, and equipment; ánd (d) its office furniture and fixtures, together with all personal property which the corporation might acquire during the subsistence of the mortgage and appropriated to the uses and purposes of its business, whether in addition to the mortgaged personalty or in substitution therefor; and with the privilege to the corporation to sell any article of such personalty that may become worn or useless, and to apply the proceeds of the sale to the purchase of other equipment for its use. In the event of a default in the payment of the debt, or in the performance of any agreement, covenant, or condition, the deed of mortgage authorized a public sale or a private sale, if the latter be at a price at least ⁵⁰⁸ sufficient to pay the mortgage obligation and the costs; and provided that out of the proceeds of sale there should be first paid the expenses of sale, which included a fee of $100 for the solicitor, and commissions to the party who might make the sale in an amount equal to the commissions allowed trustees for the sale of property under a decree of the Circuit Court for Charles County, where the principal office of the corporation was located. The mortgagor was in default, and the right of the mortgagee to foreclose subsisted, but was held in abeyance as an effect of the court having taken custody of the mortgaged property.

Since this power of sale was coupled with an interest in the property conveyed, and formed a part of the security afforded by the mortgage, and the mortgage purported to transfer all the corporate assets, except its cash and choses in action, it was a reasonable expectation that the court of equity in which the receivership was pending would have permitted a foreclosure under the power of sale in the mortgage. Forest Lake Cemetery v. Baker, 113 Md. 529, 538-540 , 77 A. 853 ; Berry v. Skinner, 30 Md. 567 ; Dill v. Satterfield, 34 Md. 52, 54 . Accordingly, the receivers promptly sought and obtained a relinquishment of the mortgagee’s right to foreclose upon obtaining the sanction of the chancellor. The parties agreed that, because of the nature of the corporate enterprise and of the promises made, it would be in the best interest of all the parties concerned that the mortgaged property should be sold by the receivers while it was in use for the corporate business of a public carrier.

The surrender of the right of the mortgagee to foreclose was a valuable consideration moving from the mortgagee to the receivers, qua receivers. Supra. The parties, however, do not agree in respect to the promise or condition which induced the mortgagee to forego its right. It would be supererogation to set forth the analysis of the testimony by which the facts have been ascertained from the conflict in recollection of the witnesses, and the court will, therefore, state its conclusions, after ⁵⁰⁹ having given due weight to all the parol and written evidence.

At the time of the agreement, all the parties concerned knew that the corporation was insolvent, but the receivers were confident that the property mortgaged would be sufficient to pay in full the mortgage debt. The receivers accordingly promised to the mortgagee that, if they were permitted (1) to operate the corporate mortgaged property as a common carrier for an estimated period of sixty days, but never longer than the time when the expenses of operation should become greater than the current receipts; and, while so carrying on the transportation of goods, (2) to sell property of the corporation free of the mortgage debt, the receivers would pay the principal and interest of the mortgage debt to the mortgagee. This agreement was made without the previous authorization or subsequent ratification of the chancellor, but the receivers, with the consent of the mortgagee, continued the transportation of goods; and for about sixty days their operations were profitable, but the ensuing two periods of thirty days were at so great a loss in each period that the net loss of operation for the entire period of about one hundred and twenty days was sufficient to absorb all former gains and to leave a net deficit of $6,607.91. On May 26th, 1933, the receivers sold for $750 four trucks, and surrendered to the purchaser its franchise or permit to carry goods on certain highways of the state.

A sale of all the remaining tangible and intangible property of the corporation, exclusive of the cash on hand, the bills, notes, accounts receivable, and the real estate, was made on July 28th, 1933, for $18,000, and confirmed by the court on August 24th, 1933. The receivers, also, sold for $400 a lot of land which was covered by the mortgage, and this money was paid direct to the mortgagee. The deposit of the corporation with the mortgagee was credited on the mortgage debt and reduced the amount due by $421.21. ⁵¹⁰ In the latter, part of August, 1933, the receivers and their attorneys filed separate petitions which respectively set forth in detail the services rendered, and the sum of $2,000 was thereupon awarded the receivers, and the sum of $3,500 was allowed to their two solicitors. At the time of these applications, the receivers and their attorneys believed that the operation of the receivers had resulted in a profit of approximately $3,500, and that there were in hand sufficient proceeds from the sales of the mortgaged property to pay the mortgage debt in full.

The receivers did not know that they had been operating at a loss until October 1st, 1933, and the mortgagee had no intimation of this deficit until April, 1934. The receivers filed on December 19th, 1933, their statement of cash receipts and disbursements for the period beginning on May 2nd, and ending on October 31st. The sum of their receipts was $90,916.21, and the aggregate of their disbursements was $86,919.94, which left on deposit the residue of $3,996.27. In February, 1935, the mortgagee filed its petition setting forth that the receivers had sold for an aggregate of $19,150 certain real and personal property which was subject to its mortgage lien, and that it was entitled to be paid out of this fund the mortgage debt, which, after all credits had been given, amounted to $10,344.89, with interest on $8,728.79 thereof from January 26th, 1935.

The receivers resisted this relief, and testimony was taken, and the chancellor, by an interlocutory order, referred the cause to an auditor for the statement of an account. Shortly after the filing of the auditor’s report and account, the mortgagee filed its exceptions (1) to the allowance of the sum of $2,000 to the receivers in lieu of commissions; (2) to the allowance of the sum of $3,500 to the attorneys as counsel fee; and (3) to the allowance of any and all items of expense which were set forth in the account under the designation of “disbursements as per their voucher, and report filed August 20, 1934,” and which totalized $89,958.68, to the extent that the items thereof constitute expenses incurred by the re ⁵¹¹ ceivers during the continuance of the business from May 2nd, 1933, to August 24th, 1933, in excess of an income of $69,545.35, as shown by the said account to have been produced by the operation of the business of the carriers by the receivers. A common ground of every one of the exceptions is that the allowances are improperly made against the proceeds of sale of the mortgaged property, because of the agreement that the mortgage debt was to be paid in full. The additional ground of objection, that the allowances are excessive, is made against the compensation of the receivers and the fee of counsel.

The major exception is to the allowance to the receivers of the difference between $69,545.34, the income from the operation of the business by the receivers, and the disbursements, which amount to $89,958.68, to the extent that there is included in this difference any operating expenses of the receivers between May and August 24th. The only other allowances, to make a grand total of $97,703.43, are: Receivers, attorneys, court and auditor costs............$5,833.75 Claims of Mayor and City Council of Baltimore... 417.79 Balance to mortgagee on its mortgage claim.......... 1,493.21 $7,744.75 The sum of $89,958.68 embraced all other disbursements. It represented the addition of seventy-seven items, which, with few exceptions, had no reference to the time when the obligations were incurred, and were themselves the total of the expenditures which could be appropriately grouped under a general heading. The auditor stated that these allowances were all based upon the report of the receivers filed, with the supporting vouchers, in the cause on August 20th, 1934.

The report is not in the record at bar. While it is obvious that the items must fall into at least two classes, the exceptions do not segregate nor identify the items which either constitute the expenses of operation, or are chargeable against the fund arising from the sale of the mortgaged ⁵¹² property. It is patent that some of the allowances are chargeable against the proceeds of sale of the mortgaged property, and that others should be allocated to expenses of operation, but many of the items are of so equivocal an origin and nature that they are not susceptible of classification in the form presented by the record. The result is that the court is not afforded the data to ascertain what items should be charged as a preference against the earnings, and what should be charged against the proceeds of sale, and whether or not there has been a diversion of the income that should be given priority by reimbursement out of the proceeds of the mortgaged corpus.

See Gregg v. Metropolitan Trust Co., 197 U.S. 183 , 25 S. Ct. 415 , 49 L.Ed. 717 ; Fletcher on Corporations, vol. 8, sec. 5402, 5403; Tardy’s Smith on Receivers (2nd Ed.), secs. 412-432; Homer v. Balto. Refrigerating & Heating Co., 117 Md. 411, 417, 421 , 84 A. 176 ; Warburton v. Perkins, 150 Md. 304, 310 , 133 A. 141 ; Hooper v. Central Trust Co., 81 Md. 559, 592, 593 , 32 A. 505 . The authorities last cited plainly indicate the difficulties of the questions and the importance of the facts in.their consideration and resolution. The exceptions are too general to aid the court, and the record does not enable it to supply the defects of the exceptions.

Moreover, the exception must be clear, precise, and certain in respect of the allowance to which an objection is made. The objection should apprise the adverse party of what he will be called on to defend, and neither the chancellor nor the appellate court should be compelled to perform the office of an auditor in the examination of the record. Miller’s Equity Proc., sec. 545; Scrivener’s Admr. v. Scrivener’s Excrs., 1 H. & J. 743, 747 ; Norwood v. Norwood, 2 Bland, 471 , 481, note; Burroughs v. Bunnell, 70 Md. 18, 28 , 16 A. 447 ; Young v. Omohundro, 69 Md. 424, 431, 432 , 16 A. 120 ; Grove v. Todd, 45 Md. 252, 256 ; Tardy’s Smith on Receivers (2nd Ed.), page 1709, sec. 610. The vagueness of the exceptions in the respect mentioned will, therefore, limit the inquiry to two grounds ⁵¹³ of objection.

The first is that the mortgage debt should have been allowed in full, and the compensation to the receivers and the fee to the solicitors should have Ibeen rejected as against the mortgagee, on the ground that the receivers and the mortgagees had agreed that the mortgage debt would be paid in full. The second ground is that the recompense allowed to the receivers and solicitors was excessive. 1. After the decree assuming jurisdiction and appointing the receivers, the assets and affairs of the corporation were in the custody and control of the chancellor. The receivers were the representatives of the court, and were without the authority or power to enter into a contract with reference to the corporate assets or management without the prior authorization or subsequent sanction of the court that had assumed jurisdiction of the property and administration of the affairs of the corporation.

Any one who either transacted any matter or attempted to contract with the receivers was charged with this knowledge, and, so, assumed all the risks of the undertaking. Here the terms of the contract were agreed, but these terms were neither authorized nor approved, and so, having no power, the receivers were without the capacity, to make a valid contract with the mortgagee that his mortgage debt would be paid in full, in consideration of the mortgagee foregoing its right to foreclose, if the court would assent, and to let the receivers sell the mortgaged corporate property clear of the mortgage lien. Tardy’s Smith on Receivers (2nd Ed.), pp. 267-269; Zielian v. Balto. Plant Ice Co., 115 Md. 658, 667 , 81 A. 22 ; Alexander v. Maryland Trust Co., 106 Md. 170 , 66 A. 836 .

The mortgagee, however, permitted the mortgaged property to be sold by the receivers pursuant to the terms of this purported contract, and the receivers reaped the full benefit of the contract, which the receivers, on their part, decline to perform according to its terms. Having enjoyed the benefits of the contract, a court of equity, although not having authorized the contract in the beginning, nor yet having subsequently ratified it, would, ⁵¹⁴ nevertheless, accept as binding such terms of the contract as it would have approved when the obligations of the contract were originally formulated. Tardy’s Smith on Receivers (2nd Ed.), p. 1714; Alexander v. Maryland Trust Co., 106 Md. 170 , 66 A. 836 ; Farmers’ Loan & Trust Co. v. Newman, 127 U.S. 649 , 8 S.Ct. 1364 , 32 L.Ed. 303 . The term that the mortgagee should be paid its mortgage debt in full, no matter what would be the amount received for the mortgaged property, was unreasonable and inequitable.

No one could estimate within a fair degree of accuracy what the proceeds of sale of the mortgaged property would be, and, however fair the prospect, it was but simple justice and equity that the mortgagee have no other advantage above other creditors than what was its right under the mortgage deed. So, the undertaking to pay the full mortgage debt must be restricted to the mortgagee’s preferential claim to the proceeds of sale of the property covered by the mortgage deed, after a deduction of the charges and expenses rightly apportioned. ■ The corporation was a common carrier of freight upon certain highways under license from the State. It would be conducive to a sale under more advantageous circumstances if the tangible assets of the corporation could, in connection with its franchises or licenses, be sold as a going business. It was, consequently, sound judgment for the receivers to carry on the operations of the corporation so long as the expenses of operation did not exceed the receipts.

The mortgage debt was a capital charge, and so soon as the expenses of operation were in excess of the earnings, a continuation would be a progressive impairment of the capital, and, generally prejudicial to all corporate creditors. Hence, it was a prudent limitation for the receivers to agree that they would not continue the operation as a common carrier beyond the time it was profitable. The public carrier in the pending cause was not a railway system in exclusive operation over its privately owned right of way, but a transportation line with motor vehicles engaged in the ⁵¹⁵ carriage for hire of freight between specified terminals upon certain public highways by virtue of a revocable license granted by the state. The service so rendered to the public by such a motor vehicle corporation could be more quickly and certainly supplied, and with less inconvenience to the public, by another similar' and substituted carrier than in the case of a carrier transporting goods upon a privately owned railway system.

So, there was no compelling reason of public concern for the motor vehicle line in the instant appeal to continue indefinitely in operation at a constant loss. The circumstances did not justify the court in contemplating other than an expedient and temporary operation. Compare Homer v. Balto. Refrigerating & Heating Co., 117 Md. 411 , 84 A. 176 ; Parlett Co-operative v. Tidewater Lines, Inc., 164 Md. 405 , 165 A. 313 ; Public Service Commn. v. Williams, 166 Md. 277 , 170 A. 517 ; Public Service Commn. v. Philadelphia, B. & W. R. Co., 122 Md. 438 , 89 A. 726 ; Benson v. Pub.

Serv. Commn., 141 Md. 398, 403, 404 , 118 A. 852 ; Public Service Commn. v. Philadelphia, B. & W. R. Co., 155 Md. 104, 120 , 141 A. 509 . Applying the principle that equity regards as having been done what it would have declared should be done, if its order had been duly requested, in accordance with orderly practice in proceedings in receivership, the rights and liabilities of the mortgagee will be ascertained and adjudged on this record upon the assumption (a) that the receivers were to continue the corporate affairs as a common carrier for a tentative period of sixty days, and no longer than its receipts were in excess of the expenses of operation; (b) that the receivers were to sell, as soon as could be done, the property of the carrier free of the lien of the mortgage; and (c) that the proceeds of the sale of the corporate assets which were subject to the mortgage, less the proper charges, would constitute a fund which should be first applied to the payment of the principal and interest of the mortgage debt. See Alexander v. Maryland Trust Co., 106 Md. 170 , 66 A. 836 ; Farmers’ Loan & Trust Co. v. Newman, 127 U.S. ⁵¹⁶ 649, 8 S.Ct. 1364 , 32 L.Ed. 303 ; Brown v. Hazlehurst, 54 Md. 26, 28 ; Abell v. Brown, 55 Md. 217, 226 ; McCrory v. Beeler, 155 Md. 456, 461 , 142 A. 587 ; Forest Lake Cemetery v. Baker, 113 Md. 529, 538-540 , 77 A. 853 .

Considering the matter from the standpoint of operation, the first thirty days of their management of the affairs of the carrier were profitable ($2,846.10), but the second like period was fifty-nine per centum ($1,156.42) less profitable than the preceding period. The third period of thirty days was at a loss of $1,109.58, and the final monthly period was at a cumulatively greater loss of $9,500.85, so that the total loss in operation was finally ascertained to be $6,607.91. The receivers testified that they did not discover that they had been operating at a loss until about the following October 1st. The reason assigned for this failure to know such a vital fact was that on September 1st, when the new purchasers assumed control, the receivers discharged all but one employee, who did not conclude his computations of their financial position until around the 1st of October.

The answer to that would seem to be that their chief concern was with the financial result of their operations, and all during this period they had their complement of clerical force. Their ignorance of the affairs of the carrier is attested by the facts that on August 24th and 28th the attorneys and receivers were allowed $3,500 and $2,000, respectivély, for their services to the dates of the orders which awarded the compensation; and, a few days later in the. month, went to the mortgagee to complete the arrangements to pay in full the mortgage debt and interest, and the payment was not made, because the mortgagee would neither give credit in full for the deposit of the carrier with the mortgagee, as its financial reorganization contemplated a payment of fifty per centum to its depositors, nor accept as cash the obligation of the purchasers to the receivers in the sum of $2,000. This lack of knowledge is not excused if it were due to an absence of ordinary care and diligence on the part ⁵¹⁷ of the receivers in the administration of the receivership. When a receiver acts as would an ordinarily prudent man in the management of his own affairs, he is not liable, but should he fail to exercise this degree of care and diligence, he will become answerable for losses to the property and assets in his charge in consequence of his neglect.

Perry on Trusts (7th Ed.), secs. 401, 415, 441, 454, 598a; Pomeroy’s Equity Jurisprudence (4th Ed.), sec 1638 (217) ; Tardy’s Smith on Receiverships (2nd Ed.), pp. 199, 244, 245; Caldwell v. Graham, 115 Md. 122, 128-130 , 80 A. 839 . The carrier was insolvent. The receivers were appointed because of its financial condition. Under the circumstances, there could have been no reasonable expectation that the receivers could so lessen the expenses and increase the business and receipts as to assure a constant monthly excess of operating' receipts over operating expenditures.

The immediate past warned the receivers to expect a monthly deficit. Frequent statements of the financial result were necessary to an intelligent and prudent control. These statements could have been procured and should have been obtained at short and regular intervals. Without these statements or an equivalent knowledge which had been obtained from the books and records kept of the transactions of the receivership, the receivers were not proceeding with that degree of care and diligence which an ordinarily prudent business man would have exercised in the management of a similar business, whose capital assets would be progressively dissipated if its operating expenses should exceed the