Hagerstown Furniture Co. v. Baker

Parke, J., delivered the opinion of the Coqrt. These two appeals are presented on separate records which, although incomplete and confused, are together sufficient for a determination of the questions involved without putting the parties to the expense of a writ of diminution. The present controversy grows out of a decree appointing receivers for the Hagerstown Furniture Company, a corporation engaged in the manufacture and sale of furniture at Hagerstown. The company’s board of directors were Henry F. Wingert, William Wingert, Lewis P. Wingert, John Gr.

Ernst, and Solomon Baker; and, in the same order in which their names are given, the first four directors respectively filled the offices of president, vice-president, treasurer, and secretary. Baker died in May, 1927, and no one was elected in his place. The ⁵⁷⁷ capital stock of the company was $9,000, divided into shares of the par value of $100 each; and sixty of the shares were originally held by the Wingert family, fifteen by Baker’s estate, and the remaining fifteen by Ernst. The ownership of the majority of the stock put the Wingerts in full control, and they so abused their position as officers and directors and mismanaged the company’s affairs as, npon their own formal admissions in answers filed in the canse, made it necessary for the court to appoint receivers to protect and conserve the resources of the company for the benefit of its creditors and stockholders.

The bill of complaint was filed by tbe executors of Solomon Baker, the dead stockholder, against the company, and later John G-. Ernst, the stockholder, The Hagerstown Bank, Victor M. Oushwa, and Clarence H. Baker were made parties plaintiff. The petition of the new parties disclosed the reasons for their application. Ernst was the owner of ten shares of stock; Clarence A. Baker of eleven shares of stock; Cushwa was the purchaser of ten shares of stock bought by bim of the pledgee of the ten shares of stock issued to William Wingert, but for which the president of the company declined to issue the buyer a certificate; and the Hagerstown Bank was the pledgee of the forty shares of stock of Henry F. Wingert, Miller Wingert, Lewis P. Wingert, Martha A. Wingert, to secure a loan by the pledgors of more than $100,000.

These four parties approved of the proceedings and intervened to protect their rights and interests. It further appears that, after the stock was transferred to the Hagerstown Bank as pledgee, and before the filing of the proceedings for a receivership, the hank had a call issued for a special meeting of the stockholders to oust the Wingert directors and elect other officers, but this could not be accomplished, since by statute a pledgee has no right to vote the stock, but the pledgor retains until a sale that privilege. Code, art. 23, sec. 2G. The Wingerts, therefore, continued in complete control, although the substantial ownership of the majority of the stock was in other hands.

The difficulties ⁵⁷⁸ of the subsisting situation were increased by an involuntary bankruptcy proceedings begun against Henry F. Wingert, Miller Wingert, Lewis P. Wingert, and Martha A. Wingert, and now, after an adjudication of bankruptcy, in course of litigation on appeal. These facts, which are here repeated by reason of their pertinency to the present appeals, along with other facts which are not stated, will be found in the decision of this court in Hagerstown Furniture Company v. Clarence H. Baker and others, 155 Md. 549 . In the case cited the action of the chancellor in appointing a receiver was affirmed, and Judge Pattison thus stated our conclusion: “The Wingerts, serving as directors of the furniture company, having no longer any real interest in its affairs, and having shown a disposition to dispose of its money and funds in the furtherance of their own individual interests, to the loss and injury of the company and its stockholders, we are impressed with the fact that, should the present management be allowed to continue in the control of its affairs, the property and assets of the company will be in imminent danger of loss and injury. Consequently, we cannot escape the conclusion that the order appealed from appointing receivers should be affirmed, in order that those really interested in the welfare of the company, who have asked for their appointment, may be protected in their rights.” Pages 562, 563.

The bill of complaint asked for the appointment of receivers to take possession of the corporate property and continue to operate the business -under the direction of the court until the corporate property could be sold, and the proceeds applied to the payment of its debts and the residue be distributed among the stockholders. By the decree two receivers were named to take possession of all the property, whether real or personal, of the company, to collect all outstanding debts, due and, until the further order of the court, to conduct the business and maintain the affairs of the company as a going concern. The receivers selected were two stockholders of the company, Victor M. Cushwa and John G-. Ernst, who were not ⁵⁷⁹ allied with, the Wingerts, but the latter named had been its secretary and had been actively associated in its management daring the period in which the company had been successful.

Erom April 16th, 1928, the receivers operated the business. On July 6th, 1928, the chancellor authorized the receivers to borrow the sum of $10,000 on their note, payable in ninety days, with the right of renewal until paid, and made the note and its renewals a lien on the assets of the company; and the receivers so made the loan and used its proceeds to pay taxes and other obligations of the company. The receivers reported to the chancellor on May 22nd, 1929, that they had not been able to run the business at a profit; that it would be unadvisable to continue, because of insufficient capital, business depression, and a failure in demand for the manufactured product; and that they feared a continuation of the business would result in a loss of the existing - assets. The receivers stated that, in view of all the circumstances, they believed it would be for the best interest of the creditors and stockholders that a sale of all the assets and a complete liquidation be made, and prayed for an order authorizing a sale as prescribed by the court.

Accompanying this verified report was the petition of John G. Ernst, Clarence H. Baker, and the Hagerstown Bank and Trust Company. The petitioners were the actual or substantial owners of seventy-six shares of the stock of the company, and, concurring in the report of the situation by the receivers, they formally consented to the passage of a decree in conformity with the prayer of the petition of the receivers. On the same day the above mentioned report and petition were filed, the chancellor passed a decree directing the receivers to make the sale requested, without providing that, so far as was practicable, all parties who might be affected by the sale should have notice and be given an opportunity to be heard and show cause why the proposed order should not be passed. Because this order was absolute and not provisory, the company took the appeal which is first in order. 1.

Disregarding for the present all other questions, the ⁵⁸⁰ one- intended to be presented by this appeal will be considered. As appears by tbe decision of this court on the former appeal, the first decree passed in the cause was to protect and conserve the corporate resources and continue the company’s business subject to the further orders of the court. Generally, the situation so created would run until a final decree would be passed determining whether there should be a liquidation of all the assets and a distribution of the net proceeds of sale. However, the principle upon which a court of equity assumed possession of the corporate property and undertook the management of the corporate affairs was not spent, but simply awaited the development of circumstances which would require its further application.

So, if it became necessary to sell the property before a final decree is reached, in order to secure assets against depreciation and depletion, a court of equity will again invoke the same principle and direct an immediate sale to preserve the value of the assets for the benefit of all parties, by reducing them to a fund which will remain the constant equivalent in value of the property sold. The general rule is thus stated in High on Receivers (4th Ed.), sec. 192: “A court of equity appointing a receiver to take possession of property pending a litigation concerning the rights of the parties thereto is vested with the power of selling the property in the receiver’s hands, whenever such course becomes necssary to preserve the interests of all partis.” Miller’s Equity, sec. 615. It should be noted that this equitable method of the preservation of value in property through a conversion by sale is not to be confounded with the statute authorizing, under specified conditions, a summary method of sale in anticipation of an inevitable final decree to the same effect. The statute was not invoked in this case, but the decisions construing and enforcing it present certain interesting analogies.

See Donohue v. Daniel, 58 Md. 595, 600, 601 ; Cornell & Johnson v. McCann, 37 Md. 89, 99 ; Kelly & Martin v. Gilbert, 78 Md. 431, 435 ; Washington City etc. R. Co. v. Southern Md. R. Co., 55 Md. 153, 155 ; Dorsey’s Lessee v. ⁵⁸¹ Garey, 30 Md. 489, 498 ; Dorsey v. Dorsey, 30 Md. 528 ; Title Guar. & Tr. Co. v. Burdette, 104 Md. 666, 673, 674 ; Elkton Electric Co. v. Perkins, 145 Md. 224, 238, 249-250 . And compare Hammond v. Hammond, 2 Bland, 306 , 359; Brown v. Wallace, 2 Bland, 585, 598. If the court did not possess and exercise such power when the occasion arises, and thereby lessen or prevent the loss incidental to the litigation or attendant circumstances, the original assets, instead of being preserved and kept intact, would be much diminished before the rights of the several parties could be adjudicated, and thus the basic reason for creating the receivership would be repudiated in its administration.

Clark on Receivers (2nd Ed.), secs. 510, 486, 487; Pomeroy’s Equity Jurisprudence (4th Ed.), sec. 1631; Smith v. Burton, 67 Vt. 514 ; First Nat. Bank v. Shedd, 121 U. S. 74, 86 ; Mellen v. Moline etc. Works, 131 U. S. 352 , 33 L. Ed. 178, 183, 184 ; Syracuse Sav. Bank v. Syracuse, C. & N. Y. R. Co., 88 N. Y. 110, 114 . It follows that the court had jurisdiction to sell the assets of the company when necessary to protect the interests of all parties concerned.

Mason v. Hubner, 104 Md. 554, 556, 557 . The necessity for such action rests in the sound legal discretion of the court, and, therefore, upon principle and according to sound practice the interlocutory decree for a sale of all real estate and tangible personalty of a solvent corporation should not have been entered until the court had provided that, so far as was practicable, all persons affected by the proposed sale and not shown to have assented should have notice, and be given an opportunity to be heard and show cause why the sale should not be made. The correct practice is indicated by the order passed in Deford v. Macwalty, 82 Md. 168, 169 . See Clark on Receivers (2nd Ed.), sec. 510; Forms Nos. 77 £ 78, pp. 1700, 1701, 16 Encyc. of Forms, Pl. & Pr. 743; 17 Encyc.

Pl. & Pr. 833. The giving of notice and of opportunity for hearing were procedural and not jurisdictional, and, so, subsequent events may correct the error in procedure. Mellen v. Moline etc. Works. 131 U. S. 352 . 369-370. 33 L. Ed. 178 . 184. Thus ⁵⁸² if, after