Homer v. Baltimore Refrigerating & Heating Co.

StookbRidgts, J.. dissenting. Epon the 29th day of February, 1912, the following order was passed modifying the order of February 2nd, 1912: The petition of Francis T. Homer and others representing a committee of bondholders of the Baltimore Refrigerat ⁴²⁶ ing and Heating Company for a modification of the order affirming the two orders appealed from in this canse, and passed on the second day of February, 1912, being read, it is ordered this 29th day of February, 1912, that said order be and the same is hereby modified in so far as it affirmed the order of the Circuit' Court No. 2, directing immediate payment by the receivers of the claim of R. Lee Iones, and that the receivers be and they are hereby directed to suspend payment of said claim, until the statement and ratification of an auditor’s account distributing the special fund of $12,013.74, in accordance with the opinion heretofore filed, and'the cause is hereby remanded for the statement of such an account. ⁴¹² Pjsaeoe, J., delivered tlie opinion of the Court (Stock-beidge, J., dissenting). The Baltimore Refrigerating and Heating Company of Baltimore City is a corporation under the laws of Maryland, engaged in supplying heat in the business centre of Baltimore, and in conducting a large cold storage business in said city, and will be designated herein as the Heating Company. On December 30th, 1908, Peter E. Tome, a creditor of said company upon an overdue promissory note of $1,000, and also the owner of 500 shares of the capital stock of said company.of the par value of $100 each, filed a bill'in the Circuit Court No. 2 of Baltimore City against said company, alleging those facts, and also alleging that it had an authorized capital stock of $1,000,000 divided into 10,000 shares, of which 1,612 had been issued; that said company on October 1st, 1902, executed and delivered to the Continental Trust Company, as trustee, a mortgage or deed of trust of all its property and accessories to secure 2,000 five per cent, bonds of said company for $1,000 each, of which number 1,300 had been issued, and that 1281 were still outstanding; that default had been made October 1st, 1908, in payment of interest coupons then due on said bonds; that the company was indebted to other creditors upon sundry claims, some of which were overdue, and others not yet due, and that it was without funds to pay any of such debts; that the company was a public service corporation, and that the obtaining of judgments and executions against it would endanger its bondholders, creditors and stockholders, and that it was necessary, in order to prevent this result, that a receiver or receivers be appointed to take charge of, maintain and operate said plant for the benefit of those entitled thereto, and for the performance of the duties and obligations it owed the public — and there was an appropriate prayer for relief. ■ The Heating Company answered the same day, admitting all the allegations of the bill, and consenting to the appointment of a receiver, as authorized by a resolution of the directors, and on the same day Peter E. ⁴¹³ Tome with two others were appointed receivers.

On January 16th, 1909, the Continental Trust Company, trustee intervened by petition, setting up its said mortgage, alleging its interest in the proceedings, and praying to be made a party plaintiff, and it was so ordered. On January 12th, 1909, the receivers upon their petition, setting forth the necessity at that season of the year of supplying the public with the steam heat for which it had contracted, and to enable it, to maintain the low temperature within their large cold storage houses necessary for the preservation of the merchandise stored therein, were authorized and directed to continue all the branches of its business under the direction of the Court and until its further order. On January 27th, 1909, R. Lee Jones filed a petition in the cause alleging that the Heating Company was indebted unto him in the sum of $2,778.64 for coal supplied by him between December 1st and December 30th, 1908, and used during that period; that the receivers had then in hand about $10,000 received by them for earnings for December, 1908, none of which could have boon earned but for the use of said coal, and that he had a just claim to be paid therefore out of said earnings, and prayed an order for siicb payment, and an order nisi was passed the same day. On February 10th, 1909, the receivers answered this petition admitting they had made collections for December, 1908, but alleging that these would be required lo pay operating expenses and mate such repairs and additions to the machinery and premises as would enable them to run the plant successfully.

They call for strict proof of the petitioners claim, and allege that in any event it was an unsecured account, and should not be preferred to other general creditors. On February 16th, 1909, Jones filed an amended petition selling forth his claim with more particularity, and alleging 1hat since the previous July a committee, of bondholders had been in charge of all the financial affairs of the company; that this coal was used for their benefit by enabling them to continue the operation of the plant and that it ⁴¹⁴ would be inequitable to postpone bis claim to tbe lien of said bonds. On November 3rd, 1910, J. William Middendorf and Wilson P. Hayward, as a committee of said bondholders, together with Robert M. Spedden, a holder of 68 of said bonds, suing as well for themselves as all other bondholders who would come in, filed a bill in Circuit Court No. 2 of Baltimore City, against the heating company, its receivers, and Francis T. Homer and others, another committee of said bondholders, Richard B. Fentress and Continental Trust Company, trustee alleging the execution and delivery of the mortgage before mentioned and filing a copy thereof as an exhibit, together with copies of the two agreements under which said two committees of bondholders were constituted, showing that each of said committees were vested by the depositors of their bonds with full title to and ownership thereof for the purposes of said agreements. The bill further recited the various transactions leading up to the then existing situation, praying among other things for an account of all outstanding b&nds with the names of the lawful holders; that the Heating-Company bring in ithe total amount found to be due thereon, and that in default thereof a sale of the Heating Company’s property be decreed.

Answers were filed; that of the Homer Committee being filed November 29th, 1910; admitting all the material allegations of the bill ás to the necessity of sale, but questioning whether the Continental Trust Company, trustee, was not incapacitated for the execution of the trust contained in the mortgage or was the proper trustee for appointment by decree of the Court, and on the same day, with leave of the Court — R. Lee Jones filed in that case a petition similar to that filed in the receivership case, setting-up his claim and praying to be made a.party thereto with leave to take testimony in support of his claim. No order appears to have been passed thereon — but on December 7th, 1910, a decree was passed appointing the Continental Trust Company, trustee, to make the sale prayed, and on December 16th, Jones filed another petition in that cause, showing- that ⁴¹⁵ be bad in the receivership case, obtained in 1909 an order to italic testimony therein, but had .not done so because he was led to believe by sundry bondholders that his claim would be adjusted without taking testimony in its support, and now asked leave to take such testimony to be used in either or both cases as might be desired; and an order was passed giving the leave asked, and referring the case to the auditor, before whom such testimony was taken. The answer of the Continental Trust Company was filed after the decree of sale, viz.: On December 20th, 1910, but it requires no special notice as it alleged nothing in contravention of the necessity of the sale, and admitted the inability of the Heating Company to comply with its obligations either to its creditors or to the public. It appears from the copy of the mortgage filed, that the Heating Company granted to the Continental Trust Company, not only its real and leasehold estates, but also “all rents, issues and profits thereof.” It appears from .the testimony of Mr. Tome, one of the directors of the Heating Company, that on October 5th, 1908, after default in payment of interest on the bonds, that the directors prepared, with a view of reorganizing the company, an agreement between the holders of bonds and stock of the company to be known as depositors of the first part, the Fidelity Trust Company of Baltimore, depositary of the second part, and Mr. Tome with six others, as a commit!, of the third part, but it does not appear, what, if anything, was done thereunder.

The Middendorf Committee was appointed by an agreement of April 26th, 1909, and the Homer Committee under an agreement of April 12th, 1909, but no readjustment was accomplished by either. "Mr. Tome testified that Mr. Wright was general manager in December, 1908, and had authority to purchase coal and approve' the bills, and Mr. Wright testified upon examining (he itemized bill of coal rendered by Mr. Jones that he supplied all the coal used in December, 1908, and that the bill was correct in weights and prices, and that no part of the ⁴¹⁶ $2,778.64 bad been paid. He also testified that tbe receivers purchased tbe negro school bouse mentioned in tbe proceedings, for tbe storage of coal — for $12,000 which was paid for out of tbe funds of tbe receivership; and that they installed an elevator' in tbe cold-storage building at a cost of $1,500, and an additional brine cooler, and that these items were all betterments, rendered necessary by tbe neglect of repairs and improvements during 1907 and 1908. Mr. Fonteneau, tbe bookkeeper of tbe Heating Company, testified that tbe collections for January, 1909, were $17,-900.17, of which 16,097.10 was earned in December, 1908, from beat, ice and storage.

Tbe property was sold under tbe decree mentioned for $503,000. and tbe purchaser not complying, it was resold under order of tbe Court for $261,000. On June 10th, 1911, exceptions to tbe claim of R. Lee Jones were beard, andan order was passed in the receivership case directing tbe receivers to pay ithe same in full with interest from January 1st, 1909, and on tbe same day an order was passed in tbe case where sale bad been made, declaring that certain net income received by said receivers bad been diverted under ordérs of tbe Court and expended in betterments to the property which bad been sold therewith; that said Jones’ claim should be paid outt of any net income that bad come into tbe receivers’ bands, and that to tbe extent of said claim, tbe same should be made good out of tbe proceeds of said sale; and ordering that until said claim should be paid by said receivers, as directed by tbe order in their case, tbe Continental Trust Company, in tbe sale case, should retain in its hands tbe amount diverted by said receivers. This order was so modified on June 15th, 1911, as to require tbe retention of only $4,000 dollars of tbe amount of net income so diverted. Tbe Homer Committee representing certain of the bondholders secured by said mortgage have appealed both from tbe order of June 10th, 1911, in tbe receivership case, directing tbe payment of the claim of R. Lee Jones and from tbe ⁴¹⁷ order of June loth, 1911, in the mortgage case directing the retention by .the trustee of $4,000 for the-protection of said claim.

It will be seen from the foregoing statement of facts that this appeal presents a controversy between a mortgagee, as represented by the appellants, a committee of certain bondholders secured by a mortgage, and a current supply creditor of the mortgagor, a corporation engaged in furnishing heat and refrigeration to the public in Baltimore City. It has been held in a series of decisions in the Supreme Court of the United States, at least as far back as Fosdick v. Schall, 99 U. S. 235 , as well as in some of the State Courts, that when a Court of Chancery is asked by mortgagees of a railroad to appoint a receiver of the mortgaged property, pending proceedings for a foreclosure, the Court in tbe exercise of its sound judicial discretion may, as a condition of issuing the necessary order, impose such terms in reference to the payment from the receivership, of outstanding debts for labor, supplies, equipment or permanent improvement, of tbe mortgaged property, as may under the circumstances of the particular-case appear reasonable; some of the reasons for this rule are thus stated by Chief Just ion Waite hi Fosdick v. Sch all, supra: “Where such companies become pecuniarily embarrassed, it frequently happens that debts for labor supplies, equipment and improvements are permitted to accumulate, in order that bonded interest may be paid, and a. disastrous foreclosure be postponed, if not altogether avoided. In this wav, the daily and monthly earn ings which ordinarily should go to the daily and monthly expenses, are kept from those to whom in equity they belong, and are used to pay the mortgage debt.” This is precisely what -was done in the case before us, as was shown by the testimony of Mr. Wright, the manager of the Heating Company. The Chief Justice further said: “The income out of which the mortgagee is to be paid is the net income obtained by deducting from the gross earnings what is required for necessary operating and managing expenses, proper equipment and useful improvement. * * * If, for the convenience ⁴¹⁸ of the moment something is taken from what may not improperly be called the current debt fund, and put into that which belongs to the mortgage creditors, it certainly is not inequitable for the Court, when asked by the mortgagees to take possession of the future income, and hold it for- their benefit, to require as the condition of such an order, that what is due from the earnings to the amount of the debt fund, shall be paid by the Court from the future current receipts before anything derived from that source goes to the mortgagees.

In this way the Court will do what, if a receiver should not be appointed, the company itself ought to do.” Accordingly in that case the receivers were required to pay out of the funds in their hands for the rent of certain cars during the time they were used by the company, before the appointment of receivers, though the mortgage in that case, as in this, gave a lien upon the income and profits of the company. In Burnham v. Bowen. 111 U. S. 776 , it was held that debts contracted by a railroad corporation as part of necessary operating expenses (for fuel for example), the mortgage interest of the company being in arrear at the time, are privileged debts, entitled to be paid out of current income, if the moftgagee trustees take possession, or if a receiver is appointed in a foreclosure suit. Also that if the current income is diverted to the improvements of the property by the trustees in