Rosenbloom v. Electric Motor Repair Co.

Lowe, J., delivered the opinion of the Court. Louis J. Sagner, Esq., representing The Electric Motor Repair Co., a creditor of Knight Press of Maryland, Inc., filed a Bill of Complaint in the Circuit Court for Baltimore County, for the involuntary dissolution of Knight Press due to its insolvency, and the appointment of a receiver, ⁷¹³ pursuant to Md. Code, Art. 23, § 80. On March 19, 1975, the court, by Order of the chancellor pursuant to § 80, declared the corporation insolvent and appointed Mr. Sagner Receiver, 1 expressly authorizing him to take possession of all property, books, records, papers, and effects of Knight Press. Knight Press was “required to yield up and deliver the same to the Receiver. . . .” On June 20, 1975 the Receiver, alleging that he had not received any of the items specified in the order (nor had Knight Press prepared a schedule of its properties, encumbrances, creditors, exemptions or transfers) filed an application to compel compliance with Md. Rule BP2.

That rule requires that a schedule of property and debts be filed by the debtor within fifteen days after the assumption of jurisdiction by a court. The rule provides an alternative in the event the debtor fails to comply. “If the debtor fails to file the schedule within the time provided . . . the assignee or receiver shall, . . . cause such schedule to be made and filed. . . .” Md. Rule BP2.b.l. The Receiver here did not comply with the rule’s alternate provision but chose instead to invoke its penalty clause. He filed an “Application to Compel Compliance with Rule BP2” and prayed simply that the “Court . . . pass an Order requiring the defendant to file schedules within a certain time or otherwise to be held in contempt . . .”, presumably because Md. Rule BP2.b.3. states that “[a] debtor who wrongfully fails to file a schedule . . . may be punished for contempt.” Thereafter, Saul Rosenbloom moved to strike the order and prayed a hearing on the Receiver’s application.

In his answer to that motion, the Receiver asserted: “ . . . that there is not one penny in this estate and that the books and records of the Defendant are ⁷¹⁴ voluminous and are still in the possession of and under the control of Saul Rosenbloom and his accountant and that, therefore, it would be impossible for the Respondent to file schedules, as provided by the rules of court.” The chancellor’s “Memorandum Opinion,” shows that the reasoning behind his order rested upon the respondent’s assertion that the corporate defendant was impecunious. The essence of the opinion is contained in its last three paragraphs which state: “It is agreed that at the present time the corporation has no assets of any kind out of which the Receiver could pay for the preparation of schedules, nor has it had any such assets since March 19, 1975. It is my judgment that Maryland Rule BP2 directs the filing of schedules by the debtor, and by necessary implication the debtor in this case being a corporation, contemplates that the preparation of schedules is to be effected by the officers and stockholders of the corporation. Clearly in this case, where there are no funds out of which the Receiver can pay for the cost of preparing the schedules, the burden should be on the last officers and stockholders of the corporation.

It will be ordered that the schedules be prepared and filed in this Court by Mr. Saul Rosenbloom on or before September 15,1975.” (Emphasis added). The order that followed directed that “Saul Rosenbloom, former president of Knight Press, Inc., of Maryland” file the schedule of property and debts in compliance with Md. Rule BP2. Such schedule was not filed in the time prescribed by the order and, again, the Receiver ignored subsection b. of Md. Rule BP2 which mandates that if the debtor fails to comply, the receiver “shall” do so. This time the Receiver moved against Benjamin Rosenbloom, the sole stockholder and board chairman of Knight Press. “Appli ⁷¹⁵ cation to Compel Benjamin Rosenbloom to Comply with Rule BP2” was filed by the Receiver and again the chancellor acquiesced, ordering “Benjamin Rosenbloom, former Chairman of the Board and sole stockholder of the Defendant [to] file schedules of the Debtor’s property and debts in compliance with Rule BP2. . . .” On the same day, the chancellor compounded that error by holding Saul Rosenbloom (the corporate president) in contempt, ordering him “committed to [the] custody of the Sheriff of this county to be confined until he shall obey the said lawful order of the Court.” On October 1, 1975, both Benjamin and Saul Rosenbloom appealed from the orders directing them to file schedules pursuant to Md. Rule BP2.

No appeal was filed from the contempt order directed at Saul Rosenbloom dated September 19, 1975. However, it is apparent that if the order upon which the contempt order is based is without merit, it too must fall. Inexplicably, two days after appeal was noted, an “Application for Accountant” was filed reciting that a named Accountant had agreed to act if approved, on a contingent fee basis. It stated that the accountant “ ... is willing to . . . gamble on the ultimate results in view of the fact that he well realizes that at the present time there is not one penny in the estate.” The chancellor signed the order on October 3, 1975.

If such action has mooted the controversy, we have not been so apprised, nor can we take judicial cognizance of that order since the chancellor had no authority to so act in this case after an appeal had been entered. The Court of Appeals has held as a general principle that the entry of an appeal divests the circuit court of its jurisdiction and it may not take further action upon the order appealed from “and any matters embraced therein.” Bullock v. Director, 231 Md. 629, 633 . See also State v. McCray, 267 Md. 111, 145 ; Vancherie v. Siperly, 243 Md. 366, 375 ; Dietrich v. Anderson, 185 Md. 103, 111 ; Eastern States Corp. v. Eisler, 181 Md. 526, 535-536 . Would it were not so that we might proceed no further.

But proceed we must. ⁷¹⁶ Appellants ask three questions, only two of which are subject to this appeal: 2 “1. May the former officer of a corporation in involuntary receivership, be compelled to prepare or cause to be prepared at his own expense, schedules of the property and debts of the insolvent corporation and to file same in the receivership proceedings? 2. May a former director and/or sole stockholder of a corporation in involuntary receivership, be compelled to prepare or cause to be prepared, at his own expense, schedules of the property and debts of the insolvent corporation and to file same in the receivership proceedings?” The issues have become obfuscated partly because of the skeletal record from which we write. Because our decision in this case depends upon the interpretation of Md. Rule BP2, 3 ⁷¹⁷ it is unnecessary to respond directly to the questions as they are asked.

Our review of the record and of the provisions of Rule BP2 convinces us that the chancellor erred in issuing the orders from which this appeal is taken. He committed not one error but three, by 1) ignoring the alternative provided by Rule BP2.b. in the event that the debtor fails to file a schedule; 2) issuing a contempt order for failure to comply with the rule without any finding that such failure was wrongful as required by subsection b.3.; and 3) attempting to “pierce the corporate veil” of the debtor by ordering the director and shareholder to do that which was required of the “debtor” under the provisions of the rule. The chancellor fell into the interpretive trap, probably ⁷¹⁸ unintentionally laid by the Receiver who had obviously misread Md. Rule BP2, of invoking the penalty provision of the rule against the debtor who failed to file a schedule within the time provided. Subsection a. of that rule places the primary responsibility for filing the required schedule upon the debtor and subsection b.l. places upon the receiver the secondary responsibility for the schedule’s filing.

Both the chancellor and Receiver obviously misread subsection b.3. as an alternative to subsection b.l. The Receiver might complain (had he filed a brief) that, in the event of failure by the debtor to file the schedule because of lack of funds, it is more unjust to compel the Receiver to assume that responsibility than to lay it personally upon the officers, directors and shareholders. We do not agree. In the first place, as we have indicated, the rule does not permit that alternative.

Moreover, requiring the Receiver to advance the costs of preparation of a schedule, to whatever extent costs may be incurred, is consonant with the principle that the debtor’s property is entrusted to the receiver as an officer of the court and is in custodia legis awaiting ultimate disposal by the court