89 N.J. Eq. 481 | New York Court of Chancery | 1919
Petitioners obtained a judgment in the district court of Newark at ten a. m., October 25th, 1918, against Hammer and Israel, partners, trading as the Eandi Shop: on October 25th,
“Ordered, that Homer C. Zink, Esq.j be and he is hereby appointed temporary receiver pending the return of this order to show cause, to take charge of the property, estate, books and papers of the said copartnership business
the bill and order were marked filed by the vice-chancellor and the order therefore became immediately effective under rule 130; at ten a. ai., on October 25th, the receiver went into possession of the partnership propérty; at ten-fifteen a. m. an execution was issued upon the judgment of petitioners and delivered to the constable of the district court, who at ten tweny-five a. at. proceeded to the shop of the partnership and found the receiver in possession; the constable went through the form of making a levy; on the return of the order to show cause in this court on November 7th, Homer C. Zink was appointed receiver with full power to reduce to cash the assets of the partnership; to institute suits, to compromise with creditors, sell and convey all of the estate, rights and interests of the partnership and to hold and dispose of the proceeds thereof under the direction of this court; under order of this court, the receiver has disposed of all the partnership assets, free and clear of any pretended lien of petitioners.
The present application is for an order directing the receiver to pay to petitioners the amount of their judgment. No decree of dissolution has yet been made, although an order has been made directing creditors to present claims, and claims have been presented. The time prescribed by the order for the presentation of claims has expired. The cause is proceeding with due speed; the delay in obtaining the formal decree of dissolution is due to the fact that the partner Israel is a non-resident and must,
The first question to be determined is whether the judgment creditor could, after the appointment of the receiver and his taking possession, proceed upon his judgment, obtained after the filing of the bill but before possession was taken by the receiver, by execution, and acquire a preferential right in the assets of the partnership. The law, when justice requires, takes cognizance of parts of days. Gallagher v. True American, Pub. Co., 75 N. J. Eq. 171. It is argued that upon the doctrine of stare decisis this court is concluded by the decision of Chancellor Runyon in Ross v. Titsworth, 37 N. J. Eq. 333. In that case a bill was filed By one copartner against another praying that an account might be taken of the partnership affairs, that a receiver might be appointed to take charge of the partnership matters under the direction of the court and for general relief. A receiver was appointed with full power to reduce the partnership assets to his possession and to take charge of the partnership matters under the direction of the court. Subsequent to the appointment of the receiver, judgments were recovered against the partnership, and applications were made by the judgment creditors for payment out of the partnership assets. No decree of dissolution had been entered, although the bill had been filed January 9th, 1883, and-the decision of the case was during the October term of court, 1883. The chancellor based his conclusion upon the fact that up to the decree of dissolution the proceedings were within the control of the parties, and the suit might at any time be discontinued, and that therefore it could not be said that the court had taken over the administration of the affairs of the partnership so that diligent creditors might not pursue their remedies at law. At the time of the decision there appeared to be two divergent views taken by the courts of two .other states, one represented by the cases of Adams v. Hackett, 7 Cal. 187; Adams v. Wood, 8 Cal. 153; 9 Cal. 24; Nagle v. Minturn, 8 Cal. 540, and the other by Holmes v. McDowell, 15 Hun 585; affirmed by the court of appeals of New York (76 N. Y. 596) on the prevailing opinion of the court below. The chancellor, adopted the rule he considered had been applied by the California courts and
The rule in New York, as now formulated, secures an equitable distribution of the assets of an insolvent partnership, but prevents the partners invoking the aid of the court to protect the assets of a solvent partnership, or of an insolvent partnership for fraudulent purposes. It is significant that the result has been reached in New York through the decisions of appellate tribunals, inferior to the court of appeals, which had decided Holmes v. McDowell. It was recognized by the New York courts that at the time of the decision of that ease the court was feeling its way, and that the determination should be considered as binding authority only in cases in which the facts were similar to those there dealt Avith.
A consideration of the California eases referred to by the chancellor in Ross v. Titsworth will indicate, as pointed out by the supreme court of Oklahoma, 1903 (Foster v. Field, 74 Pac. Rep. 190), that the California court did not go to the length of hold
Unless Ross v. Titsworth he considered as authority, I have yet to find a case holding squarely that, after an appointment of a temporary receiver of an insolvent partnership, before decree of dissolution, while the proceedings are being carried forward with due speed and in good faith, creditors may acquire liens. In England the rights of creditors are protected by what is known as a charging order. Kewney v. Attrill (1886), 34 L. Rep. Ch. Div. 345; Ridd v. Thorne (1902), 2 L. Bep. Ch. Div. 344. Mr. Justice Kay, in Kewney v. Attrill, said: “I give the applicants, the judgment creditors, a charge now on the moneys which are in the hands of or may be taken possession of by the receiver, and they must undertake to deal with the charge according to the order of the court.” He had said: “By the appointment of a receiver the court aims at equality amongst the creditors. If I give you leave it must be on your undertaking to hold the proceeds and deal with them in accordance with any order the court may make.” There had been a decree of dissolution. The purpose of the action of the court was that if, for any reason, the administration of the estate should be taken awajr from that court, such as by an act of bankruptcy, the creditors might have, in the bankruptcy proceedings, the same advantage as they would have if they had levied an execution. I find no English au
The rights of diligent creditors may be protected by permitting them to levy but not to sell. The receiver may then be directed to sell free of the lien or charge of the levy, the lien, if any, to attach to the proceeds, the levy to give the creditor no prior right in case the assets are distributed as a result of the then pending proceeding, but in case the assets are turned back to the partners, either because of discontinuance of the suit, or for other reasons, the levy to be as effective as if a receiver had never been appointed. Whether the same result may be obtained by a charging order, as in the English practice, I do not determine. By this method an equitable distribution of the assets of the partnership taken initially for that purpose under the control of the court by the appointment of the temporary receiver will be achieved, and yet the partners will not be permitted to invoke the rule fraudulently to the disadvantage of creditors.
The result may be worked out upon the doctrine of relation. The supreme court of the United States held in Bailey v. Baker Ice Machine Co., 239 U. S. 268, that a trustee in bankruptcy takes the status of a creditor holding a lien by legal or equitable process as of the date of the filing of the petition in bankruptcy, although there is no express provision in the act to that effect. Judge Rellstab (In the Matter of the Capital City Cap Co. (United States District Court, District of New Jersey), 41 A. B. R. 604), said: “It is not the passing of the title to the bankrupt’s property, under section 70-A, but the passing of such property gremio legis for purposes of liquidation, which fixes the time when the trustee is regarded as having acquired the status of a lienholder under section 47.”
It is elementary that when property is taken over by a court for distribution amongst creditors, the maxim “equality is equity” is to be applied, if possible. It is so with respect to corporations. In Squire v. Princeton Lighting Co., 72 N. J. Eq. 883; 15 L. R. A. (N. S.) (1908) 657, th‘e court of errors and appeals, speaking through Mr. Justice Pitney, referring to Doane v. Millville Mutual Insurance Co., 43 N. J. Eq. 522, said: “With respect to Yiee-Chaneellor Bird’s decision upon the point now raised, it is sufficient to say that if the order that he had under consideration did amount to a taking possession of the assets of the company by the court, his declaration that there was no longer opportunity for anyone to obtain advantage by diligence is correct.” The court of errors and appeals held that the order to show cause containing the ad interim restraint, ordinarily granted in corporation cases, did not amount to a taking over of the property by the court, and that creditors might proceed to acquire liens, notwithstanding the order. It recognized, however, I think, that the court might take possession of the property, so that liens could not be acquired, otherwise than by the appointment of a receiver, and in order to comply with this decision in all cases hereafter in which I am called upon to advise orders and the facts warrant temporary restraint, but either do not warrant, or for some reason there is not desired, the appointment of a receiver, I shall incorporate in the order a provision that from the date of the service of the order the corporation, its agents and officers, shall hold its property as trustees under appointment of, and accountable to, the court, with leave to continue the business or such other powers or restrictions as may be appropriate.
It seems to me that the right of creditors to an equitable distribution of the assets of an insolvent partnership arises, at least, upon the property being taken over by a temporary receiver with a view to ultimate distribution, and that after such a taking over, liens cannot be obtained through legal proceedings and that this is so notwithstanding the fact that the suit may be discontinued; that creditors, however, will be permitted to make levies, so that in case of discontinuance their legal rights will be protected, and that if it appears that the partnership is solvent, or that the proceedings are not being taken in good faith, the court may permit judgment creditors to proceed with their legal remedies. I think this view is supported by the great
Ross v. Titsworth has not received the direct approval of the court of errors and appeals. It is mentioned in Brockhurst v. Cox, 71 N. J. Eq. 703; affirmed, 72 N. J. Eq. 950, on the opinion of this court, but the remarks made by Yice-Chancellor Garrison (at p. 709 of 71 N. J. Eq.) were not necessary to the determination of that case, and were more in the nature of a recital than anything else. My conclusion is, in view of the subsequent decisions and of the fact that a rule may be adopted which will secure equality amongst creditors and yet not result in the evil anticipated by the chancellor, that the determination in Ross v. Titsworth must be contraed to the facts in that case. It there appeared that the proceedings had been unduly delayed, no excuse was given for the delay, the result would have been the same had the present New York doctrine been considered as prevailing here. The chancellor said: “The bill prays no dissolution. It does not expressly allege insolvency, though it shows it.”
I do not think that the court should tolerate a scramble for priority after it has taken control of assets with a view to ultimate distribution, but before it can be said that the assets are irrevocably within its control, where the delay in getting such a determination is due to a necessary delay in the service of process and the bringing on of the case to trial. An argument which would so result may be made with almost equal force in the case of an insolvent corporation prior to adjudication; that that argument would not prevail in such a case, I think, is clearly indicated by Squire v. Princeton Lighting Co., 72 N. J. Eq. 883. If Mr. Justice Pitney had considered this the rule he would have undoubtedly plainly so stated; on the other hand, he intimates that if the order then under consideration, prior to adjudication, had amounted to a taking possession of the assets by the court, there would have been no longer opportunity for anyone to obtain advantage by diligence. After the award of an order to show cause and the appointment of a temporary equity receiver in a corporation case, before adjudication, there are many contingencies which may result in the turning back of the
Is the judgment creditor entitled to any priority by reason of his judgment, irrespective of his proceedings under it? If I am right in my answer to the first query, then the judgment
I will advise an order denying the petition of the judgment creditor, but charging upon the moneys in the hands of the receiver, the proceeds of the sale of the property upon which the judgment creditor made his levy, a charge to the amount of the judgment creditor’s debt, such charge to continue until the further order of the court; upon the appointment of a receiver in dissolution and the administration of the estate by this court, the charge will be discharged. I draw counsel’s attention to the fact that it may be that the order directing creditors to come in and the order barring creditors are of no effect because made prior to the decree of dissolution and that the procedure may have to be gone through-again after decr.ee of dissolution.
No costs to either party.
Settle order on two days’ notice.