A claim was presented against the estate of the Peoria and St.
Louis Railway Company in the hands of a receiver, which the
receiver disputed. After reference to a master, and his report
stating the facts, an order was entered directing the receiver to
pay the claim. He appealed from this decision to the court of
appeals. The record on appeal contained the order of reference, the
findings of fact, the report of the master, and the exceptions of
the receiver. The court of appeals directed the appeal to be
dismissed.
Held, that the proper entry should have been an
affirmance of the decree, rather than a dismissal.
A receiver may defend, both in the court appointing him and by
appeal, the estate in his possession against all claims which are
antagonistic to the rights of both parties to the suit.
He may likewise defend the estate against all claims which are
antagonistic to the rights of both parties to the suit, subject to
the limitation that he may not in such defense question any order
or decree of the court distributing burdens or apportioning rights
between the parties to the suit, or any order or decree resting
upon the discretion of the court appointing him.
He cannot question any subsequent order or decree of the court
distributing the estate in his hands between the parties to the
suit.
He may appeal from an order or decree which affects his personal
rights, provided it is not an order resting in the discretion of
the court.
His right to appeal from an allowance of a claim against the
estate does not necessarily fail when the receivership is
terminated to the extent of surrendering the property in the
possession of the receiver.
The facts in this case are briefly these: on September 21, 1893,
the Mercantile Trust Company, of New York, filed its bill of
complaint in the Circuit Court of the United States for the
Southern District of Illinois against the Chicago, Peoria & St.
Louis Railway Company, praying foreclosure of a mortgage and the
appointment of a receiver. On the same day, an order was entered
appointing the present appellant receiver of that road. Among other
things, the order of appointment
Page 174 U. S. 183
directed the receiver to pay
"all claims for materials and supplies which have been incurred
in the operation and maintenance of said property during the six
months last past, and all ticket trackage traffic balances due from
said railroad."
The plaintiff, the Mercantile Trust Company, objected to this
part of the order, but, after argument, the objection was
overruled. On May 27, 1895, the Terminal Railroad Association of
St. Louis filed an intervening petition, claiming that it had
performed labor and furnished materials for the defendant railroad
company within the six months named in the order of appointment.
The receiver answered, denying the claim. The matter was referred
to a master, who found in favor of the petitioner, and on July 30,
1896, the following decree was entered:
"It is therefore ordered, adjudged, and decreed by the court
that the receiver herein pay to the intervener, the Terminal
Railroad Association of St. Louis, the said sum of eight thousand
one hundred and sixty-two dollars and eleven cents ($8, 162.11) out
of the income of said receivership, if any such income is in his
hands, and, in case he has not the funds in hand for this purpose,
it is ordered, adjudged, and decreed that the same be paid out of
the proceeds of the sale of the mortgaged premises in preference to
the mortgage debt, and until paid the same is hereby declared a
lien upon the said mortgaged estate superior to the lien of the
mortgage herein."
The receiver appealed from this decree to the court of appeals,
but on June 8, 1897, that court dismissed the appeal. 80 F. 969.
Thereafter a certiorari was issued, and under that writ the case
was brought to this Court.
MR. JUSTICE BREWER, after stating the facts in the foregoing
language, delivered the opinion of the Court.
Page 174 U. S. 184
Upon the record as it was filed in the court of appeals, and
independently of other considerations, its decision was manifestly
erroneous. A claim was presented against the estate in the hands of
the receiver, which he disputed. A part of his contention, as
appears from the exceptions, was specifically that the debt,
whatever its amount, was due from the Jacksonville Southeastern
Line, and not from the mortgagor, the Chicago, Peoria & St.
Louis Railway Company. After reference to a master, and his report
stating the facts, an order was entered directing the receiver to
pay the claim. The reference, the findings, the report of the
master, the exceptions of the receiver, were all set forth. So that
in the record, as it came to the court of appeals, there was a
denial on the part of the receiver of any liability of the estate
in his possession to the petitioner, and a decree adversely
thereto. That alleged liability he was the proper person to
contest, and to contest both in the court which had appointed him
receiver and on appeal in the appellate court. But the court of
appeals, in its opinion directing the dismissal, makes this
statement of facts:
"The contention of the receiver is thus stated in the brief of
his counsel:"
"The question thus presented to this court for determination is
one as to the displacement of vested contract liens by unsecured
creditors. There is no controversy as to the labor having been
performed or the materials furnished within the six months next
prior to the appointment of the receiver of the insolvent
corporation, nor as to the value of the same. The only controversy
is as to whether or not the appellee is entitled on its petition
and proof made thereunder to have the vested lien of the mortgagee
displaced to the extent of his claim."
"He insists that the provision in the decree appointing a
receiver providing for the payment of certain claims as
preferential created no vested right, and that within our ruling in
Mather Humane Stock Transportation Company v. Anderson, 76
F. 164, the decree in that regard was interlocutory, and is not
controlling of the subsequent action of the court, and that within
the doctrine declared in
Turner v. Indianapolis, Bloomington
& Western Railway Company,
Page 174 U. S. 185
8 Biss. 315;
Fosdick v. Schall, 99 U. S.
235;
Union Trust Company v. Souther,
107 U. S.
591;
Burnham v. Bowen, 111 U. S.
776;
Union Trust Company v. Illinois Midland Railway
Company, 117 U. S. 434;
Wood v.
Guarantee Trust & Safe Deposit Company, 128 U. S.
416;
Kneeland v. American Loan & Trust
Company, 138 U. S. 509;
Thomas v.
Western Car Company, 149 U. S. 111;
Farmers'
Loan & Trust Company v. Green Bay, W. & St. P. Railway
Company, 45 F. 664, before a claim can be deemed to be
preferential to the mortgage debt, there must be first established
a diversion of income from the payment of operating expenses to the
payment of interest, and that, failing diversion, there can be no
restoration. The broad ground is taken that a court of equity,
assuming at the request of a trustee the operation of a railway,
has not the right to provide for the payment out of the income or
the corpus of the road, of operating expenses incurred within a
limited time prior to the suit, unless there has been diversion of
income, and then only to the extent of such diversion."
And again, page 307:
"The record here is not complete. There has been brought to this
court only so much of the record as is thought to bear upon the
particular question which the receiver desired to present. It was,
however, conceded at the argument that, prior to the decree
appealed from the railway had been sold under decree of sale, and
had passed out of the possession of the receiver, and into the
possession of the purchaser, and that the receiver had not in hand
any moneys with which to pay the debt adjudged."
Even with the change made in the condition of the case by these
admissions, we are of opinion that the proper entry should have
been an affirmance of the decree, rather than a dismissal. A
dismissal implies that the receiver had no right to appeal, whereas
we are of opinion that he was the proper party to take such appeal,
was entitled to a hearing in the court of appeals, and also bound
the estate in his possession as receiver by any admission of facts.
Such admission in this case went so far as to relieve the appellate
court from any
Page 174 U. S. 186
necessity of inquiry as to the merits of the claim; but it was
made after the case had been taken to the appellate court, and did
not affect the rightfulness of the appeal.
It becomes important to consider what are the rights and duties
of a receiver in respect to claims made against the estate in his
possession. It is often said that he is merely the hand of the
court which has appointed him, and for certain purposes that is not
an inapt expression. He is charged with the duty of carrying into
execution the orders of that court, but he is also a custodian of
property, and has, by virtue of such custody, certain obligations
to the parties owning or interested therein.
First. A receiver may defend, both in the court appointing him
and by appeal, the estate in his possession against all claims
which are antagonistic to the rights of both parties to the suit.
For instance, he may thus contest a claim for taxes, because, if
valid, they are superior to the rights of both parties; in a case
like the present, superior to the rights of mortgagor and
mortgagee.
Second. He may likewise defend the estate against all claims
which are antagonistic to the rights of either party to the suit,
subject to the limitation that he may not, in such defense,
question any order or decree of the court distributing burdens or
apportioning rights between the parties to the suit, or any order
or decree resting upon the discretion of the court appointing him.
As this is a matter specially pertinent to the present controversy,
it may be well to consider briefly the scope of this proposition. A
suit is brought by a mortgagee to foreclose his mortgage, and a
receiver is appointed to take possession of the mortgaged property.
The right to have a decree of foreclosure and sale is an absolute
right on the part of the mortgagee, flowing from a breach of the
conditions in the mortgage. But the appointment of a receiver is a
matter resting largely in the discretion of the court -- not of
course, an arbitrary, but a legal, discretion -- and depending not
simply upon the breach of condition in the mortgage, but also upon
the question of relative injury and benefit to the parties and the
public by the taking of the property out of the
Page 174 U. S. 187
possession of the mortgagor, and placing it in the hands of a
receiver. In appointing a receiver the court has a right, within
certain recognized limits, to prescribe the terms and conditions of
the appointment. A receivership is not essential to a foreclosure
and sale, and the court is charged, when an application therefor is
made, with the duty of inquiring whether, under all the
circumstances, considering the interests of the parties and the
public, it is wise and proper to take possession of the property.
It may, in its judgment, be necessary to appoint a receiver without
prescribing any terms. It may be that the interests of the parties
or the public require that the appointment shall be made subject to
certain conditions. Now these conditions, whatever they may be, are
beyond the challenge of the receiver. He may not say, directly or
indirectly, "I accept the appointment; I take charge of the
property; but I repudiate the terms and conditions imposed on the
receivership." Whether, under the present state of the statutory
law in reference to appeals, any review can be had of the terms of
such an order, it is clear that a receiver, whose rights spring
from the appointment, cannot be heard to question them.
Third. Neither can he question any subsequent order or decree of
the court distributing the estate in his hands between the parties
to the suit. It is nothing to him whether all of the property is
given to the mortgagee or all returned to he mortgagor. He is to
stand indifferent between the parties, and may not be heard, either
in the court which appointed him or in the appellate court, as to
the rightfulness of any order which is a mere order of distribution
between the parties. In this connection, it must be noticed that an
intervener, although for certain purposes recognized as a party to
the litigation, is not such a party as comes within the scope of
the limitation just announced. He is one who comes into the
litigation asserting a right antagonistic or superior to that of
one or both of the parties thereto, and a receiver, who represents,
so far as the property is concerned, the interests of the parties,
may rightfully challenge his claim, provided that in such challenge
he does not question any orders
Page 174 U. S. 188
of the court heretofore referred to. Let us take some
illustrations: a suit is brought to foreclose a mortgage, a
receiver is appointed, and the mortgaged property taken possession
of. A party intervenes, asserting that he has a claim against the
mortgagor and the property, but conceding that it is subordinate to
the claim of the plaintiff mortgagee. With that concession, the
mortgagee stands perfectly indifferent to the question whether the
claim be allowed or not. Still it cannot be doubted that in such a
case the receiver, holding the property against which a claim is
made, can defend, and defend not only in the court appointing him,
but also by appeal. In that defense, he not only represents, it may
be said, the mortgagor's interests, but also protects the property
in his possession.
Take another case: an intervener presents a claim against the
mortgaged property, which the mortgagor admits. There is therefore
no defense to be interposed in behalf of the defendant mortgagor,
no protection to be sought for the property, and the only question
is whether such claim, admitted by the mortgagor, is to be
satisfied out of the mortgaged property prior to the claim of the
mortgagee. The latter is the only party who has an antagonistic
relation to the intervener. Now the receiver, who represents both
mortgagee and mortgagor, both plaintiff and defendant, so far as
the custody of the property is concerned, is entitled to defend
against this claim of priority made by the intervener, and may
defend both in the court appointing him and also by appeal. It is
true, in such defense he may not be heard to say that the terms and
conditions imposed in the order of his appointment were improper,
but he may defend on the proposition that the claim presented does
not come within those terms and conditions. Whatever right, if any,
the mortgagee plaintiff may have to question, in resisting such
claim, the validity of the terms of the appointment, the receiver
cannot do so, and the only defense he can make is that the claimed
priority has no foundation in the terms of the order; or, if it be
a matter entirely outside of those terms, that it has no foundation
in any recognized legal or equitable principle.
Page 174 U. S. 189
In the case at bar, one defense, as shown by the exceptions
taken to the report of the master, was that the claim of the
intervener was not against the estate, but against some third
party. That defense the receiver had a right to make. We do not
mean that he alone can act. We do not stop to inquire what rights
either party to the suit may have in this respect. All we now
decide is that the receiver is a proper party to make the defense.
And when he alone makes it, when he carries on the litigation in
his own name as receiver, then, as the representative and custodian
of the estate, he can, subject to the supervision of the court,
bind it by admissions made in good faith in the progress of the
litigation. And as, in the appellate court, after the appeal had
been perfected, he, being the only party to the appeal, admitted
that it was a just claim against the mortgagor, and within the
priority over the mortgage prescribed in the order of appointment,
his admission showed that the allowance was right and that the
decree ought to be affirmed. But still, until that admission was
made, there was a pending dispute, and he was a proper person to
appeal from the allowance.
Fourth. He may appeal from an order or decree which affects his
personal rights, provided it is not an order resting in the
discretion of the court. Thus, he may not appeal from an order
discharging or removing him, or one directing him in the
administration of the estate -- as, for instance, to issue
receiver's certificates, to make improvements, or matters of that
kind, all of which depend on the sound discretion of the trial
court. He may appeal from an order disallowing him commissions or
fees, because that affects him personally, is not a matter purely
of discretion, and does not delay or interfere with the orderly
administration of the estate.
Fifth. His right to appeal from an allowance of a claim against
the estate does not necessarily fail when the receivership is
terminated to the extent of surrendering the property in the
possession of the receiver. It is a common practice in courts of
equity, anxious as they are to be relieved of the care of property,
to turn it over to the parties held entitled thereto, even before
the final settlement of all claims against it, and at
Page 174 U. S. 190
the same time to leave to the receiver the further defense of
such claims, the party receiving the property giving security to
abide by any decrees which may finally be entered against the
estate. An admission that the railway property had been turned over
to the purchaser is not, therefore, of itself conclusive against
the right of the receiver to appeal. And the fact that the trial
court allowed the appeal must, in the appellate court, be taken, in
the absence of other evidence, as sufficient authentication that
such reservation of authority had been made in the order directing
the surrender of the property.
It seems unnecessary to say more. We have indicated, so far as
it can safely be done by general propositions, the powers of a
receiver in respect to appellate proceedings. We are of opinion
that the decree of the court of appeals should have been one of
affirmance, and to that extent it is modified. Under the admissions
of the receiver, the cost of the appellate proceedings should be
paid by him, and this notwithstanding, in our judgment, the formal
order of the court of appeals dismissing the case was
incorrect.
The judgment of the circuit court is affirmed at the cost of
the appellant.