Chapman v. Schiller, Judge

This case is heard on an original application for a writ of prohibition to prevent a judge of the Third District Court from holding a receiver's sale according to notice given, at which sale the property of the Bamberger Electric Railroad Company, now in the hands of receivers, will be sold free of all liens and without right of redemption. The railroad has been in receivership since about February 1, 1933, and on February 5, 1938, the receivers filed their report and petitioned the district court to sell the property as a unit, free of liens and without right of redemption. The principal liens are two deeds of trust issued in 1909 and 1927 to secure the payment of bonds. The first deed of trust ran to Harris Trust Savings Bank of Chicago, Illinois, as trustee, and secured an authorized bond issue of $2,000,000 of 25 year 5% first mortgage bonds, due February 1, 1934. Of these bonds $1,500,000 were sold and are now outstanding, in default as to principal and interest. The second deed of trust, to Tracy Loan Trust Company of Salt Lake City, Utah, covered all property of the railroad and secured $150,000 of second mortgage 6% bonds, which are in default as to interest only. Plaintiff is the owner of $3,000 of the first mortgage bonds and $2,000 of the 1927 issue.

Upon the filing of the receiver's petition, Judge Schiller entered an order directing that notice of the filing of the petition be served upon parties to the proceeding, that notice be mailed to those creditors whose claims were listed and by publishing notice once a week for six consecutive weeks in the Salt Lake Tribune. Before hearing on the petition the trustees under the deeds of trust securing bonds filed petitions joining in the request that the property be sold as prayed for by the receivers, and that the liens of the bonds be transferred to the proceeds of sale. The plaintiff and other bondholders received no personal notice of the filing of the petition.

On March 23, 1938, the day set for the hearing, Judge Schiller heard testimony in behalf of the petitioners and made findings of fact in which he found, inter alia, that an existing emergency required a speedy sale of the property and assets of the railroad company, under the equity powers of the court, and decreed a sale of all the real and personal property "as a single unit free and clear from all liens and encumbrances of every kind whatsoever" and transferring the existing liens on the property to the proceeds of the sale in their same order of priority.

To prevent the district court from carrying out this sale, the plaintiff obtained from this court an alternative writ of prohibition, alleging that the district court was without jurisdiction to order a sale free of liens and 1 encumbrances without right of redemption, and to deny plaintiff and other bondholders their right to foreclose. Matters within the discretion of the district court are not here reviewable.

Undoubtedly there have been numerous instances where receiverships have been appointed, not for the real purpose designed by the statute, i.e., to preserve and operate or liquidate the property for the benefit of the creditors, but to protect the debtor from the creditor. Courts have unwittingly and at times, it appears, almost wittingly been a party to such purpose. Also after a period of operating receiverships, receivers' sales have been ordered which have resulted in the denial of rights to mortgagees or lien bondholders. But a rule which would prevent the courts in receivership proceedings from making any order depriving bondholders of their right of redemption is too inflexible. It is too much like burning down the house to rid it of rats. In many cases it is to the advantage of the boldholders that the sale be ordered without right of redemption. This may or may not be true in this case. But we are not here testing out the question of whether the court abused its discretion in ordering the sale as it did, but only the question of whether it exceeded its power.

I. The main question is, does the court, in receivership cases of public utility properties, have the power to order a receivership sale of those properties free and clear of all right of redemption without the consent of all bondholders? This presents squarely the question of whether the court's power in reference to receiverships contains the power 2 to sell on terms fixed by the court, independently of the foreclosure statutes. We think the court has such power. The reason is quite fundamental and lies in the nature of receivership proceedings as distinguished from the statutory foreclosure proceedings. The latter provides a method for the lien holder to satisfy his debt from the pledge. It does not supersede the power of the court to deal with property properly in its custody for operation or liquidation through its own instrumentality, a receiver. This power is a judicial power. It arises as a fit mode of exercising its more ultimate power of preserving and administering a debtor's property for the benefit of all parties concerned, but primarily for the creditors. It is therefore spoken of as judicial rather than statutory. Although statutes do prescribe the conditions and limits of its exercise, we are not here concerned with the power of the legislature to prescribe conditions or limitations on the power by statute.

A receiver's sale is said to be a judicial sale as contradistinguished from a sheriff's sale on execution or foreclosure. Cressler v. Tri-State Loan Trust Co.,182 Ind. 572, 107 N.E. 68; 35 C.J. 810. And such judicial sales, unless defined or regulated by statute, rest upon and 3-5 are governed by the order of the court decreeing the sale. In a judicial sale the court makes its own law of the sale, subject only to the use of sound discretion in the exercise of the power. High on Receivers, 4th Ed., Sec. 191; Clark on Receivers, Sec. 591. The statutory provisions governing mortgage foreclosures or sales on execution do not apply to a sale by a receiver. American Mine Equipment Co. v. Ill. CoalCorporation, 7 Cir., 31 F.2d 507; Yakima Finance Corp. v.Thompson, 171 Wash. 309, 17 P.2d 908; Bailey Collins v.Ryan Cotton Oil Mill Co., 119 Okla. 57, 248 P. 321; HomeMortgage Co. v. Sitka Co., 148 Or. 502, 36 P.2d 1038; Clark on Receivers, Sec. 592; High on Receivers, Sec. 199c; 53 C.J. 210, Sec. 330.

We conclude, therefore, that receivers' sales made under proper order of court with jurisdiction of the interested parties (to be later considered) is valid by 6 virtue of a power outside and independent of the power which is in the courts by reason of the foreclosure statutes.

II. Can the property be sold at a receiver's sale by order of the court, free from right of redemption? It follows as a corollary from what has been said that the court in its sound discretion may do so. Right of redemption is a privilege conferred by statute. It does not exist 7-9 independently of statute. 16 R.C.L. 141. The statutory right of redemption is conferred in case of execution sales. It does not exist by statute in the case of receivers' sales. Consequently, the right of redemption, together with a named period for redemption, may be given or withheld by the decree of the court ordering a receiver's sale. Home Mortgage Co. v.Sitka Co., supra. Generally in selling a railroad we would expect the right to be withheld because the sale with the privilege of redemption would keep a purchaser in such uncertain status during the period that the property might not bring as much as it would if the privilege were contained in the decree of sale. The court's discretion in conferring or withholding the privilege might, in a proper action, be attacked but not in an action such as this which is to test only its power.

III. Can the property be sold at receiver's sale free of liens? Ordinarily only the debtor's equity is sold at receiver's sale. The property is sold subject to liens. J.W. Dann Mfg. Co. v. Parkhurst, 125 Ind. 317, 25 N.E. 347; Whitlock v.Auburn Lumber Co., 152 N.C. 192, 67 S.E. 504; Cashin v. 10, 11Murphy, 132 Miss. 834, 96 So. 747; High on Receivers, Sec. 191; Clark on Receivers, Sec. 639; 16 R.C.L. 138; 53 C.J. 209, Sec. 328. By weight of authority the property may be sold free of liens where the lien holders are parties to the proceedings. See State ex rel. Dooley Co. v. Superior Ct.,128 Wash. 253, 222 P. 492, 35 A.L.R. 255, Van Huffel v. Harkelrode,284 U.S. 225, 52 S. Ct. 115, 76 L. Ed. 256, 78 A.L.R. 458, where cases pro and con are cited. The following authorities uphold the right of the court to sell free of liens of parties to the proceedings. Black v. Manhattan Trust Co., D.C. Or., 213 F. 692; Spreckels v.Spreckels Sugar Corp., 2 Cir., 79 F.2d 332; People'sPittsburgh Trust Co. v. Hirsch, 3 Cir., 65 F.2d 972; Baird v. Moshannon Coal Min. Co., 318 Pa. 63, 178 A. 19; HomeMortgage Co. v. Sitka Co., supra; Buss Machine Works v.Watsontown Door Sash Co., D.C. Pa., 2 F. Supp. 757; 34 Cyc. 332; 53 C.J. 209.

Some courts have been guided by a rule which, on its face, has much to recommend it and which would indicate that the court here might have acted improvidently. That is, where there is no equity in the person in receivership, such that on a sale nothing would be obtained for the general creditors, a 12 sale free of liens will not ordinarily be ordered. This is based on the now established rule in bankruptcy cases as expressed in Louisville Joint Stock Land Bank v. Radford,295 U.S. 555, 584, 55 S. Ct. 854, 860, 79 L. Ed. 1593, 97 A.L.R. 1106:

"By the settled practice, a sale free of liens will not be ordered by the bankruptcy court if it appears that the amount of the encumbrance exceeds the value of the property." (With numerous authorities.)

This rule has been applied to sales by receivers in the following well considered cases: Spreckels v. Spreckels SugarCorp., supra; Home Mortgage Co. v. Sitka Co., supra, at page 539, 36 P.2d 1038; Emerick v. Jackson Consolidated Co.,37 N.M. 600, 26 P.2d 1077 (governed by statute); Buss MachineWorks v. Watsontown Door Sash Co., supra. But we have no occasion in this case to determine whether such rule should be adopted in this jurisdiction. The rule wherever adopted has been held to be discretionary. Consequently, if we held it to exist in this state, the ruling of the court contrary thereto would be at most error and subject to review by appeal from the appointment of the receiver or from the sale but would not be in excess of the court's jurisdiction and correctable by prohibition unless it came under the exceptions of Atwood v. Cox, 88 Utah 437,55 P.2d 377. There it was said that in certain cases, in order to arrest a court from committing gross error, the consequence of which might be irremediable by appeal, we might, where those consequences would be very damaging, issue a writ arresting action until we had opportunity to review the court's order or impending order. Under the case of AttorneyGeneral v. Pomeroy, 93 Utah 426, 73 P.2d 1277, 114 A.L.R. 726, there is nothing which would prevent us from doing this. This might be such a case because if sold free from liens an appeal would do the bondholders no good unless the sale were halted pending the appeal, which might itself be harmful. But we are relieved of deciding whether the court acted with sound discretion in this case because prohibition was requested, not on the ground that a case was presented within the exception named in Atwood v. Cox, supra, but on the ground that the court acted in excess of jurisdiction.

Considering the instant case as an ordinary receivership the power of the court to order such a sale as that herein is amply supported by the authority of well-reasoned cases from many jurisdictions. With greater force it applies in 13 case of a public utility — in this case a railroad — over which there is wider control than over strictly private corporations. In the case of Oldroyd v. McCrea, 65 Utah 142,235 P. 580, 40 A.L.R. 230, it was said [page 584]:

"The rule is well settled that a court of equity in cases of receivers of railroads, upon a proper showing of necessity and upon notice and hearing, may authorize a receiver to issue and sell certificates and make them first liens and displace prior existing liens, with or without the consent of prior lienholders; but it is not often where such power is exercised in other cases of quasi public corporations, and rare where it is exercised in case of a mere private corporation."

See, also, Rose's Notes on the United States Reports onHammock v. Loan Trust Co., 105 U.S. 77, 26 L. Ed. 1111, and the note to Clearwater County State Bank v. Bagley-OgemaTelephone Co., 116 Minn. 4, 133 N.W. 91, 36 L.R.A., N.S., 1132 Ann. Cas. 1913 A, 624-627. We conclude, therefore, that a court has power to sell at receiver's sale free from liens. But as has been said above, it is an imperative prerequisite to a sale free of liens that the parties having such rights be parties to the proceedings.

IV. Were the party lien holders in this case parties to the proceedings? That depends on whether proper notice was given therein. In the absence of statutory requirements in cases where a court in administering property as in probate or receivership for the purpose of distribution of the 14, 15 same or for the purpose of liquidation for creditors and not as in foreclosure proceedings (where jurisdiction is assumed for the purpose of effecting a particular creditor's resource from particular property) the court may prescribe such notice as under the circumstances seems most likely to give notice to all parties interested. This arises again from the necessities of the administration procedure. If the property is to be sold, and a fund created in its place, there can be effective action in regard to the property and the creditors be taken care of from the fund. It is, unlike a foreclosure proceeding, not necessary to have a judgment before sale can be decreed.

In this case the court required that service be made by serving notice upon the parties, mailing notice to non-resident creditors who had listed their claims and by publishing notice in the Salt Lake Tribune once a week for six consecutive weeks prior to the sale. This is reasonable notice for 16, 17 service by publication as provided in Secs. 13-0-7 to 13-0-10, 52-2-4, 102-9-1, and 102-14-1 and 2, R.S.U. 1933. In the following cases notice of sale by advertisement and publication was held adequate. Walter M. Ballard Co. v. Peyser,67 App. D.C. 169, 90 F.2d 414, 417, 418; Nisbet v. Great NorthernClay Co., 41 Wash. 107, 83 P. 15; Farmers' Hardware ImplementCo. v. Thacker, 54 Okla. 425, 153 P. 1144; Bailey Collins v. Ryan Cotton Oil Mill Co., supra; High on Receivers, Sec. 191; 53 C.J. 207, Sec. 322. Thus in this case all the bondholders were properly served with notice and made parties to the proceedings. The trustee was in court and joined in the request for a sale without right of redemption and free from liens. Because we think the bondholders themselves received proper and adequate notice, we deem it unnecessary to decide whether the trustee represented the bondholders in the action.

V. Did the court proceed without jurisdiction as to the bondholders? We have under IV considered what it required to make the bondholders parties to the proceedings for the purpose of selling the property free from liens. The same notice that makes them parties to the proceeding for the purpose of ordering a sale free from their liens also suffices for making them parties to the proceeding for all purposes of administration of the property, and especially for the purpose of ordering the sale.

It results from what has been said above that the court did not proceed without, or in excess of, its authority. Permanent writ of prohibition is denied. Temporary writ withdrawn. Costs awarded to respondents.

FOLLAND, C.J., and HANSON, J., concur.