Opinion
07-15-1930
HARRISON IMPROVEMENT CO. v. GUARDIAN TRUST CO. OF NEW JERSEY et al.
Aaron Marder, of Newark (Ralph E. Lum, of Newark, of counsel), for complainant. Stein, McGlynn & Hannoch, of Newark, for defendants.
Syllabus by the Court.
Receivers' administration expenses are entitled to priority of payment. Cost of completing a building, under court directions, is an administration expense, and entitled to payment prior to an undisclosed equitable lien upon the assets.
Syllabus by the Court.
The holder of an equitable lien on assets of an insolvent corporation, who withholds notice until after the receiver has appropriated the assets as security for the payment of debts incurred by the receiver, is estopped from asserting superiority.
Syllabus by the Court.
The holder of an equitable lien on assets of an insolvent corporation, who withholds notice until the receiver has appropriated the assets as security for the payment of debts incurred by the insolvent company, is not estopped from asserting it as against the equities of creditors; the equitable lien being prior in point of time, and the creditors not being bona fides for present valuable consideration.
Suit by the Harrison Improvement Company against the Guardian Trust Company of New Jersey and others.
Decree in accordance with opinion.
Aaron Marder, of Newark (Ralph E. Lum, of Newark, of counsel), for complainant.
Stein, McGlynn & Hannoch, of Newark, for defendants.
BACKES, Vice Chancellor.
Criterion Construction Company and 67 South Munn Avenue, Inc., were controlled by Lunsky Bros. On September 7, 1927, the Criterion Construction Company entered into a formal contract with 67 South Munn Avenue, Inc., to erect for the latter an apartment house on a tract of land known as 67 South Munn avenue, East Orange. The estimated cost was $1,850,000. It was to be built for the actual cost of labor and material anda fee of $100,000. The undertaking was to be financed by $1,017,500 proceeds of a first mortgage to be effected on the apartment house and by $832,500 in five-year promissory notes secured by a second mortgage. The first mortgage, afterward executed, was for $1,250,000; the second for $865,000. The second mortgage was made to the Guardian Trust Company, as trustee, and the notes were delivered to the trustee to be paid to the builder from time to time as the work progressed. On June 27, 1928, this court appointed a receiver in insolvency for the Criterion Construction Company after it had completed a substantial portion of the building, and the receiver was ordered to finish it. He arranged and financed the completion, approved by the court, by using the unpaid balance of the first mortgage, $309,000; raising $75,000 on receiver's certificate secured by a first participating interest in the second mortgage and the balance of the costs by like first participating interests. Creditors who had furnished labor or material on the building before the receiver was appointed were secured by second participating interest in the mortgage; and the surplus, if any, in the mortgage is held for general creditors. The receiver finished the building in October following his appointment and adjusted with 67 South Munn Avenue, Inc., the amount due him on the second mortgage at $660,000, and for that sum notes were delivered to him by the trustee. After the receiver had finished, the Harrison Improvement Company, by written notice, January 2, 1929, laid claim to a $23,500 superior interest in the second mortgage by virtue of an assignment from the Criterion Construction Company. Of this the receiver had previously no intimation. The complainant purposely withheld notice, meanwhile knowing that the receiver was finishing the building and his plan of payment.
The bill is filed to establish a first lien on the second mortgage. The complainant has a valid but not a preferential lien. It arose in this manner; The Berwyn Estates, a corporation, held a $40,000 fourth mortgage on 67 South Munn avenue, which, with the prior three, had to be paid off to clear the title for the new $1,250,000 mortgage. The Berwyn Estates agreed with Lunsky Bros. that $40,000 set aside by the new mortgagee for payment of its mortgage be paid to the Criterion Construction Company, and canceled its mortgage, taking in lieu an assignment pro tanto of the new second mortgage. The Criterion Construction Company also executed a collateral mortgage for $20,000 on other property, later rendered worthless by foreclosure of an earlier mortgage. The assignment was executed to the complainant, a subsidiary of the Berwyn Estates, for convenience.
The receiver, of course, took corporate assets subject to all equities, and strictly, as receiver, stands in the shoes of the insolvent company. Cogan v. Conover Mfg. Co., 69 N. J. Eq. 809, 64 A. 973, 115 Am. St. Rep. 629. But as an administrative officer of the court he stands on an entirely different footing. His obligations must be paid first, and the assignment of the complainant must be subordinated to the first participating interests, primarily because the debts for which they stand as security were incurred in administering the estate under the court's direction; they are in fact administration expenses, and as such entitled to priority (another question might have arisen had the complainant given notice to the trustee of its assignment, Jenkinson v. New York Finance Co., 79 N. J. Eq. 247, 82 A. 36); and for the further reason that the complainant is estopped from setting up superiority. Central R. R. Co. v. MacCartney, 68 N. J. Law, 165. 52 A. 575. It was silent when it should have spoken. Material and labor were furnished to the receiver by the first participants to finish the building on the faith of the mortgage and in the belief that their interests were paramount while the complainant mutely stood by, obviously to profit at their expense.
The complainant loses, however, only to the first participants. It ranks before the second participants in interest in the mortgage because its equity is prior in point of time, and the second participants are not assignees in good faith for a present valuable consideration. The security was for a past debt. Jenkinson v. New York Finance Co, supra.
After the complainant gave notice to the receiver of its lien, the receiver applied to the court and was granted leave to raise an additional $56,000 upon receiver's certificate, to be a lien on the second mortgage prior to all other liens. The amount was necessary to pay unforeseen expenses—administration expenses. The complainant was a party and appealed. Lunsky v. Criterion Const. Co. (1930) 151 A. 490, Ct. of E. & A. This receiver's certificate will be a prior lien to all others in the mortgage.
The receiver complains that, if the complainant's lien is sustained to the extent indicated, he will be short of security for the second preferred creditors now protected by the mortgage, he having agreed with the mortgagor upon the sum due him on the mortgage. The mortgage is sufficient in amount to cover the complainant's lien, and it may be included in the mortgage. Unless 67 South Munn Avenue, Inc., consent, the receiver may by counterclaim impress the additional lien.
Counsel may submit a form of decree.