Opinion
December, 1904.
Eugene Treadwell, for the appellant.
Gilbert D. Lamb, for the respondent.
John Greenough was appointed temporary receiver of the property of the defendant by an order entered February 28, 1902, in an action brought by the plaintiff for the sequestration of the property of the New York and Staten Island Electric Company. The receivership was subsequently made permanent. The original order directed the receiver to take possession of the property and to "hold and use the same controlling, managing and operating, by its superintendents, managers, servants or other agents or attorneys, the electric plant of the said defendant and all other property, real and personal and franchises of the said electric company with the appurtenances and conducting the business and operations thereof, and exercising the franchises appertaining thereto, * * * and to collect and receive all tolls, income, rents, issues and profits of the same and every part thereof. * * *
"That said receiver be and he hereby is directed to demand, collect and receive all tolls, income, rents, dues and charges that may be now due and unpaid or that may become due pending his receivership; and that the said receiver is hereby empowered to continue the business of the said New York and Staten Island Electric Company; to use and employ the said property of the said electric company in conducting its business of an electric light, heat and power company and the doing of each and every act and acts, thing and things, incidental to, or growing out of or connected with the operation of its plant and appurtenances.
"That the said receiver is hereby authorized and empowered to purchase all supplies, materials and equipment that may be necessary for the transaction of the business of the said electric company and the keeping in repair of the said property and premises and the carrying out of the provisions of this or any other order of the court.
"That the said receiver is hereby authorized to employ an agent or agents, superintendent or superintendents and assistants, clerks and employees necessary in his judgment and to pay the reasonable value of their services, and to make such disbursements and payments as may be necessary to exercise the powers conferred upon him and to conform to the provisions of this and any other order of the court made herein."
On the 29th day of March, 1902, an order was entered authorizing the receiver to issue certificates to an amount not exceeding $30,000, the money to be borrowed upon such certificates to be used in maintaining in repair and preserving the plant of the electric company, as well as in the payment of wages, etc., and it was provided that "said receipts for said loan shall in the first instance be paid as far as possible out of the income generally of said company (after deducting the operating expenses and the expenses of the receivership) as it may arise from time to time, particularly such income as may arise from its contract with the City of New York, for lighting in the Borough of Richmond."
It will thus be seen that the receiver was fully authorized and empowered to take over the plant and franchises of the defendant, and to operate the same for the benefit of the creditors, and that the receiver's certificates were to be paid out of the income generally after deducting the operating expenses and the expenses of the receivership. On the 30th day of June, 1902, Frederick Bryant, an employee of the receiver, was injured through the negligence of the receiver or those acting in his behalf, and his claim for damages has since been liquidated by a judgment against the receiver for $4,821.36.
On the 7th day of July, 1902, a judgment was entered appointing John Greenough permanent receiver, and directing him to sell the property, franchises, etc., of the defendant, and this judgment provided that the "question as to the distribution of said assets and money, and of the rights and interests of the respective parties claiming the same, or any part thereof, and other questions not herein disposed of, including the question of costs, be reserved for further direction."
The receiver filed his account as directed by the judgment mentioned, showing his disbursements, on the 10th day of May, 1904, and it appears from this account that subsequent to the 20th day of September, 1902, at which time notice of motion by Bryant to sue the receiver was served, the latter paid out, without notice to Bryant, large sums of money collected out of the earnings of the business for betterments and for the payment of receiver's certificates, and the receiver now refuses to pay the claims of Bryant, who has been permitted to intervene, on the ground that the funds collected by him have already been disbursed. The learned court at Special Term has directed the receiver to pay the amount of this claim, and from the order entered, appeal comes to this court.
We believe the order was properly made, and if the receiver has allowed the funds in his hands to pass beyond his control, he has done so contrary to the orders of the court, and in disregard of his duty, and he has only himself to blame for the hardship. When the court took into its possession the property of the defendant and undertook to continue the plant in operation for the benefit of judgment creditors, it did so subject to the same risks which would attach to the corporation if it continued to exercise its franchises, and among these risks was that of personal injuries to employees through the negligence of the agent or servants of the court. It could not continue the operation of the plant and deny to those injured through its negligence a remedy, so long as the property in the hands of the court was adequate to discharge the obligation, for it would be a gross injustice to hold that the rights of the injured employee could be made secondary to those of creditors in whose behalf the plant was being operated; that they could take some portion of his rights and apply them to the payment of their debts. While it is true that claims for injuries occurring before the receivership are not commonly allowed a preference over the claims of others, we know of no case which is controlling here which has asserted the doctrine that creditors or holders of receivers' certificates can be preferred over the claims of those who have suffered injury through negligence while the plant was in the control of the receiver for the benefit of creditors. On the contrary, the rule is established by authority that damages for injuries to persons or property during the receivership, caused by the torts of the receiver's agents and employees, are classed as operating expenses and are accorded the same priority of payment as belongs to other necessary expenses of the receivership. Such claims are paid out of the net income, if that is sufficient; but in the event of a deficiency they will be paid out of the corpus. Such claims, therefore, have priority over mortgage debts, or other debts existing when the action was brought in which the receiver was appointed. (24 Am. Eng. Ency. of Law [2d ed.], 31; Union Trust Co. v. Illinois Midland Co., 117 U.S. 434, 464; Kain v. Smith, 80 N.Y. 458, 470, and authorities there cited; Cowdrey v. Galveston, etc., R.R. Co., 93 U.S. 352, 354; Barton v. Barbour, 104 id. 126, 133. See, also, Texas Pacific Railway v. Johnson, 151 id. 81, 99; Texas Pacific Railway v. Bloom, 164 id. 636, 641.) In the Cowdrey Case ( supra) the court say (p. 354): "The allowance for goods lost in transportation, and for damages done to property whilst the road was in the hands of the receiver, was properly made. The earnings received were as much chargeable with such loss and damage as they were chargeable with the ordinary expenses of managing the road. The bondholders were only entitled to what remained after charges of this kind, as well as the expenses incurred in their behalf, were paid." The rule cannot be different merely because the defendant in this action is an electric lighting company instead of a railroad. The receiver's certificates were to be paid from the earnings generally of the plant after the payment of the operating expenses; and as Bryant's claim for damages for personal injuries received during the receivership constituted a part of the operating expenses, any payments made by the receiver to the holders of certificates, or to creditors, without making provision for the payment of the Bryant claim, was contrary to the letter and the spirit of the orders of the court, and he cannot complain if he is now called upon to pay this portion of the operating expenses. He has had sufficient money in his hands properly applicable to the payment of this claim, and Bryant ought not to be made to suffer loss because the receiver may have disregarded his duty. Upon the sale of the property there was a considerable sum realized, in addition to that which was received from the operation of the plant, so that the certificate holders could all be paid, as well as the claims for operating expenses, as that term is understood in cases of this character, and the judgment creditors were entitled only to that which remained when these obligations were paid. ( Cowdrey v. Galveston, etc., R.R. Co., supra.)
The order appealed from should be affirmed, with costs.
All concurred.
Order affirmed, with ten dollars costs and disbursements.