THE ABUSES OF RECEIVERSHIPS

THE ABUSES OF RECEIVERSHIPS.

A receivership may properly be defined as one of the remedial

agencies of a court of equity to preserve a fund or property from
spoliation, waste or removal beyond the jurisdiction of the court
pending litigation, so that it may, by final decree, be appropriated
according to the rights of the parties. Unless authorized by
statute, it is solely the creature of courts of equity, frequently
denominated "courts of conscience," for the reason that they
are not bound by the strict rules of the common law, but will
grant relief when the common law remedies are inadequate, and
an appeal to the conscience of the chancellor alone will enable
the parties to obtain justice. Being a creature of equity, the
maxims governing courts of equity naturally apply, especially
that which requires that "he who seeks equity must do equity."
The appointment of a receiver and the granting of a temporary
injunction, like the granting of specific performance of contracts,
is not a matter of absolute right, but is within the sound dis-
cretion of the court, guided by the established principles, rules
and practices in equity. One of the well established rules is that
courts of equity will not grant any interlocutory relief if the
injury caused the defendants by reason thereof will prove very
great, while the benefits to the party applying therefor will be
but small compared with the injury inflicted upon the defendant.
Still, in spite of these well settled equitable principles, it is not
unusual for appointments of receivers to be made upon the most
flimsy allegations, and sometimes even without notice to the
parties directly affected thereby. For all practical purposes the
appointment of a receiver of a corporation, or firm engaged in
manufacturing, transportation or other commercial business,
means practically absolute destruction of its business. Not only
is its credit destroyed, but its organization as a going concern,
its trade and its good will is in most instances made valueless. If
such is the effect of an appointment of a receiver, or if such is
likely to be its effect, a chancellor would only be justified in
making it if the evidence is of such a nature as to be practically
conclusive that great loss is likely to be sustained by the peti-
tioner unless an appointment is made, and that there are no other
means by which his rights can be protected. That the defendants
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should be given an opportunity to be heard in a matter which

may prove so destructive all will admit as a matter of course.
In many instances the defendants may be able to execute bonds
with sufficient sureties to perform whatever decree may, upon
final hearing, be rendered against them, and in such cases there
is no reason for the appointment of a receiver, as the interests
of the complainant can thus be fully safeguarded without pur-
suing a course which is likely to result in doing irreparable mis-
chief to the defendants by practically destroying their business.
The recklessness with which receivers are sometimes ap-
pointed by courts has caused such a widespread feeling of un-
easiness among large corporations and commercial houses that
the mere threat to apply for a receiver, especially when the appli-
cation is to be made to a court whose judges are known to grant
them easily, is frequently sufficient to cause the parties threatened,
even if there be no substantial cause for such an appointment, to
submit to any terms demanded rather than take the chances of
having business destroyed by the appointment of a receiver
In fact, in some of the large financial centers of the country, it
has become an established occupation for unscrupulous parties
to buy a few shares of stock in a corporation for no other pur-
pose than that of blackmailing by asking or threatening to ask
for temporary injunctions or the appointment of a receiver.
This is particularly true when large transactions are about to be
entered into or some mismanagement is discovered, as was the
case when the results of the life insurance investigations were
published a few years ago, although at no time did it appear that
there was any danger of insolvency of any of these companies
or threatened loss to its policy holders.
Another great abuse in this matter is when the proceedings
are solely for the benefit of the defendant. By this I do not
mean where it is sought in good faith to reorganize a large cor-
poration or prevent, during a financial stringency, the destruction
of a valuable business by seizure and sale on execution or attach-
ment, which could be easily satisfied by the grant of a short
delay until the crisis has passed. But in many instances such
proceedings are instituted solely for the purpose of repudiating
unsecured claims or depriving minority stockholders, and at
times all stockholders, of their interests, for the benefit of a few.
A resort to receiverships has become quite common, especially
when the holders of a large amount of the stock of the cor-
 THE ABUSES OF RECEIVERSHIPS

poration are also the holders of the secured indebtedness. In

such cases a reorganization is effected upon terms most favorable
to these large holders by making heavy assessments on the stock
or even bonds, and excluding all who are unwilling to submit to
these terms, from participation in the reorganization. This is
made possible by reason of the fact that those usually engaged
in the reorganization are the owners of most of the secured in-
debtedness, and for this reason are able to purchase the property
at the foreclosure sale at their own price, paying therefor prin-
cipally with the securities owned by them'and leaving for distri-
bution among the outside security holders but a small percentage
and for the stockholders nothing. After the purchase by a com-
mittee acting for these bondholders, it is no unusual thing for the
property to be conveyed to a new corporation for bonds and stock
representing from ten to twenty times the purchase price paid at
the foreclosure sale. The reorganizers, calling themselves "the
committee of reorganization," are usually allowed for their
alleged services sufficient sums to protect them from loss, and
sometimes even to leave them a considerable margin of profit.
But the abuses do not end with the appointment of the re-
ceiver. Usually that is only the beginning. In the selection 6f
receivers it would naturally be supposed that courts would be
guided solely by the qualifications of the receiver appointed to
manage the business entrusted to him when the lack of proper
management by the officers of the corporation has, perhaps, been
the cause of the failure and the necessity for the appointment
of a receiver. In any event, one would naturally suppose that
when it becomes necessary for a court to take charge of valuable
property of an insolvent concern that the person selected as such
manager or receiver would be a person peculiarly qualified for
that position and willing to devote his entire time, ability and
energy to the discharge of the duties of the office, and for which
he expects to be and always is amply paid. But how often is
that done? Frequently, the receiver appointed has no knowledge
of the business entrusted to him, and the first thing he does,
assuming that he is one who desires to do the best thing for all
parties, is to employ a competent manager at a high salary to dis-
charge the duties which he was appointed to perform. In some
instances the man employed by him as manager will perhaps
have no other recommendation than that he is a friend or relative
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of the receiver or of the party upon whose recommendation the

receiver was appointed.
Usually the receiver is a man who stands high in the com-
munity, and who has large interests of his own to conserve. He
does not want to neglect them, so his duties as receiver will be
entrusted to clerks and employes whose salaries are charged as
expenses of the receivership and paid out of the property which
was placed in the hands of the court for the purpose of being
conserved, while he continues to give, if not all, most of his time
to the conduct of his own affairs in the same manner as he did
before his appointment as receiver. Next he feels that he must
have the advice of counsel in every step he takes. In the manage-
ment of his own business he manages to get along very well
without such assistance, but as it will relieve him of considerable
work and the expense is borne by the estate, he feels that he can
afford the luxury. For these services allowances are usually
made to the receiver, and also to his counsel, so large as to be
entirely out of proportion to the value of the actual services
rendered or what would be allowed if he in fact performed all
the services of general manager of that corporation under em-
ployment of the corporation itself. The result is that the ex-
penses of winding up the business of a receivership proceedings
are from five to ten times as great as sound business management
justifies.
To be appointed as receiver of a large concern is considered in
the vernacular of the politician, "the richest plum on the tree."
While there are some few instances in which appellate tribunals
have corrected these abuses, notably in the New York Bank cases
in 19o8, when they reduced the allowances made by the trial
judges very materially, these cases are rare, as the appellate
courts feel that the trial judges are more familiar with the ser-
vices rendered, hence better qualified to determine the compensa-
tion. It is true courts are not solely to blame for these condi-
tions, for but too often they follow blindly precedents made by
other courts. Many of the judges possessing but little practical
business experience, fail to realize the great wrong perpetrated
with their sanction under the forms of law and in the name of
justice.
The remedy lies primarily with the courts. They can refuse
to appoint receivers when it is not absolutely necessary for the
protection of the parties or when they can be protected without
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resort to this expensive remedy; they can exercise the same care
in the selection of receivers that they would exercise in the
selection of an executor to carry out the provisions of their will;
they can reserve to themselves the right to determine when a re-
ceiver needs the aid of counsel and appoint them for him with
such compensation as would be allowed for similar services when
performed for individuals or corporations, and they can see to it
that the compensation of receivers and their counsel is no greater
than what would be allowed for like services under employment
from individuals.
Perhaps the best manner of regulating such compensation
would be by legislation. The compensation of executors, admin-
istrators, guardians and trustees in bankruptcy is regulated by
statute, and the similarity of such services with those of a re-
ceiver would afford a proper scale for the compensation and
justify such legislative action. Other remedies may easily be
suggested. These great abuses which in many instances have
given just cause for criticism of the courts in these matters would
justify the American, as well as the State Bar Associations, to
give the subject careful consideration and suggest some remedy
to relieve the judiciary of this odium.
Jacob Trieber.
United States District Court, Little Rock, Ark.

NoTE-Mr. James Bryce in The American Commonwealth mentions

some of these abuses which existed in some of the courts of the city of
New York in the seventies, and in a note he quotes the following, alleged
to have been said by a well-known writer of that city: "In the minds of
certain New York judges, the old-fashioned distinction between a receiver
of property in a court of equity and a receiver of stolen goods at common
law, may be said to have been lost."