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Schondorf v. P.A.B. Realty Co.

Decided: May 5, 1967.


Herbert, J.s.c.


This case raises a question about the meaning of section 25 of the General Corporation Act. N.J.S.A. 14:14-25; L. 1953, c. 14, § 34. The complaint was filed May 29, 1964. It alleged defendant's insolvency and demanded an adjudication of insolvency, an injunction restraining the exercise of corporate franchises and the appointment of a statutory receiver. On the same date an order to show cause was signed which merely provided that defendant corporation show cause on June 12, 1964 "why the requested judgment in the complaint should not be entered." On June 12 there was a continuance to June 19, on which date an order was signed appointing Mr. Schondorf receiver of defendant under the provisions of N.J.S.A. 14:14-4.

On February 4, 1964 Barbosa Bros., Inc. obtained judgment in the Superior Court against P.A.B. Realty Co. in the amount of $1,925.63 plus costs. The judgment also ran against B.H.B. Construction Company, but that is unimportant for present purposes. A problem now is presented because the receiver has an offer of $500 for all of his right, title and interest in certain real estate, but the offer is conditioned upon a sale's being made free and clear of the judgment lien. Since 1953 the pertinent part of section 25 of the Corporation Act (N.J.S.A. 14:14-25) has read as follows:

"All levies, judgments, attachments or other liens obtained through legal proceedings against a corporation at any time when the corporation shall be insolvent, and within four months prior to the making of the application against it for the appointment of a receiver under this chapter shall be deemed null and void in case a receiver shall be appointed by the court and the assets of such corporation distributed in such proceedings."

From an affidavit which has been filed in support of the receiver's petition to sell, I am convinced that on February 4, 1964, when the judgment was entered, the defendant was hopelessly insolvent. This leaves only a narrow question: Was "the application" for the appointment of a receiver made within four months after the entry of the judgment?

Before 1953 the judgment of Barbosa Bros. would have been void. The statute then in effect (R.S. 14:14-25) provided that the four-month period should terminate upon "the filing of a bill or petition against [the corporation] for the appointment of a receiver under this chapter." When this matter first came up on the motion list and my attention was directed to the change which was made in the wording of the statute in 1953 I thought the shift from a "filing" date to an "application" date quite significant and would have announced a decision in favor of the judgment creditor had there not been a request for time in which to find authorities. Since then I have been referred to only one case which seems to have any significance. It is Smith v. Whitman, 39 N.J. 397 (1963), where the Chief Justice said for a unanimous court:

"But equality in distribution has an obvious appeal and hence legislation has been adopted to achieve it within stated limits of time and circumstances. So our Legislature has provided that where a debtor makes an assignment for the benefit of creditors, the assignee may attack a preference acquired within four months of the general assignment. N.J.S. 2A:19-3, N.J.S.A. With respect to insolvent corporations, preferences are declared 'null and void as against creditors' in the circumstances set forth in N.J.S.A. 14:4-2, see Central-Penn National Bank v. New Jersey Fidelity and Plate Glass Ins. Co., 119 N.J. Eq. 265 (Ch. 1935); and all liens obtained by legal proceedings within four months of an action for the appointment of a receiver are null and void as to the receiver. N.J.S.A. 14:14-25. Finally, we refer to the federal bankruptcy act, 11 U.S.C.A. § 96, under which a preference may be set aside if made or suffered by an insolvent debtor within four months of the filing of a petition by or against him. These statutes do not avoid a preference simply to permit another creditor to capture it for his sole gain but rather to the end that all general creditors, including the one preferred, may share ratably in all the assets of the debtor." (at p. 403)

Nothing in the facts of Smith v. Whitman called for a definition of the terminal point of the four-month period provided by N.J.S.A. 14:14-25, and I think it would be a mistake to assume -- since nothing in the opinion gives a basis for anything stronger than an assumption -- that the court considered the question presented here. I am even inclined to

suspect that the phrase found in the above quotation, and which reads "within four months of an action for the appointment of a receiver," was intended to be "within four months of an application for the appointment of a receiver." This second version follows the wording of the 1953 amendment, and "action" may have been inadvertently substituted in the opinion for "application."

After the present Superior Court began to function in 1948 there was an obvious reason for amending R.S. 14:14-25. The reference to the filing of "a bill or petition" was out of date; the first pleading in an action for the appointment of a receiver became a complaint. Both the receiver and the would-be purchaser argue that the act of 1953 must have been intended to bring up to date the terminology of section 25 without making any change in substance; therefore "application" should be construed as synonymous with "filing." Yet, if only a correct reference to modern pleadings had been intended, it would have been simple enough to have the act of 1953 specify a four-month period "prior to the filing of a complaint for the appointment of a receiver." That this was not done seems to indicate a change of some substance was intended when the word "application" was used.

I have made inquiry at the State Library and have been informed by a member of its staff that there is no helpful material on file there bearing upon the legislative history of chapter 14 of the Laws of 1953. The chapter is quite long, containing 45 sections. It amends and repeals various portions of the Corporation Act. One can readily see that it does much more than delete references to our old court system and substitute references to the new. I am satisfied that ...

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