McGraw v. Mott

CONNOR, District Judge. When this cause was called for argument, the attention- of the court was called to the fact that the last decree, from which the appeal is'taken, and which disposed of the merits of the cause,-was passed on December 12, 1908, and the report of the master was .filed January 19, 1909, in regard to which there does not appear that any exception is taken,, and on March 16, Í909, appellant filed an answer reiterating the allegations in his petition, and further alleging that, on February 24, 1909, complainant had executed to one Gerstell a deed conveying the property purchased at the sale made by the receiver and conveyed to him, that the consideration recited in this deed was $215,000, and that said conveyance was for the benefit of the “Cement Trust.” A copy of this deed is attached as an exhibit. It is insisted by complainant that this answer should be stricken from the files. It appears that some motion to that end was made; the court reserving to the complainant the right to make such motion. It appears that, after the demurrer filed by appellant was overruled and time given him to file answer, the parties, treated the petition, which contained the allegations relied upon as a defense to the bill, as an answer and replied to same. The depositions were taken upon the theory that these papers set forth the matters in controversy. We do not perceive that anything additional is set up in the answer, filed March 16th, except the deed to Gerstell, which was executed subsequent to the decree appealed from, and cannot be brought into this litigation. The appellant’s assignments of errors, although presented in several phases, are directed principally to the jurisdiction of the. Circuit Court of West Virginia. * It must be conceded that the cause has taken a somewhat erratic course. This, we think, has been caused, to some extent, by reason of a failure to keep in view the basis of the jurisdiction of the Circuit Court of New Jersey, wherein the original bill was filed. It is urged that the court was without jurisdiction, because the complainant had not reduced his claims to judgment in a court of law; that he had a complete and adequate remedy at law by obtaining judgment on his debts against defendant corporation and suing- out execution against its property. These objections are directed to complainant’s right, as a simple contract creditor, to invoke the equity jurisdiction of the court. It is also suggested that he may not prosecute his suit in a court of equity, in the dual capacity of a creditor and stockholder. It will be noted that, although the property of the defendant company had been conveyed, by way of mortgage, to secure a bond issue of $200,000, the mortgagee is not made a party defendant; hence the sale, and title [652] conveyed under the decree, is subject to this incumbrance; that only the equity of redemption is sold. Conceding that, generally, a court of equity will not take jurisdiction of a bill to subject property to the claims of creditors through the medium of a receiver, unless the debt of the complainant has been reduced to judgment, it is by no means clear that this objection may not be waived; the defendant assenting to the jurisdiction. In Hollins v. Brierfield Coal & Iron Co., 150 U. S. 371, 380, 14 Sup. Ct. 127, 128 (37 L. Ed. 1113), Mr. Justice Brewer says : “Defenses existing in equity suits may be waived, just as they may in law actions, and, when waived, the cases stand as though the objection never existed. Given a suit in which there is jurisdiction of the parties, in a matter within the general scope of the jurisdiction of courts of equity, and a decree rendered will be binding, although it may be apparent that defenses existed which, if presented, would have resulted in a decree of dismissal.” Reynes v. Dumont, 130 U. S. 354, 9 Sup. Ct. 486, 32 L. Ed. 934; Brown v. Lake Sup. Iron Co., 134 U. S. 530, 10 Sup. Ct. 604, 33 L. Ed. 1021. This line of decisions is found in cases wherein the general jurisdiction of the court of equity is invoked. Here, however, it is clear that the original bill, filed in the circuit court of New Jersey, is based upon the procedure providing for winding up the affairs of an insolvent corporation by the statute of that state, being section 65 of the corporation act (Laws 1896, p. 298): “Whenever any corporation shall become insolvent or shall suspend its ordinary business for want of funds to carry on the same, any creditor or stockholder may by petition or bill of complaint setting forth the facts and circumstances of the case, apply to the Court of Chancery for a writ of injunction and the appointment of a receiver or receivers or trustee, and the court being satisfied by affidavit or otherwise of the sufficiency of said application and of the truth of the allegations contained in the petition or bill, and upon such notice, if any, as the court, by order, may direct, may proceed in a summary way to hear the affidavits, proofs and allegations which may be offered on behalf of the parties, and if upon such inquiry it shall appear to the court that the corporation has become insolvent and is not about to resume its business in a short time thereafter with safety to the public and advantage to the stockholders, it may issue an injunction to restrain" the corporation and its officers and agents from exercising any of its privileges or franchises and from collecting or receiving any debts, or paying out, sellingi' assigning or transfering any of its estate, moneys * * * except to a receiver appointed by the court, until the court shall otherwise order.” The jurisdiction of the court to entertain the bill in this cause is founded upon the diverse citizenship of the complainant and defendant corporation. The decree made by Judge Banning, appointing a receiver, expressly refers to and is based upon the New Jersey statute. In Land Title & Trust Co. v. Asphalt Co., 127 Fed. 1, 62 C. C. A. 23, the jurisdiction of the Circuit Court to entertain a suit under this statute where the essential equitable elements exist is upheld by the Circuit Court of Appeals of the Third Circuit in an able opinion by Judge Gray. After quoting the statute, he says: “It is true that, independent of statutory authority, the general equitable jurisdiction of the United States courts does not extend so far as to entertain a suit by a creditor against a corporation, seeking the appointment of a receiver of its business and property and an injunction against the exercise of its corporate franchises, solely on the ground of insolvency. It is, however, [653] well settled by adjudications of the Supreme Court and subordinate federal courts that if a state Legislature, ¡by a valid law, create a right essentially equitable in its nature, prescribing a remedy for its enforcement substantially consistent with the ordinary modes of proceeding on the chancery side of the federal courts, no reason exists why it should not be pursued in a federal court of equity in the same form as it is in the state courts” — citing Clark v. Smith, 13 Pet. 195, 10 L. Ed. 123; Gormley v. Clark, 134 U. S. 338, 10 Sup. Ct. 554, 33 L. Ed. 909. The learned judge further says: “The Constitution and laws of the United States provide an additional forum to that of the state, for the adjudication of suits involving controversies between citizens of different states, not a different law. * * * while state legislation cannot directly enlarge or contract the jurisdiction of the federal courts, it can create rights that are jnsticeable in such courts, which, without such legislation, were not cognizable therein.” Referring to the New Jersey statute, he says: “A suit under these sections of the act is, therefore, cognizable in the United States Circuit Court having jurisdiction of the parties on its equity side. The right so created will be enforced by the remedies prescribed by the act, so far as the same are consistent with and not violative of the general equitable rules and procedure, as administered in the federal courts of equity.” In that case the complainant, although not a judgment creditor, was “the pledgee or mortgagee of the property of the defendant company.” Judge Gray further says: “It is not necessary, therefore, to discuss or decide the question as to the right of a simple contract creditor to proceed in a federal court of equity under the authority conferred by the state statute in the state Court of Chancqry, or the question as to the right of the complainant in the receivership suit, as a lien creditor, to appeal, by such a bill, to the general equity jurisdiction of the Circuit Court.” In Jones v. Mutual Fidelity Co., 123 Fed. 509, Judge Bradford discusses the question presented under a Delaware statute, similar to the New Jersey act, in an able and exhaustive opinion, reaching the conclusion that a bill may be filed in the Circuit Court of the United States by a simple contract creditor. ' Without entering into an extended discussion of the decisions, we reach the conclusion that, in view of the construction put upon the statute by the Supreme Court of Néw Jersey and its evident purpose, it is not essential to the jurisdiction of the Circuit Court of the United States that the complainant shall be a judgment creditor, or have a specific lien on the corporate property. If, however, the law be otherwise in that respect, it appears to be well settled that it is not open to the appellant, as an intervener, to raise the question; this being open only to the defendant corporation. The question of jurisdiction was waived and every essential averment of the bill- admitted.’ In Citizens’ Bank & Trust Co. v. Union Mining & Gold Co., 106 Fed. 97, Judge Newman says: “The contention that this is not a suit of equitable cognizance, bbcause the complainants are simple contract creditors, is raised too late, even if it can be raised by an intervening stockholder at all, * * * This is a bill brought to distribute the assets of an insolvent corporation, having its ‘ whole property and assets in Georgia and in this district. * * * The receiver hav [654] ing been appointed, given bond, and taken charge of the property, and haring cared, for- the. same, and the defendant having acknowledged, by its answer, the debts and the necessity for the receivership, the intervening stockholder cannot raise, this question: • That the complainants are simple contract creditors.”, - - ; . ■ The conclusion is sustained-by a number of decisions of the Supreme Court cited by the learned judge. Proceeding therefore upon the assumption that the Circuit Court of New Jersey had jurisdiction of the cause, and that its decrees are valid, we inquire as to the regularity of the proceedings had in the Circuit Court of West Virginia. It is immaterial in this aspect of the case whether the-refusal of Judge Tanning to permit the appellant to intervene, or, by other appropriate proceeding, to be heard in that court, because he was permitted to do so in the Circuit Court of West Virginia, and was fully heard upon the merits of the case; the validity of complainant’s debts and the insolvency of the defendant corporation having been established. These defenses he was clearly entitled, either as an intervener or as one of those persons having an interest in the property in whose behalf complainant sued, to make and have determined in some court. The Circuit Court of New Jersey having enjoined the defendant company and its officers from exercising any of its corporate powers, and having, so far as 'its power to' do so extended, vested in the control of its receiver all of the property of the, corporation, gave permission to complainant to make application to the Circuit Court of the Northern District of West Virginia for the-appointment of an ancillary receiver. This was in accordance with the' course and practice of the federal courts in'such cases.. There appears to b.e.a distinction between an ancillary bill and a bill seeking the appointment of an ancillary receiver. The federal courts in the different states, being foreign courts as to each other, the receiver appointed by the court in one state has no power, to-take charge-of, sell, or dispose of property in another state, or to'institute'suits in the courts of such other state, except by’way of Comity, " “Tbe difficulty is met, however,' by the very convenient and satisfactory practice' of instituting ancillary receiverships and appointing ancillary receivers in such foreign jurisdictions where the same becomes desirable or necessary. The practice of appointing ancillary receivers is indeed one of the striking features of the system built .up by the federal courts for the administration and winding -jip' of any business in the hands of a- receiver, and especially insolvent corporations. It affords the only method for reaching and administering .property, or. assets, in a jurisdiction foreign to that where the receiver is originally áppointed.” 3 Street’s Fed. Eq. Prac. § 2692. That a receiver is án officer of the court appointing him, and can exercise nb power, or maintain any legal status except within the territorial limits of the court,‘is settled; the latest decision upon the subject being Great Western Mining & Mfg. Company v. Harris, 198 U. S. 561, 25 Sup. Ct. 770, 49 L. Ed. 1163. The bill filed by complainant in the Circuit Court for the Northern District of West Virginia conforms to ’the practice and pleadings' in such cases. “The court-in which.-ancillary .proceedings are instituted will usually, as a-matter of comity, appoint the sanie person to be receiver as was appointed by. the, court.of principal’jurisdiction.”. '.Street’s Fed. Eq. Prac. § 2697. [655] In this case the Circuit Court followed this practice and appointed Mr. Patton, the same person named as receiver by Judge Lanning. It is not quite clear that appellant was entitled by reason of his relation to defendant company, as a stockholder, to intervene and litigate; the merits of the case, in the Circuit Court of West Virginia, except for the purpose of showing .that the corporation was not insolvent. If he had wished to insist upon the right," he should have appealed from Judge Lanning’s, order denying his petition to intervene. • We do not suggest that there was error in the refusal; that question is not before us. It is quite clear that the jurisdiction of the original bill cannot be questioned in the ancillary suit. In Gregory v. Van Ee, 160 U. S. 643, 16 Sup. Ct. 431, 40 L. Ed. 566, it is said: “Manifestly, the decree in the main suit cannot be revised through an appeal from a decree on ancillary or supplemental proceedings, thus accomplishing indirectly what could not be done directly.” The mandate of the Circuit Court of Appeals, upon the appeal from Judge Dayton’s order, dismissing his petition to intervene, directed the Circuit Court of West Virginia to proceed to hear and determine the controversy revised upon the petition and answer. This has been done, and the insolvency of the defendant corporation, together with validity of complainant’s debt, established. The sale of the property, pending the litigation, while not usual, is within the sound discretion of the court, and not reviewable here. Mellen v. Moline Malleable Iron Works, 131 U. S. 352, 9 Sup. Ct. 781, 33 L. Ed. 178. If the property did not bring a fair price, it was open to appellant to show that fact by evidence when the question of confirmation was under consideration, or he could have submitted an upset bid. The sale seems to have been conducted iii accordance with the provisions of the decree. After the decree of December 13,' 19'08‘, nothing re1 mained to. be done except to state the account of the receiver and disburse the proceeds. This was done in accordance with the master’s report. " The answer of appellant of-March 16, 1909, was, under the-'circumstances attending this case, improperly filed, and should have been stricken from the record. .... There is no reversible error. Affifmed.