Luhrig Collieries Co. v. Interstate Coal & Dock Co.

LEARNED HAND, District. Judge (after stating the facts as above). [1, 2] I shall begin with the point of jurisdiction, which may for convenience be divided into three parts: First, whether this court had jurisdiction of. the original bill; second, whether this is a proper ancillary bill, within the jurisdiction of the court; and, third, whether the receivers appointed herein may sue upon such a claim. The original bill is in a form exceedingly familiar in this district. It seeks the sequestration of the assets of a foreign corporation in the interest of their preservation. The defendant’s chief objections to it are that it is invalid as a bill to wind up the business of the corporation, not being in the state of its incorporation, and that to stand at all ’ it must allege insolvency. A suit by stockholders to wind up a corporation must, it is true, be brought in the state of its organization. Maguire v. Mortgage Co., 203 Fed. 858, 122 C. C. A. 83 (C. C. A. 2d). But the jurisdiction of this court over a bill like that at bar, though in substance it accomplishes the same result, depends upon quite another history and development. It is an evolution out of the judgment creditors’ bill to supplement the writ of execution, and normally it is dependent upon judgment, execution, and return nulla bona. Pa. Steel Co. v. N. Y. City Ry. Co., 198 Fed. 721, 736, 737, 117 C. C. A. 503 (C. C. A. 2d); Amer., etc., Co. v. Amer., etc., Co. (D. C.) 275 Fed. 121. The practice, now so well settled, of proceeding without — 269 — these conditions precedent, and upon the consent of the debtor corporation, received final sanction in Re Metropolitan Railway, 208 U. S. 90, 28 Sup. Ct. 219, 52 L. Ed. 403. The bill must, of course, have equity, and equity would not lie in the mere fact that the debtor could not presently pay. If there be leviable property, the debtor must suffer the fate common to those who have no quick assets. To enjoin collection by judgment and execution in such case would be to grant the debtor an extension because of its temporary embarrassments, and would strike at the very foundation-of credit in a commercial community. Moreover, it would scarcely be enough to allege that the leviable assets were not enough, without also alleging -that those available by ordinary creditor’s bill would not, in addition, pay all claims. It is no reason for enjoining vigilant creditors from their legal remedies that others will be forced to resort to equity, provided all can in the end be paid. It is of no interest to a court of equity, any more than to a court of law, to protect a debtor against his creditors. vBut if it appears that the assets of every kind are not enough to pay all creditors, if left to a general welter of attachments, executions, and separate creditors’ bills, a different situation is presented. The corporation may well be solvent if its assets be nursed along, and insolvent if they be thrown to the creditors for piecemeal sale. Recognizing in such event that creditors’ bills will in the end be necessary, though unsuccessful, equity will anticipate them by presently stepping in, in the interest of securing the greatest possible payment ratably for all creditors, since the protection of creditors is an interest of equity as well as law. Therefore, while it is necessary to allege that the assets, if given no protection, will not be enough to pay all creditors, it is not necessary to allege that the corporation is presently insolvent, or even that, when properly managed, it will not have a surplus for distribution among stockholders; and for that reason it is not customary to allege insolvency, though it is customary more clearly than in the bill in suit to allege that the assets will not pay all, if abandoned to general waste by separate legal proceedings. Such bills may, of course, be abused by the collusion of the debtor and friendly creditors. They may be abused by the court’s refusal to allow a present liquidation, disregarding the creditors’ unqualified right to present payment, and preserving the property for the debtor, which is not entitled to more consideration than its creditors collectively think wise to give it. But that has nothing to do with the propriety of the bills as such; they form a necessary and important part of insolvency law, and are of unquestioned validity. Clearly, then, it is irrelevant that the debtor be a nonresident, or that a strict winding; up of its affairs by statute must take place at its domicile. Central Trust Co. v. McGeorge, 151 U. S. 129, 14 Sup. Ct. 286, 38 L. Ed. 98, is an authority for such a bill against a nonresident, because the facts were quite on all fours with this. It is true that this precise point was not discussed, but the ruling could not have been made, had the suit been non justiciable in the District Court. Scattergood v. Amer., etc., Co., 249 Fed. 23, 161 C. C. A. 83 (C. C. A. 3d), — 270 — was in turn a similar case, where, indeed, there was no charge of more than financial embarrassment. While that case may have depended in-this respect on the law of Pennsylvania, the court nevertheless referred' to Central Trust Co. v. McGeorge, supra, as applicable on the general question. In Lewis v. Amer. Naval Stores (C. C.) 119 Fed. 391, foreign receivers were recognized as those of the court of original' jurisdiction, even as against the jurisdiction of the court of the corporation's domicile. In Farmers’ Loan & Trust Co. v. Nor. Pac. R. R. Co. (C. C.) 72 Fed. 26, four justices of the Supreme Court held1 that the place of original jurisdiction in the Northern Pacific foreclosure suit should be Wisconsin, although the defendant was not organized there, and did not even have any property there, except upon lease. It is true that the Circuit Court of Appeals for the Fourth Circuit, in Davis v. Hayden, 238 Fed. 734, 151 C. C. A. 584, reversed the appointment of receivers for a solvent individual in a district other than domiciliary. In that case certain creditors had been enjoined from prosecuting actions at law to execution by the order which appointed' the receivers, and this they succeeded in vacating, on the ground that the court had no jurisdiction to appoint a receiver at all. However,, the debtor was not a corporation, a distinction mentioned in the opinion (238 Fed. 738, 151 C. C. A. 588), and was positively alleged to be solvent. The case is not in point here. The origin and nature of the bill stamps it as in rem. It is to reach the assets of the debtor and’ apply them to the creditors. As such it goes directly against tlieassets themselves in substitution for attachment and execution. Just as the power of the court is confined to the assets within is jurisdicion,. so it is of no consequence that the domicile of the debtor be elsewhere. The allegations of the bill as to the financial condition of the corporation are scanty and inartificial. It was, as I have said, proper enough1 not to allege insolvency, and in its stead the bill alleged that the corporation was largely indebted and could not pay its debts, that its assets could not be quickly converted, that its creditors were threatening to-attach, and had begun to do so, and that, though the assets were enough to pay all, if properly conserved, yet, if no receivers were appointed', they would be dissipated, “to the great injury of the creditors and stockholders.” The creditors could not be injured, unless in the resulting-scramble they would not be paid in full. I could have wished for more-explicit allegations than are present, but when the point is only of jurisdiction, and the facts are not disputed, I believe that these will serve,, even if they only just serve. Finally, even if the allegations be insufficient, it does not necessarily follow that these defendants can raise the point. The only valid objection in their mouths is that a payment to the receivers will not be a valid discharge. The corporation has itself consented to the decree,, and it is at best a very doubtful question whether the absence of any allegation that the creditors cannot be protected without a receiver would make the bill nonjusticiable. It is to be noted that in Davis v. Hayden, supra, the only case where the point was taken, the objection: — 271 — was held valid only on motion of other creditors who wished to prosecute their rights. [3] Assuming, therefore, that the original bill was valid, at least valid enough to give jurisdiction when the facts were not disputed, the next question is whether this is a proper ancillary bill. There is a clear difference between suing receivers and'a suit by them to recover assets. Cases like Gableman v. Peoria, D. & E. R. Co., 179 U. S. 335, 21 Sup. Ct. 171, 45 L. Ed. 220, are of the first class, but this is of the second. The very origin of these bills, as I have already said, is to collect the assets of the corporation, and it has always been held to be a part of the ancillary jurisdiction of this court to collect them, regardless of independent jurisdictional facts. White v. Ewing, 159 U. S. 36, 15 Sup. Ct. 1018, 40 L. Ed. 67; Pope v. L., etc., Ry., 173 U. S. 573, 577, 19 Sup. Ct. 500, 43 L. Ed. 814; Glenwood Irrigation Co v. Vallery, 248 Fed. 483, 160 C. C. A. 493 (C. C. A. 8th); Kirkland v. Knox, 230 Fed. 808, 145 C. C. A. 116 (C. C. A. 4th). The absence of proper allegations of citizenship is therefore immaterial. [4] Was, then, the claim such that the receivers of this court could sue upon it? The claim is upon the contract between the firm and the corporation, or, if that be invalid, upon a quasi contract arising from its past performance. This claim is prima facie barred by the release, and the suit depends primarily on the fraud by which that was procured. But the claim, whether equitable or legal, arises from the contract, and the fraud is alleged only to clear the path for its enforcement. It is argued that the “situs” of the debt is the domicile of the creditor, and that only the Wisconsin receivers might sue. But “situs,” so applied, is a fiction which yields as soon as policy requires. Blackstone v. Miller, 186 U. S. 189, 206, 23 Sup. Ct. 277, 47 L. Ed. 439. A debt has no proper situs at all, and the situation at bar is precisely analogous to garnishment. Here the receivers speak for creditors; they are pursuing their debtor’s debtor. It is well settled that in such case the proper place for garnishment is where you can catch the debtor. Pennington v. Fourth Nat’l Bank, 243 U. S. 269, 37 Sup. Ct. 282, 61 L. Ed. 713. L. R. A. 1917F, 1159; Harris v. Balk, 198 U. S. 215, 25 Sup. Ct. 625, 49 L. Ed. 1023, 3 Ann. Cas. 1084. It is true that the right of garnishment is generally exercised only to protect local creditors, but a federal court is not limited by such considerations. It is the especial province of such a court to treat creditors equally, wherever their residence. A creditors’ bill, which would lie in a state court to garnish such a claim as this at the suit of a local creditor, will lie in a federal court to reach the same “asset” on behalf of all. Indeed, while the law is not altogether clear, it is probable that New York receivers are the only ones who could sue, since Wisconsin receivers would leave any powers which the court might give them at the state line. I conclude, therefore, that the motions to dismiss the bill for lack of jurisdiction, or because of the plaintiffs’ incapacity to sue, should be overruled. Next comes the defect in substance of the equity of the bill. The argument here is that the agreement constituted a partnership between the corporation and the firm, and that a corporation may not. en — 272 — ter into a partnership. Hence the agreement was ultra vires, and under well-settled federal law no action or suit will, lie upon it. Ergo, the' firm may' keep all the, profits which it earned, and, so far as I can see, could have kept the coal itself, and left the corporation to pay for it. The argument proceeds from misconception of the doctrine of ultra' vires. It is quite true that no obligation results from an ultra vires contract; neither the corporation nor the opposite party is bound, while, as I shall later show, the contract was not in fact invalid, still, since it must be conceded that the question is not wholly free from doubt, it appears to me desirable to discuss this phase of the case on the contrary assumption, and I shall for the moment take it that it was ultra vires. [5] Even so, the law is settled that neither party to an ultra vires contract may retain what he has received in its execution. Logan, etc., Bank v. Townsend, 139 U. S. 67, 11 Sup. Ct. 496, 35 L. Ed. 107; Pullman Palace Car Co. v. Central Transp. Co., 171 U. S. 138, 18 Sup. Ct. 808, 43 L. Ed. 108; Aldrich v. Chemical Nat. Bank, 176 U. S. 618, 20 Sup. Ct. 498, 44 L. Ed. 611; Rankin v. Emigh, 218 U. S. 27, 30 Sup. Ct. 672, 54 L. Ed. 915; Citizens’ National Bank v. Appleton, 216 U. S. 196, 30 Sup. Ct. 364, 54 L. Ed. 443. The firm is therefore liable for the coal received, subject to equitable allowance, even if the contract was' invalid. [6] But it is argued that this can be done only after the corporation has disaffirmed the contract. It is true that in Pullman, etc., Co. v. Central, etc., Co., 171 U. S. 151, 18 Sup. Ct. 813, 43 L. Ed. 108, supra, Justice Peckham said that such a suit proceeds “in disaffirmance’! of the contract; but this, I submit, does not mean a disaffirmance made in advance of suit, as is required in the case of a contract voidable, and not void. There is by hypothesis no obligation at all, and nothing which a disaffirmance could effect. Being no obligation, it requires no repudiation, fór thére is nothing to repudiate. It is true that the theory in law of the recovery is changed, but that makes no difference, when precisely the same facts support a recovery in either case. This was expressly so ruled in Appleton v. Citizens’ National Bank, 190 N. Y. 417, 83 N. E. 470, 32 L. R. A. (N. S.) 543, and was accepted in thé Supreme Court (Id., 216 U. S. 202, 30 Sup. Ct. 365, 54 L. Ed. 443), where Justice Harlan says: “This action need not be regarded as one on the written contract of guaranty, but’as based "on an implied contract.” Yet the complaint had been directly upon the guaranty. In the, case at bar, as there is no conceivable change in legal position which a disaffirmance could make, the absence of any such cannot invalidate the bill. Whether the cause is of equitable or legal cognizance, I defer for the,moment. It is enough, certainly as against motion to dismiss, that as respects the profits received and retained by the firm the bill states a good cause of action or cause of equity. -[•7] Next I; come to the motions to strike out so much of article ninth as,.alleges that at’,the time of the accord the firm promised to account in'/the future, -iff necessary. The plaintiffs naturally wished to set uo the accord as it was; which apparently included a promise to account — 273 — again, if necessary. Perhaps they could have sued on this promise, without more; but I do not see that they were obliged to do so. They seek to reopen the whole account for fraud, and with it the promise to account in the future will fail. If they sued on the promise, the notes would still be outstanding, and they are entitled to their cancellation, which could not be done, unless the promise to account was canceled as well. A more serious question arises under the second paragraph of the thirteenth article of the bill, which lays a breach of the original contract of April, 1920, by the firm’s refusal to accept certain consignments of coal in October, 1920, which they had previously directed the corporation to buy. It is apparent that there can be no recovery upon this if the contract be in fact ultra vires, so that as to this_ feature of the case the question cannot be avoided, as it was in considering the suit to recover profits. The argument, as I have said, is based upon the presupposition that the contract created a partnership, and that a partnership was idtra vires. We do not know whether the charter of the corporation gave it power to enter into a partnership, but I may assume that it did not. But the contention must rest upon the fact that the agreement contemplated the creation of a partnership, and that as this intention could not be fulfilled the contract was invalid. The defendants certainly cannot stand on any other theory, because, if the parties intended merely to share profits without becoming partners, it cannot be that the law will refuse to enforce it, on the ground that, if they had intended to form a partnership, the corporation had no power to do so. The law does not insist that parties must become partners because they share profits, and as a condition of sharing them; it merely infers that they mean to do so, because they share. [8] An agreement to share net profits and losses is of course prima facie evidence of an intent to create a partnership, but by the later authorities not conclusively or inevitably. Thus in Fechteler v. Palm Bros. & Co., 133 Fed. 462, 66 C. C. A. 336 (C. C. A. 6th), where only gross profits were to be shared, it was said that the sharing of even net profits was only evidence of partnership. Any definition is hazardous, and it is perhaps unfortunate that the law has not left the intent to become partners to be gathered generally from the evidence in each case. Recent cases where a joint venture accompanied by profit sharing was not held to constitute a partnership are Reid v. Shaffer, 249 Fed. 553, 560, 161 C. C. A. 479 (C. C. A. 6th); Clinchfield Fuel Co. v. Henderson Iron Works Co., 254 Fed. 411, 165 C. C. A. 631 (C. C. A. 5th). In London Assurance Co. v. Drennen, 116 U. S. 461, 472, 6 Sup. Ct. 442, 29 L. Ed. 688, where one Arndt contributed to the funds of the venture and shared in its profits, he was held not by that mere fact to have become a partner, when the parties intended otherwise. In Meehan v. Valentine, 145 U. S. 611, 623, 12 Sup. Ct. 972, 36 L. Ed. 835, Justice Gray stated that, while a joint venture in property, the profits' being shared, created a partnership, the evidence-was not conclusive; and in Clark v. Sidway, 142 U. S. 682, 12 Sup. Ct. 327, 35 L. Ed. 1157, the same court had held that a single venture in, land speculation, where the profits were to be shared, did not have — 274 — that result. The well-known exception when an employee is paid in profits is another instance. It is perhaps true that the agreement at bar would have created a partnership, if made by individuals; yet it is strange that, so far as I have found, no such contract to which a corporation was a party has been held invalid on the ground that a partnership was intended. The question, certainly as between the parties, being entirely one of intent, the proper rule seems to me to be that parties should not be presumed to intend to create a partnership by a joint venture, when one is a corporation. If that intent positively appears, the contract is of course invalid; but why should one assume that the intent includes what the law forbids? A corporation cannot become a partner, and certainly has no such purpose in making a contract like that at bar. Granting that such an intention could be presumed, but for the incapacity o.f one of the parties, it would be purely gratuitous to impute that purpose, in the face of the incapacity. This conclusion, at least in the case at bar, is reinforced by the fact that this was merely a “tentative agreement,” intended to be later taken over by one or more corporations. It was most unlikely that meanwhile the parties could have intended to be partners. I conclude, therefore, that the contract was valid, and that a cause of action arose upon the firm’s refusal to accept the coal. [9] Nor do I think that the addition of this breach made the bill multifarious. There was but a single course of dealing between the parties, both before and after it. True, this was a separate breach, on which separate action could have been brought; but it was none the less an incident in the execution of the whole contract. I can see no reason why it must be singled out for separate litigation, and indeed action on a single breach might have barred any other. If the contract is valid, and an accounting upon it lies in equity, this is but an item in the account, a loss arising from the refusal of one party to perform one of its stipulations in the joint venture. If the contract as a whole was invalid, then, of course, there was no breach. [10] The'jurisdiction of equity over the subject-matter is also disputed. It is clear that, in so far as the bill be limited to an avoidance of the release, there could be no question, before the passage of section 274b of the Judicial Code (Comp. St. § 1251b), that a bill in equity was necessary. Since 1915, when that statute was passed, matter in avoidance may be set up by way of replication, if the cause of action be at law, and perhaps a bill in equity, if it still lies at all, should not draw to itself the disposition of the whole controversy. Indeed, even before that, and while a bill was necessary, it did not do so in all instances, as, for example, in the case of a release for damages resulting from per-, sonal injuries. But it is not necessary in the case at bar to consider any of these questions, for it is enough that this is a complicated joint venture, in which there must be an accounting involving credits and debits on both sides. In the very similar case of Fechteler v.- Palm Bros. & Co., supra, the point was raised and decided against the defendants. This case is, moreover, stronger than that, because the accounting is asked of defendants who received coal belonging to both parties, and, having — 275 — disposed of it by sales, have fraudulently retained the money. In taking and selling the coal, and so keeping the proceeds, the defendants acted in a fiduciary capacity, and by every rule of equity they became subject to an accounting in a court of equity. Nor would it make a difference if the contract were invalid and the recovery quasi contractual. In that case the coal remained the corporation’s till sold, and the defendants became constructive trustees. Indeed, it might even be plausibly argued that the whole profits from the venture should go to the plaintiffs. In Pullman Car Co. v. Transp. Co., supra, the relief given in quasi contract was upon cross-bill filed to a bill in equity of the Pullman Company, which had had the use of the cars. There had been a demurrer to the cross-bill as improperly filed, the decree overruling which the Supreme Court affirmed. It is true that the court (171 U. S. at page 148, 18 Sup. Ct. 812, 43 L. Ed. 108) did not pass upon the character of the claim as such, and perhaps the cross-bill was germane enough to be proper, though it set up a purely legal demand. Street, Fed. Eq. Prac. §§ 1040, 1041. But certainly the decision does not hold that the claim was legal. Moreover, that was the case of an invalid lease, not, as here, the delivery of property to another to be sold and accounted for. The implied obligation is of the same character as the invalid consensual obligation. If one is the subject of a suit, so must be the other. Hence I conclude that, in either aspect, the claim for an accounting was properly cognizable in equity, regardless of the avoidance of the release for fraud. [11] There remains only the question of the propriety of joining the Universal Transportation Company and Bullowa. The first is the payee of the notes; the second, their present holder. The bill prays that the notes shall be canceled, and it was certainly proper and probably necessary that the payee should be joined. Bullowa, as holder, was also a proper party. A decree, to be complete, must direct the delivery of the notes for cancellation, and cannot be effective, unless it include the holder. The motions to dismiss are overruled.