Childs v. N. B. Carlstein Co.

SWAN, District Judge (after stating the facts). The answers of the defendants so fully repel the charges of fraud made by the bill that the only matters remaining for examination are the legal questions which govern the case. The obstacles to the maintenance of inis bill are many and insuperable. Its scheme aud theory are founded on two propositions, both of which must be established to sustain it. The first is that the assets of a corporation coinstitute a trust fund Cor the benefit of its creditors, of so sacred a nature that any disposition of those assets to secure an antecedent indebtedness in favpr of one or more of its officers, even if made in the life of the corporation, and while it is still a going concern, ak though financially embarrassed, if the same results to the detriment of iis general creditors, may at their instance be set aside as inequitable; and, second, that, for that purpose, simple contract creditors, who have begun garnishment proceedings against alleged fraudulent grantees of their debtor, ha.ve practically acquired the standing of judgment creditors, and may resort to a court of equity and obtain this redress. These two propositions are the foundations of complainants’ case. Other questions are incidental and dependent. The first contention is a misconception of the tenure by which a corporation holds its property and its control of the same. There is no difference between a corporation debtor and an individual debtor as to the power of disposition of their property, except as vhe corporation is restricted by its charter or by general rules of law. As is said in the case of Graham v. Railroad Co., 102 U. S. 148, where a like question was involved to that here presented: "A corporation is a distinct entity. Its affairs are necessarily managed by officers and agents, it is true; but, in law, it is as distinct a being as an, individual is, and is entitled to bold property (if not contrary to its charter) as absolutely as an individua 1 can. hold it. Its authority is the same; its interest is the same; its position is the -same, Its stockholders may prevent any malversation of funds or fraudulent disposal of property on their part. But that is done in the exercise of their corporate rights, not adverse to the corporate interests, but coincident with them. When a corporation becomes in-' — 90 — solvent, it Is so far civilly dead that its property may be administered as a trust fund for the benefit of its stockholders and creditors. A court of equity, at the instance of the proper parties, will then make those funds trust funds which in other circumstances are as much the absolute property of the corporation as any man’s property is his.” Speaking of this case, which is characterized by Mr. Justice Bradley’s clearness and accuracy of statement, Mr. Justice Brewer, in Hollins v. Iron Co., 150 U. S. 371, 387, 14 Sup. Ct. 129, says: “All that it decides is that, when a court of equity does take into its possession the assets of an insolvent corporation, it will administer them upon the theory that they, in equity, belong to the creditors and stockholders, rather than to the corporation itself. In other words, — and that is the idea which underlies all these expressions in reference to ‘trusts’ in connection with the property of a corporation, — the corporation is an entity, distinct from its stock-holdérs as from its creditors. Solvent, it holds its property as any individual holds his, free from the touch of a creditor who has acquired no lien; free, also, from the touch of a stockholder who, though equitably interested in, has no legal right to, the property. Becoming insolvent, the equitable interest of the stockholders in the property, together with their conditional liability to creditors, places the property in a condition of trust, first for the creditors, and then for the stockholders. S! * * It is rather a trust in the administration of the assets after possession by a court of equity than a trust attaching to the property as such for the direct benefit of the creditor or stockholder.” The learned justice adds later in the opinion: “That the cases negative the idea of any direct trust or lien attached to the property of the corporation in favor of its creditors, and, at the same time, are entirely consistent with those cases in which the assets of a corporation are spoken of as a ‘trust fund,’ using the term in the sense that we have said it was used. * * * The party may deal with a corporation in respect to its property in the same manner as with an individual owner, and with no "greater danger of being held to have received into his possession property burdened with a trust or lien.” The same doctrine is also stated by Mr. Justice Gray in Railway Co. v. Ham, 114 U. S. 587, 5 Sup. Ct. 1084, with equal accuracy. He says: “The property of a corporation is, doubtless, a trust fund for the payment of its debts, in the sense that when a corporation is lawfully dissolved and all its business wound up, or when it is insolvent, all its creditors are entitled in equity to have their debts paid out of the mortgaged property before any distribution thereof among the stockholders. It is also true in the case of a corporation as in that of a natural person that any conveyance of property of the debtoi; without authority of law, and in fraud of existing creditors, is void as against them.” This is also as emphatically stated by Mr. Justice Field in Fogg v. Blair, 133 U. S. 534, 541, 10 Sup. Ct. 338, 340. This enunciation of the rights and powers of corporate debtors is in accordance with the decision of the supreme court of Michigan in the case of Bank of Montreal v. J. E. Potts Salt & Lumber Co., 90 Mich. 345, 51 N. W. 512, in which the earlier decisions of the court are collated. Bearing in mind that the N. B. Carlstein Company, the corporate debtor, the disposition of whose property is the main question in this case, is a Michigan corporation, the significance of this harmony between the federal and state courts of last resort is important and decisive. • The complainants knowingly dealt with their debtor as such a corporation, and must be conclusively held — 91 — to have contracted with reference to all dealings of the corpoiation with its property which have the sanction of the la,ws of the state under which it exists, and from which it derives its powers. The N. B. Garlstein Company, therefore, liad a right to deal with its property precisely as an individual may, except in those particulars in which it is restrained by law, and, as to those particulars, its acts are not brought into question. Its authority included the power to execute an assignment for the benefit of its creditors (Town v. Bank of River Raisin, 2 Doug. [Mich.] 580), and to prefer one creditor to another. It might also execute its chattel mortgage to secure preferred creditors where such instrument did not provide for any transfer to the mortgagee for any other purpose than to secure the payment of honest debts. Hee, also, Hills v. Furniture Co., 23 Fed. 432; Brown v. Furniture Co., 7 C. C. A. 225, 58 Fed. 286. In the case at bar, as in that in 90 Mich. 345, 51 N. W. 512, the corporation had not ceased to he a going concern at the time that the mortgages were given, nor had its officers abandoned hope of continuing business. It is this fact which distinguishes this case from Manufacturing Co. v. Hutchinson, 11 C. C. A. 320, 63 Fed. 496, which, in important particulars, is an authority for the conclusions here reached. The bill, it is true, charges that the corporation had no expectation at. the time of the execution of the chattel mortgages of further, carrying on its business; but this is denied by the answer under oath, which was not waived by the bill, and, even if it were, the complainants cannot deprive the answer, when thus verified, of its ordinary effect. Clements v. Moore, 6 Wall. 299, 314. If a, plaintiff in equity fails to expressly waive the oath of the defendant to his answer, the answer must he given under oath, and is evidence. Conley v. Nailor, 118 U. S. 127, 134, 6 Sup. Ct. 1001, 1005. But, independent of these authorities, the answer, being responsive to the hill and denying its allegations, must be taken as true upon this hearing. Vigel v. Hopp, 104 U. S. 441; Carpenter v. Insurance Co., 4 How. 185; File Co. v. Garrett, 110 U. S. 288, 4 Sup. Ct. 90; Morrison v. Durr, 122 U. S. 518, 7 Sup. Ct. 1215. Under the authority of Bank of Montreal v. J. E. Potts Salt & Lumber Co., supra, the assets of a Michigan corporation do not become a trust fund for pro rata distribution among all of its creditors until steps are taken under the provisions of chapter 282, 2 How. Ann. St. The case last cited is also definitive of the powers of corporations in their dealings with their officers, and is in consonance with the decisions of the supreme court of the United Stales upon that point. The fact that Miller was the president of the corporation in no degree impairs his title to the securities which he holds for the payment of his just claims against the company. That he is its creditor is clear, and that he is also contingently liable as indorser or guarantor of its indebtedness to the banks and others, and has otherwise become personally liable for debts of the corporation in case the latter should fail to meet its obligations, is established beyond all question. That he incurred these obligations in an honest endeavor to aid the company in which he was interested, and — 92 — doubtless at times wben it was in extreme need of financial assistance, and that, so far as appears upon tbe hearing, he has taken no advantage of its necessities or of his position as its president and director in obtaining the security he holds, and, in short, that he is an honest creditor of the corporation, are all facts which sustain his claim to payment of his debt. The fact that he is the president of the company is neither legal nor equitable ground per se for depriving him of the right to enforce securities honestly obtained, or putting him upon a worse footing, in any respect, than other creditors of his debtor. This has so long been the law of Michigan, as held by the supreme court of the state, and equally the doctrine of the supreme court of the United States, that it may be fairly regarded as legally notified to all persons dealing with corporations. Kendall v. Bishop, 76 Mich. 634, 48 N. W. 645; Oil Co. v. Marbury, 91 U. S. 587. In the latter case it is characteristically said in the vigorous language of Mr. Justice Miller: “While it is true that the defendant, as a director of the corporation, was hound by all those rules of conscientious fairness which courts of equity have imposed as the guides for the dealings in such cases, it cannot he maintained that any rule forbids one director among several from loaning money to the corporation, when the money is needed, and the transaction is open and otherwise free from blame. No adjudged case has. gone so far as this. Such a doctrine, while it would afford little protection to the corporation against actual fraud or oppression, would deprive it of the aid of those most interested in giving aid judiciously, and best qualified to judge of the necessity of that aid, and of the extent to which it may be safely given.” These remarks are strikingly applicable to the relations of defendant Miller to the corporation. He was its president and a large holder of its stock. It is conceded that no one had a greater interest in its success, and therefore none could have a stronger motive than he, in promoting, by all means in his power, the conduct of its business and the maintenance of its credit to which he seems to have pledged his individual property to a large amount. It is obvious, also, that the only fund to which he can resort for payment of his debt is the property of his debtor. There is no equitable principle which would require him to stand by in silence, and witness the appropriation by others, who have no lien, of the property which his courage and means have preserved. The enforcement of his security is the only mode left him to make his money, and this is obviously, upon the facts stated in the bill, a scanty fund. But, whatever its amount, he should not be restrained from realizing it. 2. The second position urged in support of the bill is clearly ill' founded. The complainants are simple contract creditors of the N. B. Oarlstein Company. Their claims have not been reduced to judgment, and they have no express lien by mortgage, trust deed, or otherwise. The general rule is well settled that a creditors’ bill must be preceded by a judgment at law, and cannot be maintained before an attempt has been made to collect such judgment by the issue of execution thereon. Jones v. Green, 1 Wall. 330; Adler v. Fenton, 24 How. 407; Day v. Washburn, Id., 353; Taylor v. Bowker, 111 U. S. 110, 4 Sup. Ct. 397; Tube Works Co. v. Ballou, — 93 — 146 U. S. 517, 523, 13 Sup. Ct. 165; Bank v. Dwight, 83 Mich. 189, 47 N. W. 111. “Such creditors,” says Mr. Justice Brewer in Hollins v. Iron Co., supra, “cannot come into a- court of equity to obtain the seizure of the property of their debtor, and its application to the satisfaction of their claims, notwithstanding the statute of the state may authorize such a proceeding in the courts of the state. The line of demarkation between equitable and legal remedies in the federal courts cannot be obliterated by state legislation.” To the same effect is Cates v. Allen, 149 U. S. 451, 13 Sup. Ct. 883, 977; Scott v. Neely, 140 U. S. 106, 11 Sup. Ct. 712. It is observable, also, that a creditors’ bill should be brought for the benefit of the complainant and all other creditors similarly situated who may come in and become parties to the cause and present their rights. “A few creditors will not be permitted to bring a bill of this sort for an accounting and administration of the assets without saying in the bill that it is brought on behalf of themselves and all of the rest of the creditors.” Story, Eq. Pl. p. 104, § 99; Brown v. Ricketts, 3 Johns. Ch. 553-555; Hornor v. Henning, 93 U. S. 233; Pullman v. Stebbins, 51 Fed. 10. This equitable requirement is not met by the bill in this case, the ninth paragraph of which prays “that the collateral security in the hands of the banks aforesaid, including such securities as are the property of said Miller, should be applied to the payment of any indebtedness of said the N. B. Carlstein Company to said banks, and the other property of said the N. B. Garlstein Company should be applied, first:, to the jiay-inent in full of the indebtedness of said company to complainants, and that the remainder thereof should be distributed pro rata among the other creditors of said company, including said banks.” This is not an offer on the part of complainants to do equity, but in terms asks a preference which has no equity to commend it. The authorities last cited are persuasive that the want of this essential feature of the bill, and, a fortiori, the inequitable preference asked in the paragraph quoted, are fatal defects. But we do not rest our decision upon that ground alone, but pass to the, contention made by complainants that the institution of garnishment proceedings against the defendants entitle the complainants to practically the same standing accorded by courts of equity to judgment creditors, by giving them a lien upon the property and moneys garnished. Garnishment proceedings are someiimes loosely referred to as conferring a lien upon the money or property in the hands of the garnishee. However this may be under statutes which give the proceedings that effect, it cannot be asserted under the garnishment law of Michigan. Their express provision is (3 How. Ann. St. § 8059) that: “From the time of the service of the writ, the garnishee shall he deemed liable to the plaintiff to the amount of monies, goods, chattels, and effects under his control belonging to the principal defendant or of any debts due or to become due from such garnishee to the principal defendant or of any judgment or decree in favor of the latter against the former, and 1'or all property, personal and real, money, goods, evidence of debt or effects of Ihe principal — 94 — defendant which such garnishee defendant holds by conveyance, transfer, or title that is void as to the creditors of the principal defendant and for the value of all property, personal and real, money, goods, chattels, evidences of debt or effects of the principal defendant which such garnishee defendant received or held by a conveyance, transfer or title that was void as to creditors of the principal" defendant and such garnishee defendant shall also be liable on any contingent right or claim against him in favor of the principal defendant.” Apparently, tie sole purpose and effect of tiis statute was to add to tie liability of tie principal defendant tie personal responsibility of tie garnisiee for tie property of tie debtor, of any description, in tie iands of tie garnisiee at tie time of tie service of tie writ. By section 8068 of tie same statute it is provided that: “The affidavit for the writ of garnishment shall be held and considered as a declaration of the plaintiff in trover against the garnishee as defendant where the garnishee is chargeable for property and for money had and received when he is chargeable upon indebtedness against the garnishee.” Manifestly, neither of these actions contemplates tie enforcement of a lien, but simply tie application of tie plaintiff’s demand when that is established, and, alternatively and contingently, tie personal liability of tie garnisiee. Authority is conferred by tie statute for tie issue of execution, and its levy upon tie property, money, and effects in tie iands of tie garnisiee when served; and iis failure to expose for execution such property and effects after tie plaintiff has become entitled to levy thereon renders tie gar-nisiee defendant personally liable in iis own goods and estate to tie amount of such judgment. Tie statute regulating attachments (section 7994, 2 How. Ann. St. Mich.) expressly enacts: “Such attachment shall bind tie goods and chattels so attached from tie time they were attached.” There seems to be no equivalent enactment in tie garnishment act, — nothing which expressly or by implication creates an incumbrance on tie property which would adhere to it if transferred. But even if it were conceded that tiis statutory proceeding, by tie analogy of its effect upon tie property of tie debtor to that of a statutory or contract lien, appropriates tie property to tie use of tie creditor sub modo, tiis would not avail tie complainants, who seek to make it tie foundation of equity jurisdiction. Tie very completeness and amplitude of tie statutory remedy by garnishment is the strongest possible denial of complainants’ right to supplement those proceedings by a concurrent suit in equity. By section 8091, 3 How. Ann. St. Mich., it is provided that: “If any person garnished shall have in his possession any of the property aforesaid of the principal defendant which he holds by a conveyance or title that is void as to creditors of the defendant, or if any person garnished shall have received and disposed of any of the property aforesaid of the principal defendant, which is held by a conveyance or title that is void as to creditors of the defendant, he may be adjudged liable as garnishee on account of such property and for the value thereof, although the principal defendant could not have maintained an action therefor against him." This section was construed in Heineman v. Schloss, 83 Mich. 158, 47 N. W. 107, as enabling the creditor, by and through the agency — 95 — of a garnishment proceeding, to reach, and subject to the payment of his judgment against the principal debtor, property, or the proceeds thereof, which the garnishee might hold by conveyance or title that was fraudulent as to creditors of such debtor; and it was held that its effect was not to enlarge the liability of the defendants, but to render them liable at law, instead of in equity as formerly. This construction was followed in Treusch v. Ottenburg, 4 C. C. A. 629, 54 Fed. 867. Instead, therefore, of the proceedings in garnishment, put forward as the basis of complainants’ right to equitable aid, inuring to their benefit, their necessary effect and operation are exactly the contrary. The remedy they have sought as subsidiary to their status as suitors in equity is in itself “a plain, adequate, and complete remedy at law,” whose perfect adaptation to the investigation of the issues here tendered prohibits the exercise of equity jurisdiction in this cause. If Miller or Pratt and other of the defendants are holding the property conveyed by the chattel mortgages, and those instruments are void or claimed to be so by complainants, the garnishment act furnishes machinery as efficient for the ascertainment of that fact as that afforded by a court of equity. Bee, also, Fearey v. Cummings, 41 Mich. 376, 1 N. W. 946; Crippen v. Fletcher, 56 Mich. 389, 23 N. W. 56. In Killian v. Ebbinghaus, 110 U. S. 568, 573, 4 Sup. Ct. 235, quoting from Hipp v. Babin, 19 How. 271, 278, the court says: “That whenever a court of law is competent to take cognizance of a rig'lit and has power to proceed to a judgment which affords a plain, adequate.', and complete remedy without the aid of a court of equity, the plaintiff must proceed at law, because the defendant has a constitutional right to a trial by jury.” This principle, though there applied to an ejectment hill, is obviously of equally direct bearing in this case; and it is there further held that the objection to the jurisdiction may be enforced by the court sua sponte, though not raised by the plea.dings or suggested by counsel. The following eases are instances of the application of the same doctrine: Wright v. Ellison, 1 Wall. 16; Oelrichs v. Spain, 15 Wall. 211; Buzard v. Houston, 119 U. S. 347, 351, 7 Sup. Ct. 249; Whitehead v. Shattuck, 138 U. S. 147, 11 Sup. Ct. 276; Mills v. Knapp, 39 Fed. 592. A further objection to the maintenance of this suit, because of any supposed interest in the property of the corporation acquired by the garnishment proceedings, is suggested by the possible failure of the complainants in those proceedings. The issue in those cases is triable before a jury, by the express terms of the statute; and, as the remedy is purely legal and statutory, the defendants cannot he deprived of their constitutional right to such trial. It cannot be assumed in favor of the jurisdiction of this court that the plaintiffs will prevail in such trials at law. If complainants fail, the only ground which they urge as giving them a standing to invoke equitable relief is disproved, and the effect ol' the proceedings, both here and at law. will be made doubly disastrous to the defendants. The court itself would be put in the humiliating posi — 96 — tion of having entertained a jurisdiction which a court of equally plenary powers, in another form of proceeding, to- whose jurisdiction complainants first resorted, had pronounced altogether baseless. If plaintiffs should prevail in the garnishment suits, their success will have demonstrated that the aid of a court of equity was not needed for their relief. In either event the result to the 'defendants must necessarily be most unfortunate, and the injustice of harassing them with double litigation for the same cause of action would be undeniable. Added to this is the fact that the claims of the defendant banks are indisputably valid, and the validity of their mortgage securities is not attacked. The only relief sought against them is that they may be compelled to surrender some of the securities which they hold for the debts covered by the mortgage; and this, too, at the instance of creditors who have no lien upon the property of the mortgagor, nor any claim which can be maintained against the person whose obligations they ask' may be thus indirectly appropriated to the use of themselves, in preference to other unsecured creditors of the N. B. Carlstein Company. The bill reveals no special considerations which ought to take cone plainants’ case out of the general rúle that a creditor holding collat-erals is not bound to apply them before enforcing his direct remedies against the debtor and his effects. Lewis v. U. S., 92 U. S. 618. Without considering other questions which were discussed upon the argument, it is sufficient to say that the reasons already given, and especially the want of equity and the adequacy of the garnishment proceedings to afford complainants all the relief to which they are entitled, compel the dismissal of the bill. The restraining order in this case was improvidently granted, and is vacated and set aside. The injunction is denied, and the bill is dismissed, with costs.