Pusey Jones Co v. Hanssen, 431

• Decision Date: 09 April 1923
• Docket Number: No. 431,431
• Parties: PUSEY & JONES CO. v. HANSSEN
• Court: U.S. Supreme Court

261 U.S. 491

43 S.Ct. 454

67 L.Ed. 763

PUSEY & JONES CO.

v HANSSEN.

No. 431.

Argued Feb. 27, 1923.

Decided April 9, 1923.

Mr. Lindley M. Garrison, of New York City, for petitioner.

Mr. Wm. H. Button, of New York City, for respondent.

[Argument of Counsel from pages 491-494 intentionally omitted] Mr. Justice BRANDEIS delivered the opinion of the Court.

Section 3883 of the Revised Code of Delaware of 1915 (which embodies the Act of March 25, 1891, chapter 181; 19 Del. Laws, p. 359) provides:

'Whenever a corporation shall be insolvent, the Chancellor, on the application and for the benefit of any creditor or stockholder thereof, may, at any time, in his discretion, appoint one or more persons to be receivers of and for such corporation, to take charge of the estate, effects, business and affairs thereof, and to collect the outstanding debts, claims, and property due and belonging to the company, with power to prosecute and defend, in the name of the corporation or otherwise, all claims or suits, to appoint an agent or agents under them, and to do all other acts which might be done by such corporation and may be necessary and proper; that powers of such receivers to be such and continued so long as the Chancellor shall think necessary: Provided, however, that the provisions of this section shall not apply to corporations for public improvement.'

Whether the federal court sitting in equity has, by reason of the above statute, jurisdiction to appoint a receiver of an insolvent Delaware corporation upon application of an unsecured simple contract creditor is the main question presented.¹

Invoking the power conferred by the statute, Hanssen, a subject of Norway, brought in the federal court for the District of Delaware this suit in equity against the Pusey & Jones Company, a corporation organized under the general laws of that state. The bill, which was prosecuted on behalf of all creditors and stockholders, alleged that the corporation was insolvent, that plaintiff was a creditor, holding promissory notes issued by it, and that he was also a stockholder. It prayed that a receiver be appointed.² The bill was filed on June 9, 1921, receivers were appointed ex parte, and an order issued that the defendant show cause, on June 18, why the receivers should not be continued during the pendency of the cause. On June 11, the defendant moved to vacate the receivership. The motion was denied. Then, by answer, the defendant objected that the court had no jurisdiction either at law or in equity, denied that plaintiff was either a creditor or a stockholder, denied that defendant was insolvent, and asserted that defendant was entitled under the federal Constitution to have determined in an action at law the question whether plaintiff was a creditor.

Upon a hearing of the order to show cause, had on bill, answer, affidavits, and exhibits, a decree was entered confirming the appointment of the receivers and continuing them pendente lite. 276 Fed. 296. This decree was affirmed by the Circuit Court of Appeals for the Third Circuit, 279 Fed. 488. Neither the District Court, nor the Circuit Court of Appeals, passed upon the question whether Hanssen was a stockholder. Both courts held that, by reason of the state statute, the federal court sitting in equity had jurisdiction and power to appoint a receiver of a Delaware corporation upon a plication of a simple contract creditor, whose claim had not been reduced to judgment and who had no lien upon the corporate property. Both courts held that the controverted question whether the plaintiff was a creditor could be determined in the equity suit; and both held (upon the evidence submitted by affidavit) that the plaintiff was a creditor. The case is here on writ of certiorari.

That this suit could not be maintained in the absence of the statute is clear. A receiver is often appointed upon application of a secured creditor who fears that his security will be wasted. Kountze v. Omaha Hotel Co., 107 U. S. 378, 395, 2 Sup. Ct. 911, 27 L. Ed. 609. A receiver is often appointed upon application of a judgment creditor who has exhausted his legal remedy. See White v. Ewing, 159 U. S. 36, 15 Sup. Ct. 1018, 40 L. Ed. 67. But an unsecured simple contract creditor has, in the absence of statute, no substantive right, legal or equitable, in or to the property of his debtor. This is true, whatever the nature of the property, and although the debtor is a corporation and insolvent. The only substantive right of a simple contract creditor is to have his debt paid in due course. His adjective right is, ordinarily, at law. He has no right whatsoever in equity until he has exhausted his legal remedy. After execution upon a judgment recovered at law has been returned unsatisfied, he may proceed in equity by a creditors' bill. Hollins v. Brierfield Coal & Iron Co., 150 U. S. 371, 14 Sup. Ct. 127, 37 L. Ed. 1113. Compare Swan Land & Cattle Co. v. Frank, 148 U. S. 603, 13 Sup. Ct. 691, 37 L. Ed. 577; National Tube Works Co. v. Ballou, 146 U. S. 517, 13 Sup. Ct. 165, 36 L. Ed. 1070; Pierce v. United States, 255 U. S. 398, 403, 41 Sup. Ct. 365, 65 L. Ed. 697. He may, by such a bill, remove any obstacle to satisfy his execution at law, or may reach assets equitable in their nature, or he may provisionally protect his debtor's property from misappropriation or waste, by means either of an injunction or a receiver. Whether the debtor be an individual or a corporation, the appointment of a receiver is merely an ancillary and incidental remedy. A receivership is not final relief. The appointment determines no substantive right, nor is it a step in the determination of such a right. It is a means of preserving property which may ultimately be applied toward the satisfaction of substantive rights.

That a remedial right to proceed in a federal court sitting in equity cannot be enlarged by a state statute is likewise clear. Scott v. Neely, 140 U. S. 106, 11 Sup. Ct. 712, 35 L. Ed. 358; Cates v. Allen 149 U. S. 451, 13 Sup. Ct. 883, 977, 37 L. Ed. 804. Nor can it be so narrowed. Mississippi Mills v. Cohn, 150 U. S. 202, 14 Sup. Ct. 75, 37 L. Ed. 1052; Guffey v. Smith, 237 U. S. 101, 114, 35 Sup. Ct. 526, 59 L. Ed. 856. The federal court may therefore be obliged to deny an equitable remedy which the plaintiff might have secured in a state court.³ Hanssen's contention is that the statute does not enlarge the equitable jurisdiction or remedies, and that it confers upon creditors of a Delaware corporation, if the company is insolvent, a substantive equitable right to have a receiver appointed. If this were true the right conferred could be enforced in the federal courts (Scott v. Neely, 140 U. S. 106, 109, 11 Sup. Ct. 712, 35 L. Ed. 358),⁴ since the proceeding is in pleading and practice conformable to those commonly entertained by a court of equity. But it is not true that this statute confers upon the creditor a substantive right.⁵ Bankruptcy Act July 1, 1898, c. 541, §§ 3, 18, 30 Stat. 544, 546, 551 (Comp. St. §§ 9587, 9602), does confer upon creditors of a corporation (or individual) the right, under certain conditions, to have the property of an insolvent debtor taken possession of and administered by an officer of the court. Compare Acme Harvester Co. v. Beekman Lumber Co., 222 U. S. 300, 309, 310, 32 Sup. Ct. 96, 56 L. Ed. 208; ulcan Sheet Metal Co. v. North Platte Valley Irrigation Co., 220 Fed. 106, 136 C. C. A. 198. The Delaware statute does not confer upon creditors the right to have a receiver appointed, although the insolvency of the corporation may be palpable, hopeless and attended by indisputable fraud or mismanagement. Insolvency is made a condition of the Chancellor's jurisdiction; but it does not give rise to any substantive right in the creditor. Jones v. Maxwell Motor Co. (Del. Ch.) 115 Atl. 312, 314, 315. It makes possible a new remedy, because it confers upon the Chancellor a new power. Whether that power is visitorial (as the appellant insists), or whether it is strictly judicial, need not be determined in this case. Whatever its exact nature, the power enables the Chancellor to afford a remedy which theretofore would not have been open to an unsecured simple contract creditor. But because that which the statute confers is merely a remedy, the statute cannot affect proceedings in the federal courts sitting in equity.

The case is wholly unlike Louisville & Nashville R. R. Co. v. Western Union Telegraph Co., 234 U. S. 369, 34 Sup. Ct. 810, 58 L. Ed. 1356, and other cases in which federal courts, because of a state statute, entertained suits to remove a cloud upon title, which otherwise must have been dismissed. In those cases, as pointed out in Clark v. Smith, 13 Pet. 195, 203, 10 L. Ed. 123, the statute changed a rule of substantive law. For instance, a statute provides that a deed, void on its face, shall be deemed a cloud, whereas theretofore it was not. It declares 'what shall form a cloud on titles.' As stated in Reynolds v. Crawfordsville First National Bank, 112 U. S. 405, 410, 55 Sup. Ct. 213, 216 (28 L. Ed. 733), the federal court looks 'to the legislation of the state in which the court sits [and the land is situated] to ascertain what constitutes a cloud upon the title, and what the state laws declare to be such the courts of the United States sitting in equity have jurisdiction to remove.' In such cases, as the statute confers upon the landowner a substantive right, he is entitled to the aid of the federal court for its enforcement. But where a state statute relating to clouds upon title is held merely to enlarge the equitable remedy, it will not support a bill in equity in the federal court. Thus, in Whitehead v. Shattuck, 138 U. S. 146, 11 Sup. Ct. 276, 34 L. Ed. 873, the statute relied upon authorized a suit in equity by one out of possession against one in possession. As an action at law in the nature of ejectment afforded an adequate legal remedy, the bill to quiet title...