Lion Bonding Surety Co v. Karatz Department of Trade and Commerce of State of Nebraska v. Hertz

• Decision Date: 23 April 1923
• Docket Number: Nos. 574,467,s. 574
• Citation: 67 L.Ed. 871,43 S.Ct. 480,262 U.S. 77
• Parties: LION BONDING & SURETY CO. v. KARATZ.* DEPARTMENT OF TRADE AND COMMERCE OF STATE OF NEBRASKA et al. v. HERTZ et al
• Court: U.S. Supreme Court

262 U.S. 77

43 S.Ct. 480

67 L.Ed. 871

LION BONDING & SURETY CO.

v KARATZ.*

DEPARTMENT OF TRADE AND COMMERCE OF STATE OF

NEBRASKA et al.

v. HERTZ et al.

Nos. 574, 467.

Argued March 2, 1923.

Decided April 23, 1923.

[Syllabus from pages 77-78 intentionally omitted] Messrs. Halleck F. Rose and Arthur R. Wells, both of Omaha, Neb., for petitioner.

Mr. Bruce W. Sanborn, of St. Paul, Minn., for respondents.

Mr. Justice BRANDEIS delivered the opinion of the Court.

These two cases arise out of the insolvency of the Lion Bonding & Surety Company, a Nebraska insurance corporation. They are here on writs of certiorari to the United States Circuit Court of Appeals for the Eighth Circuit. In the Karatz Case, it affirmed a decree of the federal court for Minnesota which appointed receivers in a suit brought by an unsecured simple contract creditor. See 280 Fed. 532. In the Hertz Case, it reversed a decree of the federal court for Nebraska, which dismissed a suit brought by those receivers for possession of the company's property. 280 Fed. 540. At the date of each decree the property of the company in Nebraska was held by the department of trade and commerce of that state, with the usual powers of a receiver, under a decree of a state court. The Circuit Court of Appeals directed, in the Hertz Case, that the lower court enjoin the department from doing any act in relation to the property, except to hold custody thereof subject to the further order of the federal court for Minnesota. Petitioners ask that the judgments of the appellate court be reversed and that the bills in the federal District Courts be dismissed. The grounds on which jurisdiction was asserted by the federal courts make necessary a fuller statement of the facts.

The Lion Bonding & Surety Company had for some years prior to 1921 been licensed to conduct the business of insurance in Nebraska, and was doing business and had property also in 18 other states. A statute of Nebraska commits to its department of trade and commerce the supervision of insurance companies and control thereof in case of insolvency and otherwise. Compiled Statutes Nebraska 1922, §§ 7745-7748; Laws Nebraska 1919, c. 190, tit. 5, art. 3, pp. 576-579. Paragraph 1 of section 4 of that act provides:

'Whenever any domestic company is insolvent, * * * or is found, after an examination, to be in such condition that its further transaction of business would be hazardous to its policy holders, or to its creditors, or to its stockholders, or to the public; * * * the department * * * may apply to the district court, * * * in the county * * * in which the principal office of such company is located, for an order directing such company to show cause why the department * * * should not take possession of its property, records and effects and conduct or close its business, and for such other relief as the nature of the case and the interest of its policy holders, creditors, stockholders or the public may require.'

On April 12, 1921, the department applied to the district court of Douglas county, Nebraska, for an order directing it to take possession of the property and to conduct the business of the company, under paragraph 2 of secti n 4, which provides:

'On such application, or at any time thereafter, such court or judge may, in his discretion, issue an order restraining such company from the transaction of its business, or disposition of its property, records, and effects until the further order of the court. On the return of such order to show cause, and after a full hearing, the court shall either deny the application or direct the department * * * forthwith to take possession of the property, records and effects, and conduct the business of such company, and retain such possession * * * until on the application of the department * * * or of such company, it shall, after a like hearing, appear to the court that the cause of such order directing the department * * * to take possession has been removed, and that the company can properly resume possession of its property, records and effects, and the conduct of the business.'

The petition prayed also for an order restraining the company from the transaction of its business or from disposing of any of its property, and for other and further relief. The company immediately filed an answer, by which it admitted the material allegations of the petition, and joined in the prayer thereof. On the same day the state court entered a decree in accordance with the prayer; the department entered upon the duties prescribed by the decree; it immediately took possession of all the property of the company in Nebraska, has since held possession thereof subject to the orders of the state court, and has also obtained like possession of property of the company in other states. On May 28, 1921, the department filed, in the court, a supplemental petition, in which it prayed for an order directing it to liquidate the business under paragraph 3 of section 4, which provides:

'If, on a like application and order to show cause, and after a full hearing, the court shall order the liquidation of the business of such company, such liquidation shall be made by and under the direction of the department, * * * which may deal with the property, records, effects and business of such company in the name of the department * * *, or in the name of the company, as the court may direct and it shall be vested by operation of law with title to all the property effects, contracts and rights of action of such company as of the date of the order so directing it to liquidate. * * *'

The supplemental petition prayed, among other things, that the orders theretofore made, so far as applicable, and necessary to further the liquidation, remain in full force. The company filed an answer by which it admitted the material allegations contained in the supplemental petition and joined in the prayer thereof. On the same day that court entered an order in accordance with the prayer of the supplemental petition, all action of the department being made subject to the direction of the court.

On May 2, 1921, while the decree of the Nebraska court entered April 12, 1921, was in full force and the department was in actual possession thereunder of the property in that state, Karatz, a citizen of Minnesota, purporting to sue also on behalf of others similarly situated, filed a bill in equity against the company in the federal court for the district of Minnesota, Fourth division. No disclosure was made of the proceedings taken against the company in the state court of Nebraska, nor that under its decree the department was in possession of all the company property in that state, and, at least, of some of its property elsewhere. The bill alleged that the company had been admitted to do business in Minnesota; that through its operation there plaintiff had become an unsecured simple contract creditor to the amount of $2,100; that the company had ceased to do business and was insolvent; that it had assets within that district valued at $20,000; and that there was danger that the property of the company would be wasted. The bill prayed that the amount due plaintiff be ascertained and decl red a first lien upon all the assets of the company in Minnesota; that, for the purpose of protecting the general public, creditors, and stockholders, receivers be appointed to collect all its assets, wherever situated, and to realize upon and distribute the same; that the company be directed to deliver possession to them of all the property wherever situated; that the company and its officers be restrained from interfering in any way with such receivers; and for general relief. On the filing of this bill the federal court, acting ex parte, appointed Hertz and Levin receivers of all the property of the company wheresoever situated, and authorized them to apply to any other District Court of the United States in aid of the order so entered. The company (which was served on May 5 by process upon the insurance commissioner of Minnesota) moved, on May 14, 1921, to dismiss the Karatz bill for want of federal jurisdiction and for want of equity. A motion was also made to discharge the receivers and to restore the property to the company or to the department of trade and commerce. Both motions were denied on May 30, 1921.

The Minnesota receivers secured the appointment of themselves as ancillary receivers by the federal courts for 12 other districts, but not for the Nebraska district. On May 11 and May 12, 1921, they filed, in purported compliance with section 56 of the Judicial Code (Comp. St. § 1038), certified copies of the bill and of the order of appointment with the clerks of the federal District Courts for Nebraska and other states in the Eighth circuit. On May 14, 1921, the company moved the Circuit Court of Appeals under that section for an order of disapproval of the appointment of receivers, so far as it may be operative outside the district of Minnesota. This motion was denied on May 31, 1921.¹

On September 6, 1921, the Minnesota receivers filed in the federal court for the district of Nebraska, Omaha division, a bill in equity (called the Hertz suit) against the company, the department of trade and commerce and others. It charged that there was a conflict of authority between the federal court for Minnesota and the Nebraska state court concerning the administration of the company's property; that the department threatened to liquidate the company under the order of the state court entered May 28, 1921; that its rights were limited to the temporary possession and listing of the property authorized by the order of April 12, 1921; and that it had no longer any right to the possession or control of the property either for the administration of the affairs of the company under direction of the state court or otherwise. The bill prayed that defendants be restrained from interfering with the Minnesota receiver's...