276 U.S. 36 (1928), 117, Harkin v. Brundage

Docket Nº:No. 117
Citation:276 U.S. 36, 48 S.Ct. 268, 72 L.Ed. 457
Party Name:Harkin v. Brundage
Case Date:February 20, 1928
Court:United States Supreme Court

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276 U.S. 36 (1928)

48 S.Ct. 268, 72 L.Ed. 457

Harkin

v.

Brundage

No. 117

United States Supreme Court

Feb. 20, 1928

Argued December 5, 6, 1927

CERTIORARI TO THE CIRCUIT COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

Syllabus

1. As between two courts of concurrent and coordinate jurisdiction, the court which first obtains jurisdiction and constructive possession of property by the filing of a bill is entitled to retain it without interference, and cannot be deprived of its right to do so because it may not have obtained prior physical possession by its receiver of the property in dispute; but where the jurisdiction is not the same or concurrent, and the subject matter in litigation in the one is not within the cognizance of the other, or there is no constructive possession of the property in dispute by the filing of a bill, it is the date of the actual possession of the receiver that determines the priority of jurisdiction. P. 43.

2. A stockholders' suit having been brought in a state court to protect the assets of a corporation from wasteful and dishonest management and to restore them, when in safe condition, to the corporation after election of a new management, the attorney for the corporation fraudulently procured a postponement of a motion for receivers by agreeing in the state court that nothing would be done in the interim to affect the status quo, the real intention being to secure a prior receivership in the federal court. To this end, during the continuance, a collusive creditors' suit was begun against the corporation by a nonresident, a receiver was appointed with the corporation's consent, the bill, answer, and consent being filed simultaneously, and the receiver took custody of the corporate property.

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Soon afterwards, receivers appointed by the state court, explaining he facts to the federal court, applied for a surrender of the property, which was denied, although the parties there at that time were limited to the corporation and the plaintiff, both charged with knowledge of the fraud, and although, due to the insolvency of the corporation, the proceeding in the state court could by amendment have been given the effect of a creditors' bill. The federal court proceeded to administer the corporate estate, receiver's receipts were issued and paid, some of the property was sold, some distribution made to creditors, and the rights of innocent creditors who had become parties were involved.

Held:

(1) The means by which the state court was induced to delay exercise of its jurisdiction to appoint receivers and the failure to reveal the facts to the federal court constituted a fraud on both courts. P. 56.

(2) Vindication of the cause of comity and good faith as between the two courts should not be limited to punitive proceedings against the lawyer whose pledge to the state court was broken. P. 54.

(3) Although the difference in character between the two suits as brought was such as to have enabled the federal court to retain jurisdiction of the property but for the fraud, when it learned of the fraud, the parties before it being both guilty, it was bound in good faith and comity to accord the state court an opportunity to exercise its jurisdiction, even to the taking of the property. P. 56.

(4) Notwithstanding the subsequent change of situation, through the administration of the estate in the federal court and the introduction of innocent parties, comity still required that the federal court, after paying reasonable compensation to its officers for work done by them, should surrender the property still in its custody to the state court receivers, but on condition that that court first confirm all that was done in the sale, disposition, and distribution of assets as though done by its own decree, and so shape its pleadings, etc., that the case in that court might proceed, as a creditors' bill, to a liquidation of all debts and distribution of remaining assets. P. 57

(5) Failing the making of such an order by the state court and its production in the federal court in a seasonable time, the pending administration in the federal court should continue. P. 58.

3. As a general rule, a creditors' bill can be brought only by a judgment creditor after a return of nulla bona. P. 52.

4. When a receiver has been irregularly appointed in a suit by a simple contract creditor with consent of the defendant, and the

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administration has proceeded so far that it would be detrimental to all concerned to discharge the receiver, the receivership has been permitted to continue because not seasonably objected to. P. 52.

5. A receiver is an officer of the court, and should be as free from "friendliness" to any party as should the court itself. P. 55.

6. A conclusion of fact made by the district court upon hearing the witnesses will not be accepted here when the agreed stenographic report and other circumstance in the case show it to be clearly erroneous. P. 53.

13 F.2d 617 reversed.

Certiorari, 273 U.S. 682, to a decree of the circuit court of appeals affirming an order of the district court, which denied an application by the petitioners here for surrender into their custody, as receivers appointed by a state court, of property in the custody of the respondent, as receiver appointed by the district court. See post, p. 604.

TAFT, J., lead opinion

MR. CHIEF JUSTICE TAFT delivered the opinion of the Court.

This case presents a controversy between state court receivers and the receiver of a federal court over the possession of the property and assets of the Daniel Boone Woolen Mills Corporation. It is here by certiorari to the judgment of the Circuit Court of Appeals for the Seventh Circuit affirming a decree of the District Court for the Northern District of Illinois. The receivers in the state court were appointed on the prayer of what was called a stockholder's bill. The receiver in the federal court was appointed on the prayer of what was called a creditor's bill. The receiver in the federal court was appointed

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first; but the bill in equity upon which the state court receivers were appointed was filed five days before the bill in the federal court. The receivers in the state court filed a motion in the federal court, requesting that the property in the hands of the federal court receiver be transferred to the state court receivers, on the ground that the state court, by the earlier filing of the bill in that court, had acquired constructive possession, and its receivers were entitled therefore to actual possession of the property.

The Daniel Boone Woolen Mills was a corporation of the State of Illinois engaged in the manufacture of woolen cloth in Illinois, with its principal place of business there, but with additional plants in other states. It had 187,000 shares of stock, owned by 1,500 individual stockholders, resident in many states. It had been so badly managed during the year 1924, and its indebtedness had been so much increased, that a surplus of $500,000 had been changed into a deficit of more than $2,000,000. Nevertheless, at the end of 1924, it was alleged by all parties that its assets exceeded its liabilities by $1,000,000, although the event has proved the fact to be otherwise, and administration under receivership shows the debts much to exceed its assets. The mismanagement had led its president and its treasurer, both named Gumbinski, to resign, and they were replaced by Joseph Byfield, as president, and Frank Solomon, as vice-president. These two officials had not been able to secure the financial support necessary to meet the expenditures and conduct the business. On February 14, 1925, therefore, Harry Hurwitz, a stockholder of the company, filed a bill in the Superior Court of Cook County, Illinois, in his own behalf and in that of all other stockholders of the corporation, "and all other firms or corporations who might be interested [48 S.Ct. 270] in the litigation, and who might seek to intervene or contribute to the expense thereof."

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The averment of the bill was that, during 1924, those in control had used for their own purposes the assets of the corporation, and it became the duty of the new officers to bring suit to recover the property thus abstracted, embezzled, or wasted, but that nothing had been done. It averred the solvency of the company, but alleged that it was not able to pay its current expenses, that the business ought to be maintained and conducted in order to make up in salable form a great deal of material on hand uncompleted, and that, in order to save the property in the interest of the stockholders and others, a receiver should be appointed who should continue the business. The prayer was for an injunction forbidding those engaged in the management from imposing any lien or mortgage on the property. In effect, the bill asked for the appointment of receivers, with authority to take possession of the property, carry on the business, and subsequently, after getting the property into proper condition, to provide for and call a stockholders' meeting and a transfer of the property back to a new management.

On the 19th of February, five days later, a bill was filed in the United States District Court for the Northern District of Illinois by the United States Worsted Sales Company, a corporation of the State of New York, claiming to be a simple non-judgment creditor of the Woolen Mills in the sum of $6,000. The plaintiff brought the bill on its own behalf and on behalf of all the creditors of the Woolen Mills who would join in the prosecution. Its averments in respect to ownership and the disastrous operation of the company were much the same as those of the bill by Hurwitz in the state court. It specifically averred that the Woolen Mills was not insolvent, but that it had been impossible to secure money with which to carry it on; that there was grave danger of the recovery of...

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