Safety Car Heating & Lighting Co. v. US Light & Heating Co.

• Citation: 2 F.2d 384
• Parties: SAFETY CAR HEATING & LIGHTING CO. v. UNITED STATES LIGHT & HEATING CO. et al.
• Decision Date: 21 August 1924
• Court: U.S. District Court — Western District of New York

2 F.2d 384 (1924)

SAFETY CAR HEATING & LIGHTING CO. v. UNITED STATES LIGHT & HEATING CO. et al.

District Court, W. D. New York.

August 21, 1924.

COPYRIGHT MATERIAL OMITTED

Randolph Parmly, of Jersey City, N. J. (George Clinton, of Buffalo, N. Y., Van Vechten Veeder, of New York City, Frank A. Abbott, of Buffalo, N. Y., and Henry T. Stetson, of New York City, of counsel), for plaintiff.

Kenefick, Cooke, Mitchell & Bass, of Buffalo, N. Y. (Daniel J. Kenefick and Charles P. Franchot, both of Buffalo, N. Y., of counsel), for defendant United States Light & Heat Corporation.

Stetson, Jennings, Russell & Davis, of New York City, and Dudley, Stowe & Sawyer, of Buffalo, N. Y. (Ansley W. Sawyer, of Buffalo, N. Y., and Thomas Garrett, Jr., of New York City, of counsel), for defendant Guaranty Trust Co. of New York.

Tracy, Chapman & Welles, of Toledo, Ohio (Thomas H. Tracy and Frank M. Cobourn, both of Toledo, Ohio, of counsel), for interveners.

HAZEL, District Judge (after stating the facts as above).

The paramount contention of the new corporation, and emphasized by the other respondents, was that its obligation was contractual to pay a contingent claim without any right of equitable lien, and, further, that plaintiff erroneously joins an action to establish express liability, a remedy at law, with a pending action for infringement of patent.

It is unnecessary to recite the details of the scheme or plan of reorganizing the insolvent old company involving the issuance and sale of preferred and common stock and the existing indebtedness, or the issuance and sale of bonds. The reorganization, a resultant of the receivership, was lawful and valid between the parties and the public generally. The evidence discloses the financial straits of the insolvent new company; that funds were obtainable only by sale of the assets and property of the original company to the reorganized new corporation; that the issue of capital stock in the latter was largely taken over by the stockholders and officers of the old company and the management and control is substantially the same; that bonds were issued to pay indebtednesses; and that the creditors except the plaintiff have been paid. The reorganization of the old company could not affect the creditors. As to them it was simply a means of procuring money to pay their claims, and the assets as to plaintiff's claim were subject thereto. Baker Motor Vehicle Co. v. Hunter, 238 F. 898, 152 C. C. A. 28. The principle by which the rights of unpaid creditors are retained and enforceable against a reorganized company is clearly stated in Northern Pacific Railway Co. v. Boyd, 228 U. S. 482, 33 S. Ct. 554, 57 L. Ed. 931:

"Corporations, insolvent or financially embarrassed, often find it necessary to scale their debts and readjust stock issues with an agreement to conduct the same business with the same property under a reorganization. This may be done in pursuance of a private contract between bondholders and stockholders. And though the corporate property is thereby transferred to a new company, having the same shareholders, the transaction would be binding between the parties. But, of course, such a transfer by stockholders from themselves to themselves cannot defeat the claim of a nonassenting creditor. As against him the sale is void in equity, regardless of the motive with which it was made. For if such contract reorganization was consummated in good faith and in ignorance of the existence of the creditor, yet when he appeared and established his debt the subordinate interest of the old stockholders would still be subject to his claim in the hands of the reorganized company. Cf. San Francisco & N. P. R. R. v. Bee, 48 California, 398; Grenell v. Detroit Gas Co., 112 Michigan, 70. There is no difference in principle if the contract of reorganization, instead of being effectuated by private sale, is consummated by a master's deed under a consent decree."

In the Baker Case, supra, an action at law to recover on a bond, Judge Rogers, writing for the Circuit Court of Appeals, said:

"It is elementary that a corporation cannot give away its assets to the prejudice of its creditors, nor can it, as against its creditors who have not assented to it, transfer all of its assets to another corporation which guarantees the payment of the debts of the former. The express agreement to pay the debts does not constitute a novation, and the corporation, taking the property, holds it subject to a lien in favor of the creditors of the transferrer."

And the learned court clearly points out that where the transferee corporation agreed to assume the debts under equitable principles or the modern codes of procedure, the creditors of the transferring company have the right to maintain a direct action against the transferee corporation upon the contract. The obligation to pay the plaintiff on liquidation of its claim arising out of the infringement by the old company of the patent in suit was not exclusively a contractual obligation between it and the new corporation, since the later corporation, as a condition of sale to it, assumed the burden of paying plaintiff's claim for recoverable damages upon ascertainment of the amount. The wording of the order of sale and a similar clause in the deed of conveyance is believed sufficiently comprehensive to include such recovery. The assumption to pay not only all obligations and indebtedness of the receivers, but also all unmatured obligations of creditors of the old company, and the specific provisions that the purchaser "assumes claim for damages for alleged infringement by the defendant of letters patent of the United States," is plain and unequivocal. It makes no material difference that the reference to damages for alleged infringement was contained only in the order of sale and omitted from the deed of conveyance. There is also oral testimony that bidders were expressly warned at the sale of plaintiff's unliquidated claim against the old company. Under the circumstances, plaintiff in my opinion is not limited to a remedy at law based on the legal assumption to pay a recovery, but may resort to equitable cognizance and establish a lien against the assets and property acquired under order of the court.

Many adjudications are cited by learned counsel to the effect that any existing liability was simply contractual, and that plaintiff was obliged to recover a judgment at law or in a creditor's bill before resorting to a supplemental bill. This contention, however, and the argument in support thereof, I find unpersuasive. The interlocutory decree in the infringement suit had been entered and the accounting before the special master was under way when the order was made in the receivership action for creditors to prove their claims, and subsequently on application of the plaintiff herein and notice to the receivers it was stipulated that the claim of the latter when ascertained should be protected in the decree of sale. The plaintiff as a creditor practically became and was a party to the action brought to wind up the affairs of the original defendant. Its claim was the only one not paid and was an unmatured business obligation. That it was not liquidated or ascertained within the time specified in the order for proving claims of creditors is not of material importance. No laches resulted from the omission. The sale by the receivers was not delayed and the administration was not hindered. This in a measure, no doubt, was due to the arrangement willingly entered into by the receivers representing the old company who were assisting to effect the reorganization plan. The successor company by the arrangement and assumption of the obligations of its predecessor became primarily liable in equity to pay the unascertained damages.

Philadelphia Rubber Co. v. U. S. Rubber Reclaiming Works (D. C.) 276 F. 600-613, affirmed (C. C. A.) 277 F. 171, certiorari denied 257 U. S. 661, 42 S. Ct. 187, 66 L. Ed. 422, is not distinguishable in principle from this case because of any difference in the assumption of liability. It makes no difference that in this case the assumption is denied. And the case of Scott v. Neely, 140 U. S. 106, 11 S. Ct. 712, 35 L. Ed. 358, presents no analogy to the facts here. In that case a suit in equity was brought on facts disclosing an action at law, and, even though the statutes of Mississippi gave a right in equity, the Supreme Court held that such a right could not be invoked in the federal courts. That decision it seems to me was based on a different principle. Here the equitable jurisdiction of the subject arises, as heretofore pointed out, from the procedure in the...