First Trust & Savings Bank v. Iowa-Wisconsin Bridge Co.

• Decision Date: 08 August 1938
• Docket Number: No. 11055.,11055.
• Citation: 98 F.2d 416
• Parties: FIRST TRUST & SAVINGS BANK et al. v. IOWA-WISCONSIN BRIDGE CO. (KENDRICK, et al., Interveners).
• Court: U.S. Court of Appeals — Eighth Circuit

98 F.2d 416 (1938)

FIRST TRUST & SAVINGS BANK et al. v. IOWA-WISCONSIN BRIDGE CO. (KENDRICK, et al., Interveners).^*

No. 11055.

Circuit Court of Appeals, Eighth Circuit.

August 8, 1938.

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Vincent L. Boisaubin and Lon O. Hocker, both of St. Louis, Mo. (Frank Y. Gladney and Jones, Hocker, Gladney & Grand, all of St. Louis, Mo., on the brief), for appellants.

William C. Green, of St. Paul, Minn., and F. A. Ontjes, of Mason City, Iowa (Charles N. Dohs, of St. Paul, Minn., on the brief), for appellees.

Before GARDNER, WOODROUGH, and THOMAS, Circuit Judges.

THOMAS, Circuit Judge.

This is an appeal in equity from a decree denying foreclosure of a Mortgage Trust Deed. Bechtel Trust Co. v. Iowa-Wisconsin Bridge Co., D.C., 19 F.Supp. 127.

The trust deed, dated January 1, 1932, but actually executed February 20, 1932, was given to secure a bond issue of $200,000. It conveyed to the complainant trustees all the property of the defendant including a bridge across the Mississippi river at Lansing, Iowa. The trustees named therein were the Bechtel Trust Company, now called First Trust and Savings Bank, an Iowa corporation, and A. H. Schubert, a citizen of Wisconsin. The grantor, Iowa-Wisconsin Bridge Company, is a Delaware corporation.

On August 28, 1933, the bill of foreclosure was filed in the district court by the trustees, complainants, against the bridge company, defendant. The bill alleged jurisdiction based upon diversity of citizenship, the authority of the trustees to sue under the terms of the trust deed, default, and acceleration of the due date. The prayer was for foreclosure and sale and the appointment of a receiver. The defendant bridge company filed answer September 25, 1933, admitting the jurisdiction of the court, the execution of the trust deed and the issuance of the bonds; denying complainants' right to the appointment of a receiver; alleging that a part or all of the bonds secured by the trust deed were invalid; and praying the protection of the court. On September 26, 1933, the court appointed a receiver of all of the property of the bridge company with direction to take immediate possession and to operate its business.

On December 5, 1933, by leave of court, Fayette D. Kendrick, a stockholder of the bridge company and citizen of Minnesota, intervened on behalf of defendant, praying that the complainants' bill be dismissed, the bonds cancelled and the deed of trust set aside. He alleged that the bridge company was and had been since 1930 dominated by one J. A. Thompson and his associates; that by the exercise of such domination these men had fraudulently procured the execution and delivery of the trust deed and the issuance of the bonds to themselves or to corporations controlled by them. Kendrick then moved that certain corporations alleged to be controlled by Thompson including Phoenix Finance System, Inc., and Phoenix Finance Corporation, Delaware corporations, be made parties. This motion was granted. Thereafter Phoenix Finance Corporation appeared and filed answer to the petition of intervention. Inasmuch as the district court found that Phoenix Finance Corporation was in all respects so far as concerns this case the successor of Phoenix Finance System, Inc., and was managed by the same officers, both corporations are hereinafter indiscriminately referred to as Phoenix. The answer of Phoenix denied the charges of fraud and alleged that the corporation was the owner of a large amount of the bonds. Other stockholders of the bridge company, residents of Iowa, intervened and adopted the pleadings filed by Kendrick. By order of court, the petition of intervention was considered as an answer to the bill of foreclosure.

On December 5, 1934, counsel for the parties agreeing, the court appointed a special master to hear all the issues and to report his findings of fact and conclusions of law. The master, after taking evidence, filed a comprehensive report on March 18, 1936, to which all parties excepted. After a hearing on the exceptions the court adopted the findings of the master, with slight modifications hereafter noted, and amplified them with additional findings. On December 1, 1936, the court entered its decree: "That the mortgage and bonds in suit were fraudulently issued. That all bonds are without valid consideration; with the exception of the bonds aggregating $15,000," which were specified. Foreclosure was denied, but the receivership was continued for the purpose of impounding the income of the bridge company until the $15,000 of obligations found to be meritorious should be paid. On December 19, 1936, Phoenix moved the court to vacate all orders entered in the cause and to dismiss the cause without prejudice on the ground that "no diversity of citizenship exists upon which jurisdiction in this suit is based." A similar motion was filed by the trustees. Both motions were overruled. Thereafter complainants filed a petition for rehearing, or in the alternative to modify the decree. The petition was overruled.

On this appeal two classes of error are assigned: (1) That the district court was without jurisdiction because diversity of citizenship did not exist; and (2) errors occurring in the proceedings in the lower court. The attack on the jurisdiction will be first considered.

With respect to the jurisdiction of the district court, it must be conceded that prior to the joining of Phoenix as a party there was complete diversity of citizenship. It is appellants' contention that Phoenix is a proper, necessary, and indispensable party, and that after it was joined as a plaintiff diversity of citizenship no longer existed because both Phoenix and the defendant bridge company are citizens of Delaware. Appellees say that Phoenix is only a formal and not an indispensable party, and that therefore its citizenship is not material to the question of jurisdiction.

It is settled that jurisdiction of the federal court can not be defeated by the joinder of an unnecessary party, Cella v. Brown, 8 Cir., 144 F. 742, certiorari denied 202 U.S. 620, 26 S.Ct. 766, 50 L.Ed. 1174; Egyptian Novaculite Co. v. Stevenson, 8 Cir., 8 F.2d 576, 579; and the bringing in of an unnecessary party after the commencement of the suit will not oust the jurisdiction. Sioux City Terminal Railroad & Warehouse Co. v. Trust Co. of North America, 8 Cir., 82 F. 124, affirmed 173 U.S. 99, 19 S.Ct. 341, 43 L.Ed. 628; Weiland v. Pioneer Irrigation Co., 8 Cir., 238 F. 519, affirmed 259 U.S. 498, 42 S.Ct. 568, 66 L.Ed. 1027; Phelps v. Oaks, 117 U.S. 236, 240, 6 S.Ct. 714, 29 L.Ed. 888.

The question here presented, in its simple form, is whether under the facts of this case a bondholder is a necessary and indispensable party in a suit brought by the trustees to foreclose the trust deed where the defense is the invalidity of the trust deed and the bonds because of fraud in their inception.

Looking to the language of the trust deed alone it is apparent that the trustees are the only necessary and indispensable parties plaintiff. The trust deed made it the duty of the bridge company to pay taxes on the mortgaged property, to pay interest on the bonds, and to pay the bonds as they matured. In case of default for a period of sixty days it was provided that the trustees may, and upon the written request of the holders of 25 per cent of the bonds then in default, shall declare the principal of all the bonds due, and "shall proceed to protect and enforce their rights and the rights of the bondholders under this Indenture by a suit or suits in equity, or at law, * * * by * * * foreclosure hereunder, or for the enforcement of any other appropriate, legal or equitable remedy, as the Trustees * * * shall deem most effectual."

It is further provided in the trust deed that "No holder of any bond or coupon secured hereby shall have any right to institute any suit, action or proceeding in equity or law, for the foreclosure of this Indenture," except in case the trustees after notice and demand refuse to act.

The suit was commenced by the trustees at the request of Phoenix, holder of more than 25 per cent of the bonds, and was prosecuted by attorneys selected by it.

One of the questions raised in connection with the matter of jurisdiction relates to the applicable law. It is settled that federal courts of equity look to the law of the state for the ascertainment of rights of a substantive character; but in questions of remedy the equity jurisdiction of the national courts under the Constitution and laws is uniform throughout the United States and can not be limited in its extent or controlled in its exercise by the laws of the states. Watts v. Camors, 115 U.S. 353, 6 S.Ct. 91, 29 L.Ed. 406; Carolina Power & Light Co. v. South Carolina Public Service Authority, 4 Cir., 94 F.2d 520, 525; Mathis v. Hemingway, 8 Cir., 24 F.2d 951. Cf. A. & R. Realty Co. v. Northwestern Mut. Life Ins. Co., 8 Cir., 95 F.2d 703, 707; Henrietta Mills v. Rutherford County, 281 U.S. 121, 127, 50 S.Ct. 270, 272, 74 L.Ed. 737. The Conformity Act of 1872, 28 U.S.C.A. § 724, by its terms is not applicable to equity causes.

In so far as the right here involved is substantive it is controlled by the laws of Iowa and Wisconsin, in which states the property is situated. Section 10968 of the Code of Iowa of 1935 provides: "A trustee of an express trust, a party with whom or in whose name a contract is made for the benefit of another, or party expressly authorized by statute, may sue in his own name, without joining with him the party for whose benefit the action is prosecuted." In the case of Tucker v. Silver, 9 Iowa 261, 262, the Supreme Court of Iowa said: "The general rule, independent of the Code, is, that a trustee is a necessary party;" and it was held that the provisions of the code do not change the rule. See also, Bennett Savings Bank v. Smith, 171 Iowa 405, 408, 152 N.W. 717; In re Receivership of Selway Steel Post & Fence Co., 198 Iowa...