Carey v. McMillan

• Decision Date: 23 April 1923
• Docket Number: 6224.
• Parties: CAREY v. McMILLAN.
• Court: U.S. Court of Appeals — Eighth Circuit

289 F. 380

CAREY v. McMILLAN.

No. 6224.

United States Court of Appeals, Eighth Circuit.

April 23, 1923

Robert Healy, of Ft. Dodge, Iowa (V. P. McManus, of Manson, Iowa, C H. Wegerslev, of Alta, Iowa, Whitney & Whitney, of Harlan Iowa, S.D. Riniker, of Rock Rapids, Iowa, B. H. Mallory, of Hampton, Iowa, Kindig, McGill, Stewart & Hatfield, of Sioux City, Iowa, Lovrien & Lovrien, of Humboldt, Iowa, and Hanson & Schaupp and Healy & Breen, all of Ft. Dodge, Iowa, on the brief), for appellant.

E. E Wagner and C. M. Stilwill, both of Sioux City, Iowa, for appellee.

Robert J. Bannister, of Des Moines, Iowa, amicus curiae.

Before STONE, Circuit Judge, and BOOTH and JOHNSON, District Judges.

BOOTH District Judge.

This is an appeal from an order denying a motion to dismiss a bill in equity filed by the receiver of the Midland Packing Company and alleged by him to be ancillary to the suit in which he was appointed receiver, pending in the same court. The defendants are divided in the bill into two classes: Stockholder defendants, 240 in number; and creditor defendants, consisting of banks and others, 9 in number. The bill is voluminous, but its allegations may be summarized as follows:

The Midland Packing Company is an Iowa corporation, organized in March, 1918, to carry on a general meat packing business. Its original authorized capital stock was $3,500,000, which by amendment was increased to $8,000,000. About $3,000,000 was received by the company for stock sold, and about $5,000,000 subscribed by the stockholder defendants and others, upon which part payments have been made. The company built a packing plant at Sioux City, Iowa, the contract price being about $3,165,000. Each of the stockholder defendants entered into a written contract of subscription, making a part payment, and giving a promissory note for the balance of the stock subscribed, payable on or before a fixed date. It was provided in the subscription contract that no stock was to be issued until the amount of the subscription note given therefor was paid in full. The amount unpaid on the notes of the defendant stockholders is $1,279,404, of which $247,376 is on notes held by the receiver, and the balance by the creditor defendants. The plaintiff was appointed receiver of the company on the 10th of June, 1920, and has undertaken the collection of the assets of the corporation. Claims have been filed against the corporation amounting to $3,400,270, of which thus far $2,173,477 have been approved. The company is wholly insolvent. An appraisal of its packing plant, in May, 1921, showed the value, based on the cost of labor and material, at prices prevailing during the period of construction, of $2,522,931, but if sold to-day it would bring less than 50 per cent. of that amount. The outstanding notes of the subscribers to stock amount to $3,062,650, but owing to the impaired financial ability of the makers are worth to-day less than 50 per cent. of that amount.

About 40 actions at law have been commenced by the creditor defendants upon notes held by them, in which actions the defendants have set up that they were induced to make and deliver the notes by the fraud and deceit of the former officers and agents of the packing company. The defenses in each of said actions are substantially the same. Many other actions will be brought upon the notes by the creditor defendants, unless restrained by order of court. None of the stockholder defendants rescinded their contracts prior to the appointment of the receiver, and many of the claims which have been filed and proved against the company accrued after the stockholder defendants subscribed for stock, and on the faith of said stock subscriptions. The creditor defendants are of two classes: Those who own the notes, having purchased them from the packing company; and those who hold notes, as collateral security to loans made to the packing company. The indorsement of the packing company is upon all of the notes held by the creditor defendants, and they have filed their claims against the company, and such claims are included in the amount above given. Extensions have been made by the receiver upon some of the notes held by him, and by the creditor defendants upon some of the notes held by them. Many of the notes involved in the present controversy were due prior to the filing of the present bill, on the 23d of February, 1922; but some of them were not then due.

In addition to the foregoing, the bill alleges that the defenses to the notes in the actions already brought, as well as those to be brought in the future, are the same, and the issues between plaintiff and the creditor defendants, on the one hand, and the stockholder defendants, on the other, will be substantially identical; that the present suit is brought to avoid a multiplicity of actions, and that there will be greater convenience to the plaintiff and the creditor defendants, and no greater inconvenience to the stockholder defendants, in the maintaining of this present suit than in bringing and maintaining the numerous actions at law necessary; and that the expense of maintaining the present suit would be much less than in bringing and maintaining the numerous actions at law.

The prayer for relief is that the amount due and owing from each of the stockholder defendants be ascertained and established for the several amounts shown in a schedule attached to the bill, being the full unpaid amounts on the notes, and that judgment be rendered against each of the stockholder defendants for the amount so found against him, and that the assets be marshaled and equitably distributed so as to equalize the loss among the stockholders. It is further prayed that an injunction issue against the creditor defendants, to restrain them from bringing any actions upon the notes held by them, and, further, that they be required to bring into court and surrender to the receiver such notes, so that they may be surrendered to the stockholder defendants, upon payment.

The motion to dismiss in the court below was made on numerous grounds, but so far as relied upon in this court, may be reduced to the following: (1) That the court had no jurisdiction as a federal court to entertain the bill. (2) That the court had no jurisdiction as a court of equity to entertain the bill, since no ground for equitable relief was disclosed. (3) That, if any ground for equitable relief is stated, there is a misjoinder of causes of action and of parties defendant.

1. The bill alleges that the suit is ancillary to the suit in which the receiver was appointed-- brought to collect the assets of the insolvent company. It was stated by the court below in its decision that the court had possession of the assets of the packing company for the purpose of winding up its affairs as an insolvent corporation. We shall assume, as counsel on both sides seem to have done, that such is the fact, although we do not find it clearly appearing in the record. It is well settled that an ancillary suit may be maintained in the same federal court which appointed the receiver, without regard to the citizenship of the parties or the amount involved. White v. Ewing, 159 U.S. 36, 15 Sup.Ct. 1018, 40 L.Ed. 67, is perhaps the leading case; but there is a multitude of decisions to that effect.

2. But, though the suit be ancillary, yet it does not follow that it will be entertained by a court of equity, nor is its form determined by that of the principal case. An ancillary suit may be equitable, as affecting or in aid of an equitable suit. Pope v. Railway, 173 U.S. 573, 19 Sup.Ct. 500, 43 L.Ed. 814; Blair v. Chicago, 201 U.S. 400, 26 Sup.Ct. 427, 50 L.Ed. 801; Hatcher v. Hendrie, etc., Co., 133 F. 267, 68 C.C.A. 19; St. Louis, etc., Ry. v. McElvain (D.C.) 253 F. 123. Or it may be equitable, as in aid of or affecting a legal action. Dewey v. West Fairmount Co., 123 U.S. 329, 8 Sup.Ct. 148, 31 L.Ed. 179. Or it may be legal, as in aid of or affecting a legal action. Reilly v. Golding, 10 Wall. 56, 19 L.Ed. 858; Lamb v. Ewing, 54 F. 269, 4 C.C.A. 320. Or it may be legal, as in aid of or affecting an equitable suit. Kirkland v. Knox, 230 F. 806, 145 C.C.A. 116; Hume v. City of N.Y., 255 F. 488, 166 C.C.A. 564. The form of the ancillary proceeding is to be adapted to the facts; 'but it must be a proper proceeding, adapted to the nature of the demand. ' N.Y. Guaranty & Indemnity Co. v. Memphis Co., 107 U.S. 205, 212, 2 Sup.Ct. 279, 27 L.Ed. 484; Krippendorf v. Hyde, 110 U.S. 276, 287, 4 Sup.Ct. 27, 28 L.Ed. 145.

Before applying these principles to the present case, let us analyze the bill a little more closely. The bill divides the defendants into two classes, creditor defendants and stockholder defendants; but each of these may be properly subdivided-- the creditor defendants into (A) those who own and hold notes of the stockholder defendants; (B) those who hold as pledgee such notes. The stockholder defendants may properly be subdivided into (a) those whose notes are held and owned by the creditor defendants class (A), to which class appellant belongs; (b) those whose notes are held as collateral by the creditor defendants class (B); (c) those whose notes are held by the receiver.

As to the creditor defendants class (A) and the corresponding stockholders class (a), what is the relation of the receiver? The notes belong to the creditor defendants; they represent no asset of the packing company; they were sold to and paid for by the creditor defendants.

It is alleged in the bill that these creditor defendants will bring suits against the stockholder defendants on these notes unless restrained; that the receiver is interested in the suits by reason of the indorsement of the packing company on the notes; that there is a...