Cobb v. Interstate Mortgage Corporation

• Decision Date: 05 July 1927
• Docket Number: No. 2578.,2578.
• Parties: COBB et al. v. INTERSTATE MORTGAGE CORPORATION.
• Court: U.S. Court of Appeals — Fourth Circuit

20 F.2d 786 (1927)

COBB et al. v. INTERSTATE MORTGAGE CORPORATION.

No. 2578.

Circuit Court of Appeals, Fourth Circuit.

July 5, 1927.

W. Conwell Smith and Isaac Lobe Straus, both of Baltimore, Md. (Joseph L. Donovan, of Ellicott City, Md., and C. R. Wattenscheidt, of Baltimore, Md., on the brief), for appellants.

J. Purdon Wright, of Baltimore, Md., for appellee.

Before WADDILL, PARKER, and NORTHCOTT, Circuit Judges.

PARKER, Circuit Judge.

Samuel F. Cobb, De Wilton C. Parlett, and Howard F. Scott, citizens of Maryland, were complainants in the court below, and the Interstate Mortgage Corporation of Delaware with its principal office in New York was defendant. We shall refer to them in this opinion in accordance with the positions which they occupied there. The appeal is from an order dismissing the bill of complaint; and the only question presented is whether, considering the allegations of the bill to be true, such a case is stated as entitles complainants to equitable relief, for it is settled that on such motion the averments of the bill must be taken as admitted. Hill v. Wallace, 259 U. S. 44, 61, 42 S. Ct. 453, 66 L. Ed. 822.

The bill was filed by complainants in behalf of themselves and any other creditors of the Bankers' Mortgage Company, a Maryland corporation, who might desire to intervene. It set forth that complainants had been induced by fraud and deceit to subscribe to, and pay for, stock in the Bankers' Mortgage Company, which was absolutely worthless, and that, because of the fraud and deceit practiced upon them, they had claims against that company for the amounts which they had paid to it; the total of their claims being in excess of $10,000. It alleged that all of the assets of the Bankers' Mortgage Company had been transferred to the defendant, Interstate Mortgage Corporation, and that, in connection with the transfer, the defendant had "expressly assumed all the liabilities of the Bankers' Mortgage Company to its creditors, including the plaintiffs and all other subscribers to its stock in the same situation and plight as the plaintiffs." It described a part of the assets transferred to defendant, and prayed that defendant be enjoined from disposing of them, and that a receiver be appointed to take charge of same to the end that they might be liquidated and distributed to creditors under order of court.

With respect to the transfer of the assets of the Bankers' Mortgage Company to defendant, it was alleged, not only that in connection therewith defendant had expressly assumed the liabilities of the Bankers' Mortgage Company, including the liability to complainants, but also that defendant controlled the action of the Bankers' Mortgage Company through stock ownership, and had secured the transfer fraudulently, knowing that the Bankers' Mortgage Company was insolvent, and intending to get possession of its assets in fraud of the rights of complainants, and without intending to pay the liabilities which it had assumed. The bill further alleged that, by placing the assets in the possession of a foreign corporation without a process agent in the state, it was intended to place them beyond the reach of complainants and other creditors of the Bankers' Mortgage Company.

As to the status of the Bankers' Mortgage Company, the bill alleged that it had become a defunct corporation, "with its organization disintegrated, its assets disposed of, its corporate and business operations ended, a vote for its dissolution passed, and its officers and promoters had entered the service of the defendant corporation, or had fled from the state of Maryland, its offices and office furniture, books, papers, and effects being taken into the possession of the defendant company, so that any proceeding or proceedings whatsoever, whether by suit at law or in equity, against the said Bankers' Mortgage Company, would necessarily have been and are and will be wholly futile and ineffective." It contained also the further allegation: "That ever since the 16th of July, 1923, the said Bankers' Mortgage Company, being then and having been theretofore, insolvent, has failed and ceased to maintain its corporate organization and existence, has discontinued and abandoned its corporate business, has, as herein stated, whilst insolvent, aliened all its property and assets to the defendant corporation, and has ceased to exist."

The appeal from the order sustaining the motion to dismiss the bill presents three questions for our consideration: (1) Can complainants sue in equity to enforce against defendant, or against the property transferred to it by the Bankers' Mortgage Company, claims against that company which have not been reduced to judgment? (2) Is the Bankers' Mortgage Company a necessary party to the suit? and (3) Is the joining of the three complainants a misjoinder of parties? We shall consider these in order.

On the first question the position of defendant is that a suit in equity cannot be maintained by creditors to set aside a fraudulent conveyance, or to subject property of the debtor to the satisfaction of their claims until judgment has been obtained and execution returned unsatisfied. Undoubtedly, this is the rule of the federal courts in ordinary cases. Cates v. Allen, 149 U. S. 451, 13 S. Ct. 883, 977, 37 L. Ed. 804; Scott v. Neely, 140 U. S. 106, 11 S. Ct. 712, 35 L. Ed. 358; Hollins v. Brierfield Coal & Iron Co., 150 U. S. 371, 14 S. Ct. 127, 37 L. Ed. 1113; D. A. Tompkins Co. v. Catawba Mills (C. C.) 82 F. 780. This rule, however, is only applicable where a complainant's right to equitable relief depends upon a showing that he has exhausted his remedies at law, and is without remedy save in equity. It has no application to a case where his only remedy is in equity, as where he seeks to establish a liability which only equity will recognize or to enforce an equitable lien or a trust. Day v. Washburn, 24 How. 352, 16 L. Ed. 712; Case v. Beauregard, 101 U. S. 688, 25 L. Ed. 1004. In this case, we think, complainants assert rights against defendant under its assumption of the liabilities of the Bankers' Mortgage Company, and also rights in the property transferred by that company which only a court of equity can enforce, and consequently the obtaining of judgment and the return of execution need not be shown.

The bill alleges, and as stated above we must assume the allegation to be true, that in connection with the transfer made to it the defendant expressly assumed all of the liabilities of the Bankers' Mortgage Company to its creditors, "including plaintiffs and all other subscribers to its stock in the same condition and plight as the plaintiffs." This assumption of liabilities as a consideration for the transfer of assets conferred no right upon the creditors of the Bankers' Mortgage Company to sue defendant upon their claims at law, but it did give them the right to sue defendant in equity to enforce in their own behalf the promise made to the Bankers' Mortgage Company for their benefit. Such suit is allowed by equity upon the theory that as a result of the contract and transfer the defendant became the principal debtor, and the Bankers' Mortgage Company a mere surety, and that to avoid circuity of action equity will enforce the obligation of the principal debtor for the benefit of the creditor. Keller v. Ashford, 133 U. S. 610, 623, 10 S. Ct. 494, 33 L. Ed. 667; Johns v. Wilson, 180 U. S. 440, 21 S. Ct. 445, 45 L. Ed. 613; Silver King Coalition Mines Co. v. Silver King Consol. Mining Co. (C. C. A. 8th) 204 F. 166, Ann. Cas. 1918B, 571; Blackmore v. Parkes (C. C. A. 6th) 81 F. 899; Goodyear Shoe Machinery Co. v. Dancel (C. C. A. 2d) 119 F. 692; s. c. (C. C.) 120 F. 839; s. c. (C. C.) 137 F. 157; s. c. (C. C. A.) 144 F. 679; Philadelphia Rubber Works Co. v. United States Rubber Reclaiming Works (D. C.) 276 F. 613, 615.

In the case of Silver King Coalition Mines Co. v. Silver King Consol. Mining Co., supra, which involved the right to sue in equity to enforce the promise of the transferee of the property of a corporation to pay its obligations, Judge Sanborn, speaking for the Circuit Court of Appeals of the Eighth Circuit, stated the rule as follows:

"When a grantee contracts with his grantor to pay the latter's debt or obligation in payment, or in part payment, for the conveyance, the creditor or obligee may accept and appropriate that contract to himself and maintain a suit in equity to enforce it. In that event the grantee becomes the principal debtor and the grantor the surety, and the creditor's suit stands on the equitable doctrines that the creditor may have the benefit of any security or obligation given by the principal debtor to the surety, and that to avoid circuity of action — that is to say, an action by the creditor against the original debtor and a subsequent action by the latter against his grantee — the creditor may be, and is in equity, substituted for the promisee, the grantor."

And not only is the bill cognizable because it seeks to enforce against the defendant an obligation enforceable only in equity, but also because it asks that the assets transferred be applied to the satisfaction of the claims of creditors under a lien enforceable in equity. When these assets were transferred to defendant under a promise on defendant's part to assume the liabilities of the Bankers' Mortgage Company, though no express lien was retained to secure the payment of the debts thus assumed, yet an equitable lien arose, and the assets transferred were chargeable with the payment of the liabilities, the assumption of which constituted the consideration for the transfer. Blackmore v. Parkes, supra, at page 900. Whether the so-called "trust fund doctrine" be strictly followed or not, there can be no doubt, we think, that, where one corporation transfers all of its assets to another, and practically ceases to exist without having paid its debts, the purchasing corporation takes the property so...