Grover v. Merritt Development Co.

• Decision Date: 22 July 1925
• Citation: 7 F.2d 917
• Parties: GROVER v. MERRITT DEVELOPMENT CO.
• Court: U.S. District Court — District of Minnesota

7 F.2d 917 (1925)

GROVER v. MERRITT DEVELOPMENT CO.

District Court, D. Minnesota, Fourth Division.

July 22, 1925.

James E. Trask, of St. Paul, Minn., for receiver.

Orr, Stark & Kidder, of St. Paul, Minn., for E. I. Du Pont de Nemours & Company, Inc.

CANT, District Judge.

In the exercise of its general equity powers, this court, on August 30, 1921, appointed a receiver for the defendant, a Minnesota corporation. Such appointment was upon the express consent of the defendant. The regularity and validity thereof is unquestioned. At the time of such appointment, the apparent assets of the defendant were considerable and the fixed liabilities were large in amount. Since such appointment, practically all of those assets have been converted into cash. The actual value proved to be much less than was anticipated. There is practically nothing available for distribution to creditors. The process of liquidation by the receiver is substantially at an end. Considerable sums have come into his hands, and sums nearly equal have been expended by him. Various reports have been made by him to the court, and various orders have been based thereon. The defendant is hopelessly insolvent. Under such circumstances, the stockholders of the defendant are liable to creditors for amounts not exceeding the par value of the stock held or owned by them respectively. Constitution of Minnesota, art. 10, § 3. The receiver and various creditors now ask that the defendant be formally declared insolvent, and that, in connection with the settlement of the estate, the receiver be authorized and directed to take the steps necessary to enforce the constitutional liability of the stockholders of the defendant. Another creditor objects to taking such steps in this proceeding, and claims that such liability cannot lawfully be enforced in this court. Such creditor claims also that the present receiver is not a proper person to prosecute claims against stockholders, and urges generally that such matter should be considered and disposed of in the state district court. The resulting questions are for determination here.

The constitutional provision above referred to conferred upon creditors a substantive right. About this there can be no question. It is so spoken of in Middletown Bank v. Ry. Co., 197 U. S. 394, 403, 25 S. Ct. 462, 49 L. Ed. 803. If no statutory remedy had been provided for the enforcement thereof, this court, as between proper parties, would find means for its enforcement through the exercise of its equitable powers. Way v. Barney, 116 Minn. 285, 293, 294, 133 N. W. 801, 38 L. R. A. (N. S.) 648, Ann. Cas. 1913A, 719; Terry v. Little, 101 U. S. 216, 25 L. Ed. 864.

The state of Minnesota has provided a statutory remedy. Sections 3184-3190, Revised Laws of Minnesota 1905; sections 6645-6651, General Statutes Minnesota 1913. (These sections are substantially the same as chapter 272, Session Laws of Minnesota for 1899.) "The law is really a supplementary practice act, formulated after the practice followed in this state for the collection of unpaid stock subscriptions when insolvency has ensued." The same general rules apply. Straw & E. Mfg. Co. v. L. D. Kilbourne, etc., 80 Minn. 125, 133, et seq., 83 N. W. 36.

May the liability of stockholders under the constitutional provision above referred to be enforced through proceedings in the federal court, or must they, of necessity, be carried on in the state district court? Must proceedings here halt until the state court shall act in the matter, and shall there be two receiverships at the same time in different courts, both having to do with winding up the affairs of the corporation and paying its debts?

In view of the proceedings in this court already had, the state court has declined to appoint a receiver in that jurisdiction.

The state Legislature having provided a remedy for the enforcement of the constitutional liability, that remedy is exclusive. Middletown Bank v. Ry. Co., 197 U. S. 394, 405, 25 S. Ct. 462, 49 L. Ed. 803. The question, still further reduced, is whether the federal court may enforce those statutory provisions and apply that remedy.

When it is said that a particular statutory remedy is exclusive, this does not mean that it must be pursued in any particular court. If that were so, the states, by prescribing that certain remedies should be pursued in the state court only, would put an end to federal jurisdiction in such fields, and deprive litigants of their rights under the Constitution of the United States. This cannot be done. Ry. Co. v. Whitton, 13 Wall. (80 U. S.) 270, 286, 287, 20 L. Ed. 571; Madisonville Traction Co. v. St. Bernard Mining Co., 196 U. S. 239, 252, 253, 25 S. Ct. 251, 49 L. Ed. 462.

The receivership proceeding is properly here in court. We are past that point. The appointment was not made under any state statute, as in Scott v. Neely, 140 U. S. 106, 11 S. Ct. 712, 35 L. Ed. 358, Cates v. Allen, 149 U. S. 451, 13 S. Ct. 883, 37 L. Ed. 804, and Pusey & Jones Co. v. Hanssen, 261 U. S. 491, 43 S. Ct. 454, 67 L. Ed. 763. The claims made against the appointments in those cases are not available here. So far as concerns the appointment of the receiver, none here may claim that he has been deprived of a trial by jury. Original consent and long acquiescence, in any event, would prevent that. Pusey & Jones Co. v. Hanssen, 261 U. S. 491, 43 S. Ct. 454, 67 L. Ed. 763; Re Metropolitan Ry. Receivership, 208 U. S. 90, 109, 110, 28 S. Ct. 219, 52 L. Ed. 403. Here there is no blending of legal and equitable remedies, and no attempt to enlarge the equity jurisdiction of the federal courts, except through the creation of a substantive right and the enforcement thereof. None may claim here that there is a plain, adequate, and complete remedy at law. Under the rules hereinafter discussed, such claims, if valid, would be fatal here. We have pending a valid receivership proceeding. Given such, may the federal court avail itself of the statutory provisions above referred to, and in such proceeding enforce the constitutional liability of the stockholders of the defendant? Such enforcement would be incidental or ancillary to the main receivership proceeding. Although mistaken on one feature of the case, the court, in McKusick v. Seymour, Sabin & Co., 48 Minn. 158, 170, 50 N. W. 1114, 1116, well said: "It is only by sequestrating the corporate assets and enforcing this liability of stockholders in the same proceeding that results exactly just and equitable to all parties can be worked out." Manifestly, from a practical standpoint, it is important that, if possible, this be done.

Speaking generally and with certain exceptions not controlling here, the federal courts, when their jurisdiction is properly invoked, enforce state laws precisely as do the state courts under similar circumstances. For the time being and for the particular case in hand, they function as if sitting in the place of the local court. This is the true theory of the Constitution and of the federal laws. The aim of the government is to provide impartial tribunals to which certain classes of litigants may with confidence resort, and where they may have a complete remedy. They are not to lose any rights by going into a federal court. If they have rights, whether founded on state laws or otherwise, those rights are to be protected and enforced in the court of their choice. Clark v. Smith, 13 Pet. 195, 203, 10 L. Ed. 123; Ex parte McNiel, 13 Wall. 236, 243, 20 L. Ed. 624; Ry. Co. v. Whitton, 13 Wall. 270, 286, 287, 20 L. Ed. 571; Davis v. Gray, 16 Wall. 203, 21 L. Ed. 447; Mineral Range R. Co. v. Detroit, etc. (C. C.) 25 F. 515, 520; Grether v. Wright et al., 75 F. 742, 746, 23 C. C. A. 498; Darragh v. H. Wetter Mfg. Co., 78 F. 7, 23 C. C. A. 609; Nat. Surety Co. v. State Bank, 120 F. 593, 56 C. C. A. 657, 61 L. R. A. 394; Harrison v. Remington Paper Co., 140 F. 385, 399, 72 C. C. A. 405, 3 L. R. A. (N. S.) 954, 5 Ann. Cas. 314; Platt v. Le Cocq, 158 F. 723, 727, 85 C. C. A. 621, 15 L. R. A. (N. S.) 558; Case of Broderick's Will, 21 Wall. 503, 520, 22 L. Ed. 599; Gaines v. Fuentes, 92 U. S. 10, 23 L. Ed. 524; Cummings v. National Bank, 101 U. S. 153, 157, 25 L. Ed. 903; Dennick v. R. R. Co., 103 U. S. 11, 26 L. Ed. 439; Greeley v. Lowe, 155 U. S. 58, 75, 15 S. Ct. 24, 39 L. Ed. 69; Wehrman v. Conklin, 155 U. S. 314, 324, et seq., 15 S. Ct. 129, 39 L. Ed. 167; Cowley v. N. P. R. R. Co., 159 U. S. 569, 582, 583, 16 S. Ct. 127, 40 L. Ed. 263; Madisonville Traction Co. v. St. Bernard Mining Co., 196 U. S. 239, 253, 255, 25 S. Ct. 251, 49 L. Ed. 462; L. & N. R. R. Co. v. W. U. Tel. Co., 234 U. S. 369, 375, 376, 34 S. Ct. 810, 58 L. Ed. 1356.

The foregoing authorities all deal with the enforcement of rights created by state laws, and embrace or refer to cases of eminent domain, injunctions, death by wrongful act, actions to determine adverse claims to land, foreclosure of mechanics' liens, certain statutory proceedings, and various others, of all of which the federal courts took cognizance.

The rule here applicable is found in the leading case above cited, of Clark v. Smith, 13 Pet. 195, 203 (10 L. Ed. 123): "The state Legislature * * * having created a right, and at the same time prescribed the remedy to enforce it, if the remedy prescribed is substantially consistent with the ordinary modes of proceeding on the chancery side of the federal courts, no reason exists why it should not be pursued in the same form as it is in the state courts."

Here the substantive right was created by the constitutional provision. It was unknown to the common law. The remedy was provided by the Legislature. That remedy is "substantially consistent with the ordinary modes of proceeding on the chancery side of the federal courts." No reason exists why it may not be pursued in those tribunals.

When the plaintiff, a resident of the state of Wisconsin, instituted the receivership proceeding, he had a right to look forward to...