Harkin v. Brundage, No. 117

• Court: United States Supreme Court
• Writing for the Court: TAFT
• Citation: 276 U.S. 36,48 S.Ct. 268,72 L.Ed. 457
• Parties: HARKIN et al. v. BRUNDAGE et al
• Docket Number: No. 117
• Decision Date: 20 February 1928

276 U.S. 36 48 S.Ct. 268 72 L.Ed. 457 HARKIN et al.

v.

BRUNDAGE et al.

No. 117. Argued Dec. 5 and 6, 1927. Decided Feb. 20, 1928.

[Syllabus from pages 36-38 intentionally omitted]

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Messrs. Lioyd C. Whitman and Bernhardt Frank, both of Chicago, Ill., for petitioners.

Messrs. Edward R. Johnston, Ralph F. Potter, and Henry Jackson Darby, all of Chicago, Ill., for respondents.

Mr. Chief Justice TAFT delivered the opinion of the Court.

This case presents a controversy between state court receivers and the receiver of a federal court over the possession of the property and assets of the Daniel Boone Woolen Mills Corporation. It is here by certiorari to the judgment of the Circuit Court of Appeals for the Seventh Circuit affirming a decree of the District Court for the Northern District of Illinois. 13 F.(2d) 617. The receivers in the state court were appointed on the prayer of what was called a stockholder's bill. The receiver in the federal court was appointed on the prayer of what was called a creditor's bill. The receiver in the federal court was appointed

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first; but the bill in equity upon which the state court receivers were appointed was filed five days before the bill in the federal court. The receivers in the state court filed a motion in the federal court, requesting that the property in the hands of the federal court receiver be transferred to the state court receivers, on the ground that the state court, by the earlier filing of the bill in that court, had acquired constructive possession, and its receivers were entitled, therefore, to actual possession of the property.

The Daniel Boone Woolen Mills was a corporation of the state of Illinois, engaged in the manufacture of woolen cloth in Illinois, with its principal place of business there, but with additional plants in other states. It had 187,000 shares of stock, owned by 1,500 individual stockholders, resident in many states. It had been so badly managed during the year 1924, and its indebtedness had been so much increased, that a surplus of $500,000 had been changed into a deficit of more than $2,000,000. Nevertheless, at the end of 1924, it was alleged by all parties that its assets exceeded its liabilities by $1,000,000, although the event has proved the fact to be otherwise, and administration under receivership shows the debts much to exceed its assets. The mismanagement had led its president and its treasurer, both named Gumbinski, to resign, and they were replaced by Joseph Byfield, as president, and Frank Solomon, as vice president. These two officials had not been able to secure the financial support necessary to meet the expenditures and conduct the business. On February 14, 1925, therefore, Harry Hurwitz, a stockholder of the company, filed a bill in the superior court of Cook county, Illinois, in his own behalf and in that of all other stockholders of the corporation, 'and all other firms or corporations who might be interested in the litigation, and who might seek to intervene or contribute to the expense thereof.'

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The averment of the bill was that during 1924 those in control had used for their own purposes the assets of the corporation, and it became the duty of the new officers to bring suit to recover the property thus abstracted, embezzled, or wasted, but that nothing had been done. It averred the solvency of the company, but alleged that it was not able to pay its current expenses, that the business ought to be maintained and conducted, in order to make up in salable form a great deal of material on hand uncompleted, and that, in order to save the property in the interest of the stockholders and others, a receiver should be appointed, who should continue the business. The prayer was for an injunction forbidding those engaged in the management from imposing any lien or mortgage on the property. In effect, the bill asked for the appointment of receivers, with authority to take possession of the property, carry on the business, and subsequently after getting the property into proper condition to provide for and call a stockholders' meeting and a transfer of the property back to a new management.

On the 19th of February, five days later, a bill was filed in the United States District Court for the Northern District of Illinois by the United States Worsted Sales Company, a corporation of the state of New York, claiming to be a simple non-judgment creditor of the Woolen Mills in the sum of $6,000. The plaintiff brought the bill on its own behalf and on behalf of all the creditors of the Woolen Mills who would join in the prosecution. Its averments in respect to ownership and the disastrous operation of the company were much the same as those of the bill by Hurwitz in the state court. It specifically averred that the Woolen Mills was not insolvent, but that it had been impossible to secure money with which to carry it on; that there was grave danger of the recovery of judgment and the levy of executions, and of a race for undue preferences; and that in the preservation of the property it was

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necessary to appoint a receiver to continue the business, make up the uncompleted material, and then to dispose of the property as the court might deem wise, by sale or otherwise, in the interest of all the creditors and of the stockholders. It asked authority for the receiver to apply in either federal or state courts of other states, in which the various factories of the Woolen Mills were situate, for ancillary receiverships. It further asked an injunction against judgments and executions of all creditors and an order requiring them to file their claims with the receiver.

Application for receivers in the state court in the Hurwitz suit had been made upon the filing of the bill, and notice given to the defendant Woolen Mills that the motion would be presented on February 16, 1925, the bill having been filed February 14th. Upon application of one Cowan, the attorney for the Woolen Mills Corporation, the hearing on the motion for a receivership on the 16th was postponed until February 21st, and meantime the bill in the federal court for a receiver was filed on February 18th. On the same day the Woolen Mills Corporation entered its appearance in the District Court, filed its answer admitting the averments of the bill and consented to the appointment of a receiver. The appointment of Brundage as receiver was made on the following day.

On the 25th of February, the superior court of Cook county entered an order allowing one Max Goldenberg, a stockholder, to file in the Hurwitz suit his intervening petition, which did not in effect change the nature of the relief asked, but elaborated a description of details of the conspiracy of the Gumbinskies to loot the Woolen Mills Company, and of a conspiracy of the Woolen Mills management to evade the jurisdiction of the state court by delay in the appointment of receivers there and by the collusive answer and consent of the Woolen Mills to the

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appointment of a federal court receiver. This intervening petition was adopted on March 13th by Hurwitz as an amendment to his original bill. On February 28th, the superior court entered its order appointing the Union Bank and Harkin as receivers of the property. In that order the superior court found that it had had jurisdiction of the subject-matter and the parties, and it empowered its receivers to prosecute and defend without further order all existing actions by or against the Woolen Mills Corporation, and enjoined the corporation, its officers and directors, from incumbering or pledging or creating any liens against the property, moneys, accounts and assets of the Woolen Mills Corporation during the receivership. On March 13th the state court receivers filed a motion in the District Court in this cause setting forth their appointment as receivers in the state court and the history of the litigation, charged that the District Court was without jurisdiction to appoint a receiver of the Woolen Mills Corporation or of its property, assets or record, and prayed for an order upon Brundage, as its receiver, to turn over this property now in his possession to them.

The question mainly argued in the District Court and in the Circuit Court of Appeals and here was whether the state court, solely by the filing of a stockholder's bill for the appointment of a receiver, obtained constructive possession of the property and assets of the Woolen Mills Corporation. Upon this motion, evidence was taken disclosing at length the circumstances of the postponement in the state court, the filing of the bill in the federal court and the appointment of the receivers there. Of these we shall hereafter consider the effect. The District Court held that the controversy in the federal court was different from that in the state court, as shown by a comparison of the two bills; that the bill in the federal court was a creditor's bill, whereas that in the state court was

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a stockholder's bill; that the interests of the creditors were prior and necessarily underlay those of the stockholders, and that the stockholder's bill in the state court would have been ineffective, because in such a case the court had no power to enjoin creditors from judgment and execution against the assets; whereas the jurisdiction in the creditor's bill gave power to preserve by injunction the estate, and thus prevent undue preference among creditors. It was therefore concluded that the creditor who brought the bill was entitled to the receiver as prayed, and that the appointment of the receiver gave the federal court jurisdiction, which the state court receivers could not be permitted to disturb.

The principle which should govern in a conflict of jurisdiction like this has been a number of times stated by this court. As between two courts of concurrent and coordinate jurisdiction, the court which first obtains jurisdiction and...