Ivey v. Housing Foundation of America

• Decision Date: 05 September 1947
• Docket Number: Civil Action No. 2788.
• Citation: 73 F. Supp. 201
• Parties: IVEY et al. v. HOUSING FOUNDATION OF AMERICA, Inc., et al.
• Court: U.S. District Court — Western District of Pennsylvania

73 F. Supp. 201

IVEY et al. v. HOUSING FOUNDATION OF AMERICA, Inc., et al.

Civil Action No. 2788.

District Court, M. D. Pennsylvania.

September 5, 1947.

Robert J. Doran and Reynolds, Reynolds & Doran, all of Wilkes-Barre, Pa., for plaintiffs.

Donald O. Coughlin, of Wilkes-Barre, Pa., for defendants.

MURPHY, District Judge.

The problem before us arises from a suit by plaintiffs, citizens of North Carolina, against defendants, citizens of Pennsylvania, the Housing Foundation of America, Inc., a corporation (hereafter called Foundation), and O. C. Westfield, an individual. Jurisdiction is based upon diversity of citizenship and averment of the required jurisdictional amount.

The question for decision at this time is plaintiffs' request for the appointment of a receiver pendente lite of defendants' property. Plaintiffs join a prayer for an accounting and an injunction restraining defendants from further engaging in the business of selling distributorships and prefabricated houses, and from dissipating or transferring their assets. The prayers for relief in equity are ancillary to plaintiffs' primary claim for damages for breach of contract, although the complaint does not contain a prayer for judgment on the legal cause.

Basically plaintiffs' claim may be stated as follows:

(a) Plaintiffs relying on Foundation's representations as to its plans, experience, assets and manufacturing facilities and acting in good faith paid Foundation $7200 for a contract giving them the right to act as distributor of Foundation's product—Westco Homes.

(b) Westfield as promoter and organizer of Foundation had neither the means, facilities or experience to manufacture and deliver prefabricated houses, nor did he have any reasonable expectation that Foundation would do so. On the contrary, Westfield created and intended Foundation to be a "corporate pocket" for his own aggrandizement.

(c) Foundation falsely represented to plaintiffs and others that it was able to fulfill its undertakings to manufacture and deliver prefabricated houses whereas in truth and in fact it was never able to do so.

Wherefore there was a breach of contract and plaintiffs are entitled to relief.

Defendants dispute plaintiffs' allegations. They admit receipt of plaintiffs' money; that it was paid by plaintiffs in good faith. Defendants claim that the representations to plaintiffs were made relying upon commitments of a third party (the Bethlehem Engineering Company of New York—hereafter called Bethlehem), that a factory, manufacturing facilities and working capital would be furnished in return for Foundation notes; that no distributorships were sold or contracts for the sale of houses entered into until the building of the factory was commenced at Dallas, Pennsylvania, in this district; that when Bethlehem commitments were not forthcoming a factory was obtained and production started at Elmira, New York; that results by way of production were not as expected—only several houses were manufactured and delivered— and thereafter no other contracts were entered into for distributorships or the selling of houses.

Plaintiffs contend that as a result of Westfield's activities in organizing Foundation and Foundation's false representations to the public "Foundation or Westfield or both obtained * * * in excess of $300,000." Defendants admit Foundation received $180,000 of which $28,000 was refunded when contracts could not be met as promised and the company was running into financial difficulties; that since manufacturing operations ceased Foundation's sole function has been to sell its land and timber to raise funds to pay all creditors in full.

Plaintiffs charge Foundation at one time contemplated transferring some of its assets to some of its creditors without receiving fair consideration and this without the knowledge and consent of other creditors and against their interests.

Defendants answer that the plan was abandoned; that what was done was to attempt to raise sufficient money to pay off all claims with a considerable surplus remaining but that plan was not carried out.

Finally plaintiffs contend that if a creditors' race for assets develops and if defendants are not restrained from doing further business and dissipating their assets, the damage to plaintiffs and others similarly situated will be irreparable.

Defendants deny that the corporation has been dissipating its assets; contend that it has been trying to conserve them for the benefit of its creditors. Defendants aver that the corporation is solvent; that its assets consist of the factory site at Dallas, 65,500 acres of land and timber in Tennessee, and some inventory items; that it is trying to obtain a purchaser for the land and timber, the value of which is in excess of $1,000,000 and more than enough to pay all claims of creditors in full and allow for a surplus.

Finally defendants' answer objects to the naming of a receiver for the property of the corporation, and a general request is made that all of plaintiffs' prayers for relief be denied.

In addition to the complaint, defendants' answer, the argument of counsel at the hearing on the rule granted to show cause why a receiver pendente lite should not be named, the court has examined depositions of Westfield and of the Chief Accountant of Foundation offered in evidence by plaintiffs. Those depositions show total cash receipts by Foundation between November 19, 1945, and July 16, 1946, of $193,569.70, of which only $181.43 remain on December 16, 1946. There is discrepancy in the dispositions as to whether all or any part of the issued capital stock of Foundation was paid for. Apparently only three houses were actually manufactured and delivered.

The payroll during manufacturing operations was charged to have been exorbitant, and apparently manipulated by the then, and since replaced, president in the hope that the capital stock of the corporation could be purchased by him at a figure less than its true value. Westfield made assertions of special knowledge and experience in housing construction.

Altogether the picture before the court shows a series of extraordinary enthusiastic expectations or assertions thereof and meager mediocre realizations by way of accomplishments.

Many of the body politic have lost their money and their hopes of having a home of their own have been frustrated.

Our immediate problem, however, is plaintiff's claim for relief. Upon our first examination of the pleadings, in view of there being no prayer for judgment on the legal cause, plaintiffs' primary suit, our first reaction was that plaintiffs' action was based on fraud and deceit, in view of the charge of "false" representations.¹ Further reflection, however, indicates that if that was the basis of plaintiffs' claim there was failure in the complaint to comply with Rule 9(b) of the Federal Rules of Civil Procedure, 28 U.S.C.A. following section 723c, requiring that "* * * in all averments of fraud * * * the circumstances constituting fraud * * * shall be stated with particularity. * * *"

Later plaintiffs' counsel stated in open court that plaintiffs' claim for relief in the primary suit is for damages for breach of contract; that plaintiffs have made their determination by way of election of remedies and ask to recover only the sum of $7200 or a money judgment for breach of a simple contract.²

We are thus confronted with a request by a simple contract creditor for the appointment of a receiver of a solvent corporation over the objection of the corporation. The claim of the plaintiffs has not been reduced to judgment. Plaintiffs do not have any lien or interest in the property of defendants, their only right being their claim for breach of contract. This question has been decided by an array of United States Supreme Court decisions to the effect that such an appointment should not be made.

Many of the authorities could be quoted at length. We refrain from doing so and in place thereof direct attention to Scott v. Neely, 1891, 140 U.S. 106 at page 108, 11 S.Ct. 712, 35 L.Ed. 358, where the matter is discussed at length commencing from the earliest period in England, and from the early history of this country to the time of the decision.³ Inter alia that case holds that an action which seeks to recover a money judgment for breach of a simple contract can be brought in the Federal courts only on the law side. See 7th Amendment to the Constitution and Jud. Code, § 267, 28 U.S.C.A. § 384; Cates v. Allen, 1893, 149 U.S. 451 at page 457, 13 S.Ct. 883, 37 L.Ed. 804; Hollins v. Brierfield Coal & Iron Co., 1893, 150 U.S. 371, 14 S.Ct. 127, 128, 37 L.Ed. 1113, "It is the settled law of this court that such creditors cannot come into a court of equity to obtain the seizure of the property of their debtor, and its application to the satisfaction of their claims * * *. Nor is it otherwise in case the debtor is a corporation, and an unpaid stock subscription is sought to be reached." The court holds that the insolvency of the corporation would not alter the rule. In the instant case the corporation is solvent, at least insofar as any evidence has been presented to the court.

Pusey & Jones v. Hanssen, 1923, 261 U.S. 491, 497, 43 S.Ct. 454, 455, 67 L. Ed. 763, we quote at length from the opinion of Mr. Justice Brandeis:

"A receiver is often appointed upon application of a secured creditor who fears that his security will be wasted. Kountze v. Omaha Hotel Co., 107 U.S. 378, 395, 2 S.Ct. 911, 27 L.Ed. 609. A receiver is often appointed upon application of a judgment creditor who has exhausted his legal remedy. See White v. Ewing, 159 U.S. 36, 15 S.Ct. 1018, 40 L.Ed. 67. But an unsecured simple contract creditor has, in the absence of statute, no substantive right, legal or equitable, in or to the property of his debtor. This is true, whatever the nature of the property, and although the debtor is a corporation and insolvent. The only substantive right of a...