Jones v. Mutual Fidelity Co.

• Decision Date: 26 May 1903
• Docket Number: 230.
• Parties: JONES et al. v. MUTUAL FIDELITY CO.
• Court: U.S. District Court — District of Delaware

123 F. 506

JONES et al. v. MUTUAL FIDELITY CO.

No. 230.

United States Circuit Court, D. Delaware.

May 26, 1903

Syllabus by the Court.

The Delaware statute of March 25, 1891 (19 Laws Del.c. 181) authorizing the Chancellor on the application of creditors or stockholders of insolvent corporations to appoint receivers to take charge of the property, business and affairs of such corporations, with power to collect debts, claims and property due and belonging to them, and to administer their affairs, such receivership to be continued so long as the Chancellor shall think necessary, creates a purely equitable right and remedy which, other jurisdictional conditions existing, may be enforced by a bill filed on the equity side of a circuit court of the United States by unsecured creditors who have not reduced their claims to judgment, as well as by stockholders or judgment creditors.

The jurisdictional amount exists where the assets of an insolvent corporation proceeded against under the statute exceed exclusive of interest and costs, the sum or value of $2,000 and the claims of the creditors joined in the bill in the aggregate exceed such jurisdictional amount, although no creditor has a claim or claims equal to that amount; and further, the jurisdictional amount exists where the assets of such corporation exceed, exclusive of interest and costs, the sum or value of $2,000, although the claims of the creditors joined in the bill are not in the aggregate equal to that amount.

In the absence of statutory authority, the complainants, as general unsecured creditors at law, who have not reduced their claims to judgment, could not, solely on the ground of insolvency, successfully maintain their bill against the defendant to deprive it of the possession of its assets and secure their administration and distribution.

The Delaware statute in conferring on the Chancellor authority, solely on the ground of insolvency, to appoint receivers for insolvent corporations and take possession of and fully and finally distribute their assets, provided a purely equitable procedure for the enforcement of equitable rights on the part of creditors and stockholders.

Under the settled construction of the statute its provisions apply as well to general unsecured creditors as to creditors whose claims have been reduced to judgment or otherwise judicially ascertained or are admitted; and in the absence of such a statute neither the court of chancery nor any other court in Delaware would at the instance of creditors have authority, solely on the ground of insolvency, to appoint a receiver to take charge of the affairs and collect and make final distribution of the assets of a Delaware corporation.

While a state law cannot confer jurisdiction on any federal court, it may create a substantial right which the proper federal court, otherwise possessing jurisdiction, may enforce by a proper remedy whether in equity, in admiralty, or at law.

There is a fundamental distinction growing out of the federal constitution and legislation between legal and equitable procedure. The seventh amendment to the Constitution provides that 'in suits at common law where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved.'

So marked is the distinction between the jurisdiction of the courts of the United States in equity and at law with respect to procedure, that the blending together in one suit in a federal court of essentially legal and equitable remedies cannot be authorized or justified by any state statute or practice on the subject; but, though no state legislation is competent to extend or restrict the jurisdiction of the federal courts, a state may create an enlargement of rights and remedies, whether equitable or legal, which may be enforced or pursued in a federal court, in the exercise of that branch of its jurisdiction which is appropriate to the case, and where a state statute creates a right and a remedy for its protection or enforcement, and such remedy substantially conforms to the procedure in chancery, it, in the absence of a plain, adequate and complete remedy at law, may be pursued on the equity side of a federal court. Where the direct object of a suit is the judicial ascertainment of the existence and amount of a pecuniary legal demand and the enforcement of its payment by the process of the court in which the suit is brought, the proceeding is essentially an action at law and in a federal court must be so treated, regardless of state legislation. Nor is the distinctively legal nature of such a remedy lost merely because, owing to the circumstances of a given case, the purpose of the action may fail of accomplishment. 'The want of a remedy and the inability to obtain the fruits of a remedy are quite distinct.'

If a remedy is essentially legal and in its nature fitted or adapted, in the absence of obstacles, which may or may not exist, to attain the object in view, then, whatever equitable procedure may in particular cases be resorted to in aid of the legal remedy, it cannot wholly displace it. The jurisdiction of chancery to reach equitable or legal assets of a defendant, whether a corporation or a natural person, in aid of a legal remedy for a money demand is indisputable. But such an exercise of jurisdiction is not by way of substitution for, but only in aid of, the legal remedy, and it can be resorted to only after the plaintiff has exhausted such remedy. This necessitates the obtaining of judgment for the demand, and, usually, the issuance of execution and its return unsatisfied.

The fact that equitable relief can be granted in aid of a legal remedy only after the plaintiff has exhausted such remedy precludes the possibility of any clash or conflict between legal jurisdiction and equitable jurisdiction or of any blending of legal and equitable remedies in the same suit.

There is a clear distinction between the exercise of equitable jurisdiction in aid of a legal remedy for the collection of a pecuniary legal demand, and the exercise of equitable jurisdiction in enforcing a purely equitable right by a purely equitable remedy, created by a valid state statute, not in aid of any legal remedy, but wholly independently thereof, though the existence of such equitable right and remedy may presuppose and be dependent on the existence of such pecuniary legal demand.

The fact that a right may be cognizable at law by no means determines that it may not be cognizable in equity and serve as the basis for a purely equitable remedy; for in many cases a given demand or interest may constitute the foundation of a suit either at law or in equity, and whether the procedure shall be at law, on the one hand, or, on the other, in equity, absolutely depends on the object of the suit and the nature of the relief sought. If the procedure and relief are essentially equitable the circumstance that they bear relation to a legal demand is immaterial.

Where the procedure and relief provided by a state statute are essentially equitable and such relief is impossible of attainment in any action at law, not owing to the existence of any accidental or abnormal obstacles or difficulties, but by reason of the essential nature of such action and legal process, a case for purely equitable cognizance under the statute is presented.

Where equitable rights and remedies under the statute, founded on or bearing relation to pecuniary legal demands, would be defeated by exhausting the remedy at law on such demands, such equitable remedies cannot be considered as in aid of the legal remedy. In such a case to enjoy the equitable rights and remedies provided by the statute it is necessary that the equity procedure therein authorized should be followed, without any exhaustion of the legal remedy, for being a purely equitable procedure the constitutional guaranty of jury trial would, of course, have no application.

The fact that the equitable procedure provided by a state statute for the enforcement of a substantial equitable right created thereby does not in all respects correspond with the mere forms and modes of procedure usually observed in federal courts on their equity side, or that the enforcement of such new equitable right requires a modification of the accustomed procedure, not violative of established rules and principles, offers no bar to the prosecution in equity of such right in the federal courts.

No action at law by a non-judgment creditor, nor any legal process on behalf of a judgment creditor, can enforce the right conferred by the statute. An exhaustion of the legal remedy for the collection of the pecuniary demands of complainants, proceeding under the statute, would not only fail to secure to them the relief prayed for, but necessarily deprive them of it. An application of the assets of the insolvent corporation to final process at law would be destructive of the right conferred by the statute. This is not a case in which equitable jurisdiction can be exercised only in aid of a legal remedy for the removal of obstacles, but, on the contrary, one in which, by reason of its object, the complainants, though non-judgment creditors, are pursuing ab initio a purely equitable remedy for the enforcement of a purely equitable right.

Where an executory contract is void by a state statute, moneys paid on account of it by an innocent party may be recovered in assumpsit on the count for money had and received.

Herbert H. Ward and Andrew C. Gray, for complainants.

David T. Marvel and R. Randolph Hicks, for defendant.

BRADFORD District Judge.

The questions for determination arise on a demurrer by the Mutual Fidelity Company, a corporation of Delaware, to an amended bill of complaint brought against it by Calvin...