McNary v. Guaranty Trust Co.

• Decision Date: 27 March 1934
• Docket Number: No. 3969.,3969.
• Citation: 6 F. Supp. 616
• Parties: McNARY et al. v. GUARANTY TRUST CO. OF NEW YORK.
• Court: U.S. District Court — Northern District of Ohio

6 F. Supp. 616

McNARY et al. v. GUARANTY TRUST CO. OF NEW YORK.

No. 3969.

District Court, N. D. Ohio, W. D.

September 12, 1933.

On Rehearing March 27, 1934.

Tracy, Chapman & Welles, of Toledo, Ohio, for plaintiffs.

Baker, Hostetler, Sidlo & Patterson, of Cleveland, Ohio, for defendant.

HAHN, District Judge.

Three motions have been filed in the above-entitled cause: (1) Motion to transfer cause to equity docket; (2) motion of plaintiff for a judgment of default upon petition; and (3) motion of defendant for extension of time to move, plead, or demur.

The case has been docketed as a suit at law. The plaintiff is a committee acting for the protection of bondholders of first mortgage leasehold bonds of 269 Madison Aveaue, Inc. The latter company issued $950,000 of bonds which have been retired to $851,000 of bonds which are still outstanding. The committee represents $673,000 of bonds, and by representation undertakes to represent the remaining $178,000 of outstanding bonds.

Generally speaking, the petition alleges that 269 Madison Avenue, Inc., was the owner of a lease for a period of 63 years on 269-271 Madison avenue in New York City; that it made a sublease of said property to the National Bank of Commerce which, by its terms, might cover the same period as the lease of 269 Madison Avenue, Inc. The sublease provided that a new and improved banking building should be erected on the premises. To secure funds for that purpose, a bond issue was placed upon the lease and the leasehold, and a mortgage and deed of trust was executed to a corporate trustee; the purpose being to apply the net rentals paid by the National Bank of Commerce to the payment and retirement of the bond issue, which was in the amount of $950,000. The National Bank of Commerce was absorbed by the defendant Guaranty Trust Company of New York. It is claimed that it wrongfully procured a release from 269 Madison Avenue, Inc., of the sublease to the National Bank of Commerce; that it brought about, or connived in bringing about, dispossess proceedings, which resulted in the termination of the 63-year lease of 269 Madison Avenue, Inc.

The facts stated are a form of "milking" which has lately received much attention from the courts. 46 Harvard Law Review, 491. The petition deals with the facts from four points of view and states four separate causes of action. The first cause of action relies upon the sublease as a contract for the benefit of a third party, to wit, the bondholders; the second cause of action alleges waste in bringing about the cancellation of the sublease and the destruction of the leasehold interest;¹ the third cause of action alleges that the parties conspired and connived to destroy the security of the bondholders; and the fourth cause of action alleges that the defendant induced a breach of the contract or contracts for the benefit of the bondholders.

Unless the second cause of action is one for equitable waste, all of the causes of action are causes of action which ordinarily might be maintained in a court of law.

The prayer of the petition is for a judgment for the full amount of the bonds still outstanding, $851,000, and for interest and costs. Although the prayer of the petition is for narrow and limited relief Parker State Bank v. Pennington (C. C. A. 8) 9 F.(2d) 966, 970, as will hereinafter appear, other relief is necessary for a complete determination of the controversy between the parties because of the representative character of the suit. Moreover, if full and complete relief can be had only in a court of equity, such court will administer causes of action which otherwise would be legal causes of action. In the much-cited case of Holland v. Challen, 110 U. S. 15, 25, 3 S. Ct. 495, 501, 28 L. Ed. 52, Mr. Justice Field said: "It is not an objection to the jurisdiction of equity that legal questions are presented for consideration which might also arise in a court of law. If the controversy be one in which a court of equity only can afford the relief prayed for, its jurisdiction is unaffected by the character of the questions involved." See, also, New Jersey, etc., Co. v. Gardner-Lacy Lumber Co. (C. C. A. 4) 178 F. 772, 780, and Wehner v. Bauer (C. C.) 160 F. 240, 242.

A part of the fourth paragraph of the first cause of action of the petition alleges: "The owners and holders of the remainder of said issued and outstanding bonds are numerous. The names and locations of many thereof are unknown to plaintiff and it is impracticable to attempt to make them parties to this action by name. Said owners and holders of the remainder of said bonds have a common interest in this action with plaintiff. This action is brought by plaintiff on its own behalf and also on behalf of the holders and/or owners of all of said issued and outstanding bonds which have not been deposited as aforesaid, (who shall participate herein or benefit in any way by virtue of this action)."²

The motion to transfer is based solely upon the ground that a representative suit is maintainable in the federal court only on the equity side thereof. In other words, defendant claims that in the federal courts where, because of constitutional provisions, the distinctions between law and equity are rigidly adhered to, a representative or class suit can be maintained in equity only.

Since the ground of the motion clearly appears from the petition, it cannot be said that the motion to transfer was prematurely made.

No case has been called to my attention, and I have found none which holds that a representative or class suit is maintainable at law either in the state courts (before the Codes)³ or the federal courts. Every case which has been called to my attention which deals with representative suits has been a suit upon the equity side of the court.

It has been said that no rules of common law are more rigid, technical, or inflexible than those relating to parties to actions (1 Pomeroy on Equity Jur. 4th Ed. §§ 113 and 114), and a consideration of the limited number of actions maintainable at common law and the character of such actions would seem to lead naturally and inevitably to the conclusion that common-law actions could be pursued or defended only by parties actually in court.

The equity jurisdiction conferred on the District Courts of the United States by section 11 of the Judiciary Act of 1789 (1 Stat. 78), and continued by section 24 of the Judicial Code (28 USCA § 41), is that of the English Court of Chancery at the time of the separation of the two countries (Matthews v. Rodgers, 284 U. S. 521-529, 52 S. Ct. 217, 76 L. Ed. 447, 454), and state legislation cannot enlarge the equity jurisdiction of the federal courts. The jurisdiction on the law side of the federal courts, except as modified by statute, remains as it was in 1789. No statute of which I am aware has changed that jurisdiction as applied to this case. The Conformity Act (28 USCA § 724) which applies only to proceedings at law in the federal courts does not effect any change so far as this action is concerned.

Writing in 1818, Sir Thomas Plummer, M. R., traced the origin of the equitable doctrine of virtual representation as far back as 1701. Meux v. Maltby, 2 Swan's T. (Eng.) 281; Leviness v. Consolidated Gas, Electric Light & Power Co., 114 Md. 559, 80 A. 304, Ann. Cas. 1913C, page 649. This case discusses some of the federal cases which treat the doctrine of virtual representation as a creature of equity. And see an extended note appended to this case, Ann. Cas. 1913C, page 654.

Statutes enacted in the Code states, where forms of actions have been abolished and the distinctions between law and equity have to that extent been obliterated, are said to crystallize the chancery practice prior to the codes and the state courts in construing such statutes to determine whether or not they apply to different situations, consult the prior chancery practice, Pomeroy's Code Remedies, 4th Ed., pp. 384, 385; George v. Benjamin (1898) 100 Wis. 622, 76 N.W. 619, 621, 69 Am. St. Rep. 963, it being held in that case that the "statute has been construed as merely re-enacting the rules which prevailed in equity, and which might otherwise have been held to be abolished by the Code," Platt v. Colvin (1893) 50 Ohio St. 703, 36 N.E. 735; Tobin v. Portland Mills Co. (1902) 41 Or. 269, 68 P. 743, 1108, and Commonwealth v. Scott (1901) 112 Ky. 252, 65 S.W. 596, 598, 55 L. R. A. 597, which holds that the statute "recognizes and codifies this equitable practice." And see 21 C.J. 285; 47 C.J. 43, and note, 36 Harvard Law Review, 89.

However, this court must follow closely the decisions of the Supreme Court of the United States and those of the Circuit Court of Appeals for the Sixth Circuit, and in this instance must determine the law from the cases of Fletcher v. Burt (C. C. A. 6, 1903) 126 F. 619, and Stearns Coal & Lumber Co. v. Van Winkle (C. C. A. 6, 1915) 221 F. 590. If the first-cited case were the only case decided by that court, it would require the granting of the motion to transfer. It may be that some of the relief asked for in that case could have been granted only by a court of equity, but the court treated the petition in that case as being "in the similitude of the common law declaration in an action of trespass on the case" (page 620 of 126 F.), and in that view of the case held that the suit, being of a representative character, was maintainable only on the equity side of the federal courts.

If the second case stood alone, its proper implications would go far to sustain the position of the plaintiff. It, however, would be presumptuous, it seems to this court, for this court, in the absence of express declaration by the higher court, to hold that it overruled the earlier case by implication without any citation or reference whatsoever to the earlier case. The point involved here was not raised by counsel or discussed by the court. Counsel did not urge the point, although the...