Ozan Lumber Co. v. Davis Sewing Mach. Co.

• Decision Date: 27 October 1922
• Docket Number: 465.
• Citation: 284 F. 161
• Parties: OZAN LUMBER CO. et al. v. DAVIS SEWING MACH. CO. et al.
• Court: U.S. District Court — District of Delaware

284 F. 161

OZAN LUMBER CO. et al. v. DAVIS SEWING MACH. CO. et al.

No. 465.

United States District Court, D. Delaware.

October 27, 1922

[Copyrighted Material Omitted]

Charles F. Curley (of Saulsbury & Curley), of Wilmington, Del., for plaintiffs.

Robert H. Richards, of Wilmington, Del., for defendants.

MORRIS District Judge.

This is a motion to dismiss the amended bill of complaint in a suit instituted by simple contract creditors of Blue Bird Manufacturing Company to recover the amount of their claims from The Davis Sewing Machine Company to whom the Blue Bird Manufacturing Company had transferred its assets in exchange for capital stock of the transferee. An opinion, wherein the substantial allegations and prayers of the original bill of complaint are recited, was filed in this cause on July 19th last. 283 F. 436. Therein, upon a motion to dismiss the bill it was held that Blue Bird Manufacturing Company was an indispensable party to the cause and that the bill should be dismissed for its nonjoinder. Thereupon the plaintiffs by leave of court amended their bill of complaint by joining the Blue Bird Manufacturing Company as a party defendant, by alleging that the assets transferred to the Davis Sewing Machine Company constituted all the assets of the Blue Bird Company, and that the Blue Bird Company has nothing against which the plaintiffs may seek recourse save the capital stock received by it from the Davis Sewing Machine Company. The prayers, as in the original bill, are that the Davis Sewing Machine Company be ordered to account as to the value and extent of the assets received by it from the Blue Bird Company, that the complainants and all other like creditors of the Blue Bird Company who may intervene may have judgment against the Davis Sewing Machine Company for the amounts of their respective claims, with interest, to the extent of the value of the assets received by the Davis Sewing Machine Company from the Blue Bird Company, and for general relief.

Motion to dismiss the amended bill of complaint has been filed by each defendant. The grounds of the present motions are that it appears from the bill that the plaintiffs are simple contract creditors, and not judgment creditors, of the Blue Bird Company, and that the bill of complaint fails to disclose grounds for equitable relief. The precise problems thus presented for solution are: (1) Whether, under the facts alleged, the plaintiffs have any standing in this court sitting in equity to obtain satisfaction of their claims from the Sewing Machine Company either by a decree holding the latter company personally liable therefor to any extent, or by the seizure of the transferred property and its application to the payment of their claims; (2) whether apart from the fact that the plaintiffs are simple contract creditors of the Blue Bird Company, the bill of complaint discloses any liability, enforceable in equity, on the part of either the transferee or the transferred assets for the payment of the plaintiffs' claims; and (3) whether it appears from the bill that a plain, adequate, and complete remedy may not be had at law against the Blue Bird Company.

With respect to the first of the foregoing problems, it has been held by the Supreme Court in many cases that a simple contract creditor, having no interest in or lien upon the transferred property, cannot, in the absence of a trust in his favor, invoke the equitable jurisdiction of a federal court for his direct benefit. Scott v. Neely, 140 U.S. 106, 11 Sup.Ct. 712, 35 L.Ed. 358; Swan Land & Cattle Co. v. Frank, 148 U.S. 603, 13 Sup.Ct. 691, 37 L.Ed. 577; Cates v. Allen, 149 U.S. 451, 13 Sup.Ct. 977, 37 L.Ed. 804; Hollins v. Brierfield Coal & Iron Co., 150 U.S. 371, 14 Sup.Ct. 127, 37 L.Ed. 1113. (For brevity, these cases will be hereafter referred to as the Hollins group.) The plaintiffs, however, urge, as I understand their contentions: (1) That the Sewing Machine Company is a mere continuation of the Blue Bird Company, and so is directly liable to the plaintiffs; (2) that the Sewing Machine Company actually participated in the transfer to it of all the assets of the Blue Bird Company, and may be sued directly for the result of its active participation; (3) that the property transferred by the Blue Bird Company to the Sewing Machine Company was impressed with a trust for the payment of the creditors of the Blue Bird Company; and, lastly, that Case v. Beauregard, 101 U.S. 688, 25 L.Ed. 1004, cited with approval in Wyman v. Wallace, 201 U.S. 230, 26 Sup.Ct. 495, 50 L.Ed. 738, and Okmulgee Window Glass Co. v. Frink, 260 F. 159, 171 C.C.A. 195, in which a petition for certiorari was denied by the Supreme Court in 251 U.S. 563, 40 Sup.Ct. 342, 64 L.Ed. 415, either modify the principles of Hollins v. Brierfield Coal & Iron Co., supra, and the earlier cases therein cited, or recognize exceptions to those principles, within which exceptions this suit falls. These contentions of the plaintiffs will be considered in their order.

Where one corporation sells or otherwise transfers all its assets to another company, the transferee is not as a general rule liable for the debts and liabilities of the transferor, in the absence of statutory provision therefor, statutory consolidation or merger, or express contract. E. E. Taenzer & Co. v. Chicago, R.I. & P.R.R. Co., 170 F. 240, 244, 95 C.C.A. 436 (C.C.A. 6); Fletcher, Cyclopedia Corporations, Sec. 4751; 23 L.R.A.(N.S.) 1, 46, note. Obviously the foregoing rule is without application, where by amendment under a special act or general law of the charter of the debtor corporation there is but a mere change in the corporate name of the debtor, or a change in the corporate powers, for the identity of the debtor corporation is not thereby lost. In such instances the liabilities incurred before the change are in no way affected. Furthermore, a mere extension of the charter of a corporation before its expiration does not, unless such an intention appears, create a separate and distinct corporation, but only continues the existence of the old corporation. Fletcher, Cyclopedia Corporations, Sec. 413. Likewise a legislative act may revive and continue a charter that has expired; but the question of identity-- that is, whether such legislative act creates a new corporation or merely continues the existence of the old one-- depends frequently upon construction. Miller v. English, 21 N.J.Law. 317, 324; Bellows v. Hallowell & Augusta Bank, Fed. Cas. No. 1,279.

The foregoing illustrations and cases indicate, in a measure, that which is expressly held in Central Trust Co. v. Bridges, 57 F. 753, 6 C.C.A. 539 (C.C.A. 6), and in Armour v. E. Bement's Sons, 123 F. 56, 62 C.C.A. 142, namely, that in order to recover from a corporation of one name the obligations of a corporation of another name, upon the theory that the former is a mere continuation of the latter, it must appear that the former is the same legal entity as that whose obligation is sought to be charged upon it as one of its own; that is to say, it must be the same legal person, having a continued existence under a new name. Manifestly, where a defendant in a suit is the same legal entity as the debtor corporation, there is a personal and direct liability on the part of the defendant. In brief, the defendant is in such instances the debtor, and so of necessity may be held responsible in suits instituted (ordinarily at law, Okmulgee Window Glass Co. v. Frink, 260 F. 159, 166, 169, 171 C.C.A. 195; Armour v. E. Bement's Sons, 123 F. 56, 62 C.C.A. 142) against it by nonjudgment creditors. But if the defendant from whom recovery is sought is not the same legal entity as the debtor corporation, the theory of continuity of the corporation will not enable a nonjudgment creditor to maintain his suit against the transferee. The immediate question, therefore, is whether the allegations of the original bill (recited in the former opinion) and the amendment disclose that the Sewing Machine Company is the same legal person as the Blue Bird Company, having a continued existence under a new name. I think a perusal of the allegations is sufficient, without analysis, to show that it is not. It follows that the first contention of the plaintiffs cannot be sustained.

The second contention of the plaintiffs presents little difficulty, for in Adler et al. v. Fenton et al., 24 How. 407, 413 (16 L.Ed. 696), it was expressly held by the Supreme Court that--

'In the absence of special legislation, we may safely affirm that a general creditor cannot bring an action on the case against his debtor, or against those combining and colluding with him to make dispositions of his property, although the object of those dispositions be to hinder, delay, and defraud creditors.'

The same doctrine was laid down in Moran v. Dawes, Hopk Ch. 365, 14 Am.Dec. 550, and in Lamb v. Stone, 11 Pick. 527. As creditors' bills are in the nature of proceedings in rem and not in personam (Cunningham v. City of Cleveland, 98 F. 657, 39 C.C.A. 211), are in essence 'an equitable execution, comparable to proceedings supplementary to executions' (Pierce v. United States, 255 U.S. 398, 401, 402, 41 Sup.Ct. 365, 366, 65 L.Ed. 697); as the purpose of such suits is, in the case of a fraudulent transfer, to enable the creditor of the transferor to follow the property transferred, and as there is no personal liability on the part of the transferee unless the property transferred has been wasted, misapplied, or converted (Boyd v. Northern Pac. Ry. Co. (C.C.) 170 F. 779; Northern Pac. Ry. Co. v. Boyd, 177 F. 804, 101 C.C.A. 18; Id., 228 U.S. 482, 33 Sup.Ct. 554, 57 L.Ed. 931); and as a simple contract creditor, having no interest in or lien upon the transferred property, cannot, in the...