Powers v. Blue Grass Building & Loan Ass'n

Decision Date25 March 1898
Docket Number6,662.
Citation86 F. 705
PartiesPOWERS et al. v. BLUE GRASS BUILDING & LOAN ASS'N et al.
CourtUnited States Circuit Court, District of Kentucky

Humphrey & Davie and C. H. Stoll, for complainants.

Helm Bruce & Helm, Wm. Rogers Clay, and Bronston & Allen, for defendants.

LURTON Circuit Judge.

This case comes on upon a motion to appoint a receiver pendente lite for the Blue Grass Building & Loan Association, a corporation organized under the law of Kentucky. The motion is based upon the bill, amended and supplemental bill, and exhibits, and upon a mass of ex parte affidavits, taken either in support or opposition to the motion, and also upon a transcript of a record from the Fayette circuit court of a suit there pending, which is filed for the purpose of showing that that court has obtained jurisdiction of the subject-matter here involved, and that such prior jurisdiction should not be interfered with by this court. The complainants are stockholders in the Blue Grass Building &amp Loan Association, and citizens of states other than Kentucky. The defendants are the association and Bishop Clay, to whom the directors and officers of the association, by a deed of general assignment, on the 31st day of January, 1898 conveyed all the assets and books and papers of the association, with authority to wind up the association by collecting its assets, selling its property, and making distribution of proceeds among the shareholders according to their rights, after paying debts and expenses of the trust. I shall content myself with a mere statement of my conclusions.

1. THIS general deed of assignment to Clay of January 31, 1898, does not appear to have been made with any evil intent, nor to be fraudulent in fact. But it was made without authority from the stockholders, and under circumstances which subject the board to very just criticism. The indebtedness of the association to creditors proper was absolutely frivolous. Not more than 6 per cent. of the shareholders had given withdrawal notices, and, if they be treated as in a sense creditors, the cash in the treasury was still largely more than sufficient to have paid in full every creditor proper, and to every such withdrawing stockholder everything which, under the by-laws, they had a present right to demand. The mortgages held by the association, together with its real estate, cash on hand, and other assets, amounted to approximately $300,000. There was a difference of opinion as to the advisability of continuing in business under the law as declared by the court of appeals of Kentucky, and the stockholders had resolved upon a change in their methods of business so as to comply with the law as declared by the Kentucky court, and had adopted a plan of reorganization. Pending their efforts in this direction, the directors seem to have concluded that a continuance in business was not advisable, and the reorganization scheme an abortion. To make an assignment which amounted to putting the association into liquidation without consulting their constituency was clearly a most illy advised act. The association was not insolvent. Its debts proper were insignificant. No trust had therefore arisen in favor of creditors. Neither are withdrawing stockholders to be regarded as creditors in the sense in which that word is used when so serious an act as that of an assignment is contemplated. Ninety-nine per cent. of the liability of this association at the date of this assignment was to its own shareholders as such. I am of opinion that under such circumstances the directors had no power, either under the general assignment statute of Kentucky or at common law, to make and execute the deed of assignment to Clay. The act was ultra vires the officers and directors of the association. Still it was an act which might have been ratified by the shareholders as a mode of liquidation within the general power of the corporation. But there has been no ratification, actual or implied. Upon the contrary, the shareholders in general meeting, assembled at the call of the directors, have rejected and repudiated the assignment, and demanded that it be retracted. They have gone perhaps further than their power justified, for since the filing of the original bill they have deposed their directors, and elected a new board, and the new board have elected new officers. This result has not been recognized by the majority of the old board, and thus we have the unusual spectacle of two sets of managing officers for this distressed corporation. The one set repudiate the deed of assignment, and they represent apparently more than 80 per cent. of the whole stock. The old officers maintain that they have not been lawfully displaced, and stand by the deed of assignment.

2. Holding as I do, that the deed of assignment was a voidable act, and that, having been rejected by the shareholders, it is now a void act, it must follow that Clay has no authority to withhold from the corporation its assets, books, and papers. He is a mere trespasser, and withholds at his peril the property placed in his possession under the deed of January 31, 1898, from the association. The case for the appointment of a receiver is clear, unless the hand of this court is stayed as an effect of the bill pending in the state court, concerning which I shall shortly speak. If Clay has no title under the assignment, there ought to be a receiver pendente lite, because the question of his title cannot be finally or authoritatively decided upon a mere motion for a receiver, and before the cause is finally heard. No order can at this stage of the case be made directing that the association be placed in possession of its assets. Such an order would be premature. Neither would the court be justified, upon the facts as they now appear, even if this was a final decree, in restoring these assets to the custody of either the old officers and directors of the association or to those who claim to be their successors. The old managers, in abdicating their trust, as they did when they made the illegal assignment to Clay, have forfeited the confidence of their constituency, and should not be restored to power. The new board, I do not think, were lawfully elected under the charter and by-laws of the association. The action of the shareholders in deposing a board of directors whose term of service had not expired was irregular and illegal. Under such a condition of corporate disorganization it is proper that the corporate assets should go into the hands of a receiver until there can be elected a directorate which will lawfully represent those interested in them.

3. But it is said that this court ought not to appoint a receiver or take cognizance of the question as to the validity of the assignment to Clay, because such a course will be in conflict with the prior jurisdiction of the Fayette circuit court touching the same subject-matter. This court has the highest respect possible for the Fayette circuit court, and will cheerfully withhold any action if by so doing it will interfere with the prior jurisdiction of that court over either the res or the subjects presented to this court for judgment. But it can be no disrespect to that court if this court simply maintains its own jurisdiction, and no more. But has that court obtained any such exclusive jurisdiction as will bring this court into conflict with that court if a receiver be appointed, and this suit be maintained for the single purpose of determining the validity of the assignment to Clay? First, as to the res, which is the property of the Blue Grass Association. The principle that, where property is in the actual possession of one court of competent jurisdiction, such possession cannot be interfered with by process out of another court, is well settled. Buck v. Colbath, 3 Wall. 334; Krippendorf v. Hyde, 110 U.S. 276, 4 Sup.Ct. 27; Byers v. McAuley, 149 U.S. 608, 13 Sup.Ct. 906; Compton v. Railroad Co., 31 U.S.App. 486-523-530, 15 C.C.A. 397, and 68 F. 263. There are two classes of cases in which the court first obtaining jurisdiction should be suffered to proceed without any interference by process from another of concurrent jurisdiction. The first class consists of those cases in which the exercise of jurisdiction by one court will interfere with the prior possession of the res by another court of competent and concurrent jurisdiction. Krippendorf v. Hyde, 110 U.S. 276, 4 Sup.Ct. 27; Heidritter v. Oil-Cloth Co., 112 U.S. 294, 5 Sup.Ct. 135; Byers v. McAuley, 149 U.S. 608, 13 Sup.Ct. 906. The second class is where there are two suits pending in different courts of...

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