Ross-Meehan Brake Shoe Foundry Co. v. Southern Malleable Iron Co.

• Decision Date: 20 March 1896
• Docket Number: 466.
• Citation: 72 F. 957
• Parties: ROSS-MEEHAN BRAKE SHOE FOUNDRY CO. v. SOUTHERN MALLEABLE IRON CO. et al.
• Court: U.S. District Court — Eastern District of Tennessee

72 F. 957

ROSS-MEEHAN BRAKE SHOE FOUNDRY CO. v. SOUTHERN MALLEABLE IRON CO. et al.

No. 466.

United States Circuit Court, E.D. Tennessee, Southern Division.

March 20, 1896

Wheeler & McDermott, for receivers.

White &amp Martin, for defendant Elliot.

CLARK District Judge.

The above is a consolidated cause pending in this court. Three separate bills have been filed against the defendant company as an insolvent corporation. Receivers were appointed under the first bill, and the receivership extended to the subsequent bills as filed. The bills, as now consolidated are for the foreclosure of a mortgage on defendant's property, and as general creditors' bills, to wind up the defendant company as an insolvent corporation. The usual steps taken in such cases have been had in this. In the progress of the case, and on December 5, 1894, the receivers appointed prepared and presented to the court, Judge Key presiding, a bill against the defendant Elliott, a citizen of the state of Alabama. It is alleged in the bill (as appears to be the case) that a large balance of indebtedness exists against the corporation, after all of its other assets shall have been exhausted, and that it is necessary to collect unpaid subscriptions, and that defendant Elliott is indebted to the company for a large balance on his subscription to capital stock. This bill was presented to Judge Key, who made the following order thereon:

'File the foregoing bill or petition as a dependent and auxiliary bill in this cause, upon a proper cost bond, with security being executed by the petitioners, and issue process as prayed for.

'Sept 7th, 1894. D. M. Key, Judge.' Thereupon the bill was filed, and defendant Elliott answered the same, and in his answer sets up various defenses, and among them objections to the jurisdiction of the court in the original case in which this is filed as a dependent bill. The insolvent corporation was organized under the general incorporation act of 1875, and its original or initiatory stock was fixed by by-law at $50,000, and was subsequently and at different times attempted to be increased by resolution of the stockholders to $70,000, again to $80,000, and finally to $100,000, and defendant Elliott is a subscriber to the last increase of stock from $80,000 to $100,000. The defendant Elliott was president and general manager of the company for the period of about 11 months, beginning in 1892 and extending into 1893. He also attended meetings of stockholders representing his stock, as well as meetings of directors. No certificate of stock appears to have in fact been issued to defendant Elliott, but his subscription is in proper form. The issues now to be disposed of arise under this bill by the receivers against Elliott, and a more particular statement of the facts and history of the case is not deemed necessary to an understanding of this branch of the litigation.

Defendant's first contention is that the court is without jurisdiction, and the point made is that the present suit is in no sense a dependent and auxiliary bill, but an independent suit. The court has, however, by express order, made it such, and this bill is filed in the original case, and such order has not been set aside or reversed, and the objection is, therefore, according to Davis v. Gray, 16 Wall. 204, not well taken. Moreover, the proposition that this bill is in its essential character auxiliary or ancillary to the original suit, and that the court has full jurisdiction of it as such, is fully sustained by the case of White v. Ewing, 159 U.S. 36, 15 Sup.Ct. 1018; and the entire procedure in the case before Judge Key is fully sanctioned by the cases of Davis v. Gray and White v. Ewing. The defendant contends that, treated as an auxiliary bill, the court was without jurisdiction of the original bill, and that plaintiffs have no right, for this reason, to recover. Passing by the question whether the defendant can, in this dependent suit, make an objection to jurisdiction in the original case, it is clear, I think, that this contention cannot be sustained. The objection made is that the consolidated bills do not show exhaustion of the legal remedy by nulla bona return, and that the case is not, therefore, one of equitable cognizance. As the bills are bills for foreclosure as well as general creditors' bills, it is not perceived on what basis an attack upon the jurisdiction can rest. The court certainly had jurisdiction to foreclose the mortgages, and it was pointed out in Hollins v. Iron Co., 150 U.S. 379, 14 Sup.Ct. 127, that in such foreclosure suit simple contract creditors can intervene, and assert any equity or priority in respect to the property, and secure protection in that proceeding, and it has become the well-established practice of this court in foreclosure suits against an insolvent corporation to make the suit also a general creditors' bill, for the purpose of having all liens and priorities settled, and a complete winding up and distribution of assets made. And it was decided in Hollins v. Iron Co., that the objection that plaintiff had not exhausted the legal remedy before commencing proceedings in equity must be made in limine, and, if not so made, that a court of equity is not ousted of jurisdiction; and certainly this defense, coming, as it does, in an ancillary suit, and in an answer at the hearing after the original case is well-nigh ended, is too late. And, the corporation being confessedly insolvent, it is doubtful if there is any basis in the facts of the case for this defense, aside from the legal objection to the time and manner in which it is attempted to be presented.

It is next objected that suit cannot be maintained in a court of equity in the United States court, because the demand is purely legal, and deprives the defendant of trial by jury. This contention is again met and answered adversely to defendant by White v. Ewing, supra, and Porter v. Sabin, 149 U.S. 473, 13 Sup.Ct. 1008, in which Mr. Justice Gray, giving the opinion of the court said:

'It is for that court, in its discretion, to decide whether it will determine for itself all claims of or against the receiver, or will allow them to be litigated elsewhere. It may direct claims in favor of the corporation to be sued on by the receiver in other tribunals, or may leave him to adjust or settle them without suit, as in its judgment may be most beneficial to those interested in the estate. Any claim against the receiver or the corporation the court may permit to be put in suit in another tribunal against the receiver, or may reserve to itself the determination of; and no suit, unless expressly authorized by statute, can be brought against the receiver without the permission of the court which appointed him.'

The principle is that jurisdiction of the creditors' suit and the receivership draws to such jurisdiction all litigation necessary to completely wind up the insolvent corporation, and distribute its assets legally; and it has never been supposed that the constitutional provision for trial by jury in any manner restricted or affected jurisdiction of a chancery court as it existed at the time of the adoption of the constitution. This contention is therefore wholly untenable. It is again insisted that plaintiffs cannot recover because the suit was not preceded by a call or assessment against the defendant as a subscriber, and that until this is done no right of action accrues. In a suit by a solvent, going corporation to collect subscription, and in certain suits provided by statute, this would be true; but it is now quite well settled that when the corporation becomes insolvent, with proceedings instituted by creditors to wind up and distribute its assets, no call or assessment is necessary before the institution of suits to collect unpaid balances on subscription. Hatch v. Dana, 101 U.S. 205; Holmes v. Sherwood, 3 McCrary, 405, 16 F. 725; Washington Sav. Bank v. Butchers' & Drovers' Bank (Mo. Sup.) 17 S.W. 644; Bank v. Gillespie, 115 Pa.St. 564, 9 A. 73; Tayl. Priv. Corp. Sec. 703.

The defendant also sets up as a defense that his subscription to this stock was obtained under fraudulent misrepresentations as to the condition and past business operations of the company, and that the subscription is, for this reason, invalid. I am clearly of the opinion that this defense comes too late. All of the facts now known to the defendant as grounds for rescinding his contract were such as he could, at any time, have discovered by reasonable inquiry, and where the means of knowledge are open to him the effect is the same as knowledge itself; and, if the defendant could in any case make this defense after insolvency, and after institution of proceedings to wind up the corporation, it would be necessary for him to show that he exercised the greatest diligence to discover the fraud, and to promptly repudiate his contract of subscription. Chubb v. Upton, 95 U.S. 665; Upton v. Englehart, 3 Dill. 496, Fed. Cas. No. 16,800; Cunningham v. Railroad Co., 2 Head, 23.

The only remaining defense is that the attempted increase of stock to which the defendant became subscriber was one which the corporation was without authority to make, and that it was, therefore, illegal, and the defendant's subscription thereto void, and this presents a serious issue. Was the increase of stock, as here attempted by the resolution of the stockholders, if we treat this as equivalent to a by-law illegal? And, if so, has the defendant, by his connection with the company as above stated, estopped himself to make this question? Whether or not the corporation has power to increase its stock by by-law, after the capital stock has been originally fixed, was a question expressly reserved by the supreme court of the state...