The trustee of a mortgage upon the real estate of an Alabama
corporation commenced a suit in the circuit court of the United
States for the foreclosure of the mortgage. In his bill, he set up
that some stockholders were liable for unpaid assessments on their
stock, and, while asking for a foreclosure of the mortgage and sale
of the property, he prayed that other creditors of the corporation
might be permitted to intervene and become parties, and have their
claims adjudicated and that a full administration be had of the
estate. About three months after the commencement of that suit, a
contract creditor who had not reduced his claim to judgment filed
his bill in equity in the same court, suing for his own benefit and
that of all creditors who should become parties, asking to have the
mortgage declared void, to have the property sold, and the proceeds
applied to the payment of the debts of the creditors, parties to
the suit, and for a liquidation. The plaintiff in the second suit
did not intervene in the foreclosure suit. In due course, a decree
was entered in the foreclosure suit for the sale of the property.
The court then uttered a decree dismissing the creditor's bill upon
the merits.
Held that this was error, and that the bill
should have been dismissed for want of jurisdiction.
Simple contract creditors of a corporation whose claims have not
been reduced to judgment and who have no express lien on its
property have no standing in a federal court of equity to obtain
the seizure of their debtor's property and its application to the
payment of their debts.
This rule is not affected by the fact that a statute of the
state in which the property is situated and in which the suit is
brought authorizes such a proceeding in the courts of the state,
because the line of demarcation between equitable and legal
remedies in the federal courts cannot be obliterated by state
legislation.
This rule is not affected by the fact that when such a suit is
brought in a federal court, another suit is pending there for the
foreclosure of a mortgage upon the property of the corporation.
In such case, the defense that the rights of the plaintiff at
law should have been exhausted before commencing proceedings in
equity is a defense which must be made
in limine, and if
not so made, the court of equity is not necessarily ousted of
jurisdiction.
Neither the insolvency of a corporation nor the execution of an
illegal
Page 150 U. S. 372
trust deed, nor the failure to collect in full all stock
subscriptions, nor all together give to a simple contract creditor
of the corporation any lien on its property, or charge any direct
trust thereon.
Case v. Beauregard, 101 U. S. 688,
Sanger v. Upton, 91 U. S. 56, and
Terry v. Anderson, 95 U. S. 628,
distinguished and shown not to conflict with the subsequent cases
of
Wabash, St. Louis & Pacific Railway Railway v. Ham,
114 U. S. 587;
Fogg v. Blair, 133 U. S. 534, and
Hawkins v. Glenn, 131 U. S. 319.
When a corporation becomes insolvent, the equitable interest of
the stockholders in the property and their conditional liability to
creditors place the property in a condition of trust first for
creditors and then for stockholders, but this is rather a trust in
the administration of the assets after possession by a court of
equity than a trust attaching to the property as such for the
direct benefit of either creditor or stockholder.
The facts in this case are as follows: the Brierfield Coal and
Iron Company was incorporated under the laws of Alabama May 4,
1882. On September 1, 1882, a conveyance was made by the company to
Preston B. Plumb, as trustee, to secure an issue of $500,000 in
bonds. On July 25, 1887, the trustee, Plumb, requested a further
conveyance and assurance, pursuant to a covenant in the deed of
September, 1882, which further conveyance was executed by the
company on July 29, 1887. On August 1, he demanded the surrender of
all the company's property to him, as trustee. This was done, and
he placed John G. Murray in charge, to control and manage it. On
August 3, he filed a bill in the Circuit Court of the United States
for the middle district of Alabama against the company, joining as
defendants certain stockholders, bondholders, and creditors, though
not the plaintiffs in the present suit. That bill set out the
organization of the corporation, the stockholders, with the amounts
of stock subscribed, and the amounts paid upon such stock, and
alleged that the subscribers were liable for the unpaid
subscriptions, but that the assistance of the court was necessary
for the assessment of such sums. It also set out the issue of the
bonds and their present owners, so far as known, a default in the
payment of the interest due thereon, the property and indebtedness
of the company, the unsecured indebtedness being alleged to amount
to about $2000,000. The bill further averred that up
Page 150 U. S. 373
to that time, the chief industry of the company had been the
manufacturing of cut nails from iron; that, owing to overproduction
in the country, this business had become unprofitable to the
company, and that it was desired to change the industry from the
manufacture of nails to the production of pig iron, and that it had
purchased property with a view to carrying on that industry; that
it did not have money enough to successfully carry it on. The bill
also alleged that the trustee had taken possession, as authorized
by the deed of trust; that he could not carry on the business of
the company without obtaining money on the credit of the property,
and prayed the direction of the court as to whether he should be
permitted to borrow such money and issue certificates of
indebtedness therefor. It asked that all creditors of the
corporation and claimants against the estate be permitted to make
themselves parties and have their claims adjudicated; that a full
administration be had of the estate, and, if need be, a foreclosure
and sale. Subsequently, Plumb resigned as trustee and W. L.
Chambers was substituted in his place. Proceedings were had in that
case which resulted, on July 8, 1889, in a decree for the
foreclosure of the trust deed and a sale of the property. Nearly
three months after the commencement of the Plumb suit, and on
October 28, 1887, these appellants, as plaintiffs, filed a bill in
the same court, making the coal company and sundry stock and bond
holders, together with the trustee Plumb, parties defendant. The
plaintiffs were unsecured creditors of the company, having claims
contracted in 1886 and 1887, four or five years after the issue of
the bonds and execution of the trust deed, who sued on behalf of
themselves and all other creditors of the coal and iron company,
who were willing to come in and contribute to the expenses of the
suit. After setting forth their claims, they alleged that the
conveyance to Plumb, as trustee, was absolutely void; that a large
amount was still due on the stock. They asked to have a receiver
appointed and the property sold in satisfaction of their claims,
and that such receiver have authority to collect the unpaid stock
subscriptions, to be also applied in satisfaction of their claims.
They alleged the pendency of
Page 150 U. S. 374
the suit brought by Plumb as trustee, but did not ask to
intervene therein. After the decree of foreclosure and sale in the
Plumb case, and on July 24, 1889, a final decree was entered,
dismissing this bill. From such decree of dismissal, plaintiffs
have appealed to this Court.
Page 150 U. S. 378
MR. JUSTICE BREWER, after stating the facts in the foregoing
language, delivered the opinion of the Court.
The plaintiffs were simple contract creditors of the company.
Their claims had not been reduced to judgment, and they had no
express lien by mortgage, trust deed, or otherwise.
Page 150 U. S. 379
It is the settled law of this Court that such creditors cannot
come into a court of equity to obtain the seizure of the property
of their debtor and its application to the satisfaction of their
claims, and this notwithstanding a statute of the state may
authorize such a proceeding in the courts of the state. The line of
demarcation between equitable and legal remedies in the federal
courts cannot be obliterated by state legislation.
Scott v.
Neely, 140 U. S. 106;
Cates v. Allen, 149 U. S. 451. Nor
is it otherwise in case the debtor is a corporation, and an unpaid
stock subscription is sought to be reached.
National Tube Works
Company v. Ballou, 146 U. S. 517;
Swan Land & Cattle Company v. Frank, 148 U.
S. 603,
148 U. S. 612.
Nor is this rule changed by the fact that the suit is brought in a
court in which at the time is pending another suit for the
foreclosure of a mortgage or trust deed upon the property of the
debtor. Doubtless in such foreclosure suit the simple contract
creditor can intervene, and if he has any equities in respect to
the property, whether prior or subsequent to those of the
plaintiff, can secure their determination and protection, and here,
by the express language of the bill filed by the trustee, all
claimants and creditors were invited to present their claims and
have them adjudicated. These plaintiffs did not intervene, though,
as shown by the allegations of their bill, they knew of the
existence of the foreclosure suit. Neither did they apply for a
consolidation of the two suits. On the contrary, the whole drift
and scope of their suit was adverse to that brought by the trustee
and in antagonism to the rights claimed by him. They obviously
intended to keep away from that suit and maintain, if possible, an
independent proceeding to have the property of the debtor applied
to the satisfaction of their claims. But this, as has been decided
in the cases cited, cannot be done. The excuse suggested, that the
rule which forbids in a suit to foreclose a mortgage the litigation
of a title adverse to that of the mortgagor prevented them from
intervening, is not sound. Their rights, like those of the trustee
and the bondholders, were derived from the corporation defendant.
Each claimed under it, and the validity and amount of such claims
were matters properly and
Page 150 U. S. 380
ordinarily considered and determined in a foreclosure suit. It
is true the corporation might admit the validity of any or all of
the claims, and then the validity could only be a subject of
inquiry as between the claimants for the purpose of determining the
matter of priority; but to that extent, at least, both validity and
amount are always open to contest and determination.
It is urged, however, that this Court has sustained the validity
of proceedings and decrees in suits of this nature, in which it
appeared that the plaintiffs had not exhausted their remedies at
law, and the cases of
Sage v. Memphis & Little Rock
Railroad, 125 U. S. 361, and
Mellen v. Moline Iron Works, 131 U.
S. 352, are cited as illustrations. But, passing by
other matters disclosed by the facts of those cases, it will be
noticed that in neither of them was the objection made at the
outset, and when action on the part of the court was invoked.
Defenses existing in equity suits may be waived, just as they may
in law actions, and, when waived, the cases stand as though the
objection never existed. Given a suit in which there is
jurisdiction of the parties in a matter within the general scope of
the jurisdiction of courts of equity, and a decree rendered will be
binding although it may be apparent that defenses existed which, if
presented, would have resulted in a decree of dismissal. Take the
present case as an illustration. Suppose the corporation and other
defendants had made no defense, and, without expressly consenting,
had made no objection to the appointment of a receiver and the
subsequent distribution of the assets of the corporation among its
creditors. It cannot be doubted that a final decree providing for a
settlement of the affairs of the corporation and a distribution
among creditors could not have been challenged on the ground of a
want of jurisdiction in the court, and that notwithstanding it
appeared upon the face of the bill that the plaintiffs were simple
contract creditors, because the administration of the assets of an
insolvent corporation is within the functions of a court of equity,
and, the parties being before the court, it has power to proceed
with such administration. If there was a defense existing to the
bills as framed, an objection to the right of these
Page 150 U. S. 381
plaintiffs to proceed on the ground that their legal remedies
had not been exhausted, it was a defense and objection which must
be made
in limine, and does not of itself oust the court
of jurisdiction. This doctrine has been recognized not merely in
the cases cited, but also in those of
Reynes v. Dumont,
130 U. S. 354;
Kilbourn v. Sunderland, 130 U. S. 505;
Brown v. Lake Superior Iron Co., 134 U.
S. 530. None of these cases question the proposition
that if the objection is seasonably presented, it will be
effective.
But it is earnestly insisted that it has been held by this
Court,
Case v. Beauregard, 101 U.
S. 688, that whenever a creditor has a trust in his
favor, or a lien upon property for a debt due him, he may go into
equity without exhausting his legal remedies; that it has also
frequently been affirmed that the capital stock and assets of a
corporation constitute a trust fund for the benefit of its
creditors which neither the officers nor stockholders can divert or
waste, and several cases are cited, among them, that of
Sanger
v. Upton, 91 U. S. 56, in
which, perhaps, the proposition is asserted in the most direct and
emphatic language, and
Terry v. Anderson, 95 U. S.
628,
95 U. S. 636,
in which Chief Justice Waite made these observations:
"Ordinarily a creditor must put his demand into judgment against
his debtor and exhaust his remedies at law before he can proceed in
equity to subject choses in action to its payment. To this rule,
however, there are some exceptions, and we are not prepared to say
that a creditor of a dissolved corporation may not, under certain
circumstances, claim to be exempted from its operation. If he can,
however, it is upon the ground that the assets of the corporation
constitute a trust fund which will be administered by a court of
equity in the absence of a trustee, the principle being that equity
will not permit a trust to fail for want of a trustee."
While it is true language has been frequently used to the effect
that the assets of a corporation are a trust fund held by a
corporation for the benefit of creditors, this has not been to
convey the idea that there is a direct and express trust attached
to the property. As said in 2 Pomeroy's Equity Jurisprudence §
1046, they "are not in any true and complete
Page 150 U. S. 382
sense trusts, and can only be called so by way of analogy or
metaphor."
To the same effect are decisions of this Court. The case of
Graham v. Railroad Company, 102 U.
S. 148, was an action by a subsequent creditor to
subject certain property, alleged to have been wrongfully conveyed
by the corporation debtor, to the satisfaction of his judgment, and
the very proposition here presented was then considered, and, in
respect to it, the Court, by Mr. Justice Bradley, said (p.
102 U. S.
160):
"It is contended, however, by the appellant that a corporation
debtor does not stand on the same footing as an individual debtor;
that whilst the latter has supreme dominion over his own property,
a corporation is a mere trustee, holding its property for the
benefit of its stockholders and creditors, and that if it fail to
pursue its rights against third persons, whether arising out of
fraud or otherwise, it is a breach of trust, and creditors may come
into equity to compel an enforcement of the corporate duty. This,
as we understand, is the substance of the position taken."
"We do not concur in this view. It is at war with the notions
which we derive from the English law with regard to the nature of
corporate bodies. A corporation is a distinct entity. Its affairs
are necessarily managed by officers and agents, it is true, but in
law it is as distinct a being as an individual is, and is entitled
to hold property, if not contrary to its charter, as absolutely as
an individual can hold it. Its estate is the same, its interest is
the same, its possession is the same. Its stockholders may call the
officers to account, and may prevent any malversation of funds or
fraudulent disposal of property on their part. But that is done in
the exercise of their corporate rights, not adverse to the
corporate interests, but coincident with them."
"When a corporation becomes insolvent, it is so far civilly dead
that its property may be administered as a trust fund for the
benefit of its stockholders and creditors. A court of equity, at
the instance of the proper parties, will then make those funds
trust funds which in other circumstances are as much the absolute
property of the corporation as any man's property is his. "
Page 150 U. S. 383
With reference to the suggestion in this last paragraph, it may
be observed that the court does not attempt to determine who are
proper parties to maintain a suit for the administration of the
assets of an insolvent corporation. All that it decides is that
when a court of equity does take into its possession the assets of
an insolvent corporation, it will administer them on the theory
that they in equity belong to the creditors and stockholders,
rather than to the corporation itself. In other words -- and that
is the idea which underlies all these expressions in reference to
"trust" in connection with the property of a corporation -- the
corporation is an entity distinct from its stockholders as from its
creditors. Solvent, it holds its property as any individual holds
his, free from the touch of a creditor who has acquired no lien --
free also from the touch of a stockholder who, though equitably
interested in, has no legal right to, the property. Becoming
insolvent, the equitable interest of the stockholders in the
property, together with their conditional liability to the
creditors, place the property in a condition of trust first for the
creditors and then for the stockholders. Whatever of trust there is
arises from the peculiar and diverse equitable rights of the
stockholders as against the corporation in its property and their
conditional liability to its creditors. It is rather a trust in the
administration of the assets after possession by a court of equity
than a trust attaching to the property, as such, for the direct
benefit of either creditor or stockholder.
Again, in the case of
Wabash, St. Louis & Pacific
Railway v. Ham, 114 U. S. 587, it
appeared that four railway corporations owing debts were
consolidated under authority of law, and by the terms of the
consolidation agreement the new corporation was to protect the
debts of the old. Subsequently the new corporation executed a
mortgage on all its property, and in a contest between the
mortgagees and the unsecured creditors of one of the constituent
companies, the Court held that the lien of the mortgagees was
prior. In respect to this, MR. JUSTICE GRAY (p.
114 U. S. 594)
thus stated the law:
"It was contended that the property of the Toledo and Wabash
Railway Company was a trust fund for all
Page 150 U. S. 384
its creditors, and that upon the consolidation, the Toledo,
Wabash and Western Railway Company took the property of the Toledo
and Wabash Railway Company charged with the payment of all its
debts. The property of a corporation is doubtless a trust fund for
the payment of its debts in the sense that when the corporation is
lawfully dissolved and all its business wound up, or when it is
insolvent, all its creditors are entitled, in equity, to have their
debts paid out of the corporate property before any distribution
thereof among the stockholders. It is also true in the case of a
corporation as in that of a natural person, that any conveyance of
property of the debtor, without authority of law and in fraud of
existing creditors, is void as against them."
The case of
Fogg v. Blair, 133 U.
S. 534,
133 U. S. 541,
presented a similar question, and this Court, by MR. JUSTICE FIELD,
observed:
"We do not question the general doctrine invoked by the
appellant that the property of a railroad company is a trust fund
for the payment of its debts, but do not perceive any place for its
application here. That doctrine only means that the property must
first be appropriated to the payment of the debts of the company
before any portion of it can be distributed to the stockholders. It
does not mean that the property is so affected by the indebtedness
of the company that it cannot be sold, transferred, or mortgaged to
bona fide purchasers for a valuable consideration except
subject to the liability of being appropriated to pay that
indebtedness. Such a doctrine has no existence."
In the case of
Hawkins v. Glenn, 131 U.
S. 319,
131 U. S. 332,
which was an action brought by the trustee of a corporation against
certain of its stockholders to recover unpaid subscriptions, and in
which the defense of the statute of limitations was pleaded, CHIEF
JUSTICE FULLER referred to this matter in these words:
"Unpaid subscriptions are assets, but have frequently been
treated by courts of equity as if impressed with a trust
sub
modo upon the view that, the corporation being insolvent, the
existence of creditors subjects these liabilities to the rules
applicable to funds to be accounted for as held in trust, and that
therefore statutes of limitation do not commence to run
Page 150 U. S. 385
in respect to them until the retention of the money has become
adverse by a refusal to pay upon due requisition."
These cases negative the idea of any direct trust or lien
attaching to the property of a corporation in favor of its
creditors, and at the same time are entirely consistent with those
cases in which the assets of a corporation are spoken of as a
"trust fund," using the term in the sense that we have said it was
used.
The same idea of equitable lien and trust exists to some extent
in the case of partnership property. Whenever, a partnership
becoming insolvent, a court of equity takes possession of its
property, it recognizes the fact that in equity, the partnership
creditors have a right to payment out of those funds in preference
to individual creditors, as well as superior to any claims of the
partners themselves, and the partnership property is therefore
sometimes said, not inaptly, to be held in trust for the
partnership creditors, or that they have an equitable lien on such
property, yet all that is meant by such expressions is the
existence of an equitable right which will be enforced whenever a
court of equity, at the instance of a proper party and in a proper
proceeding, has taken possession of the assets. It is never
understood that there is a specific lien or a direct trust.
A party may deal with a corporation in respect to its property
in the same manner as with an individual owner, and with no greater
danger of being held to have received into his possession property
burdened with a trust or lien. The officers of a corporation act in
a fiduciary capacity in respect to its property in their hands, and
may be called to an account for fraud, or sometimes even mere
mismanagement, in respect thereto; but, as between itself and its
creditors, the corporation is simply a debtor, and does not hold
its property in trust, or subject to a lien in their favor, in any
other sense than does an individual debtor. That is certainly the
general rule, and if there be any exceptions thereto, they are not
presented by any of the facts in this case. Neither the insolvency
of the corporation nor the execution of an illegal trust deed nor
the failure to collect in full all stock subscriptions, nor all
together
Page 150 U. S. 386
gave to these simple contract creditors any lien upon the
property of the corporation nor charged any direct trust
thereon.
With respect to the propriety of the decree of dismissal in this
suit after the entry of the decree of foreclosure in the trustee
suit, the case of
Stout v. Lye, 103 U. S.
66, is conclusive. Indeed, that case is conclusive of
every question in this except such as arise from the fact that the
debtor is a corporation, rather than an individual. It appeared
that, pending a foreclosure suit, J. W. and J. O. Stout obtained a
judgment against the mortgagor on an unsecured claim. They
thereupon instituted a suit, making both mortgagee and mortgagor
parties defendant, to set aside the mortgage as illegal, or, if not
illegal, to have its amount reduced by certain payments of usurious
interest. While this suit was pending, the foreclosure suit passed
into decree, the Stouts having never been made parties or entered
an appearance in that suit. Thereupon their suit was dismissed, and
such dismissal was held by this Court proper, on the ground that
the Stouts, being simple contract creditors at the time the
foreclosure suit was commenced, were not only unnecessary, but
improper, parties.
"If they had been made parties when the suit was begun, they
could have done nothing by way of defense to the action until they
had acquired some specific interest in the mortgaged property. As
creditors at large, they were powerless in respect to the
foreclosure proceedings; but when they obtained their judgment --
not before -- they were in a position to contest in all legitimate
ways the validity and extent of the superior lien which the bank
asserted on the property in which, by the judgment, they had
acquired a specific interest."
And on the further ground that the mortgagor represented in the
foreclosure suit not merely himself, but all parties who, like the
Stouts, acquired any interest in the property since the
commencement of that suit.
So here these plaintiffs were simple contract creditors when the
trustee's suit was commenced. That suit passed to decree of
foreclosure, and up to that time, these plaintiffs had acquired no
specific lien upon the property. They entered no appearance
Page 150 U. S. 387
in that suit, did not intervene or claim any rights in the
property, and they were represented in that suit by the
corporation, the party under whom both they and the trustee
claimed. A decree of dismissal was therefore proper. It appears in
the record as a decree upon the merits. It should have been for
want of jurisdiction, and to that extent the decree, as entered,
will be modified. The appellants will be charged with all the costs
in the case.
Dismissed for want of jurisdiction.
MR. JUSTICE BROWN and MR. JUSTICE JACKSON dissent.
