A garnishee who occupies the double position of debtor to the
principal defendant in a definite or ascertained amount and also
that of a creditor of such principal debtor by way of unliquidated
damages arising out of the breach of a contract in existence when
the garnishment proceedings were instituted can, after an order at
law subjecting the defined indebtedness to the payment of the
garnishor, invoke the aid of a court of equity to restrain the
garnisheeing creditor from enforcing the payment of the amount due
until the unliquidated damages can be ascertained and set off
against such indebtedness on the ground that the principal debtor
is insolvent and a nonresident of the state in which the garnishee
resides and in which the garnishment proceedings are had.
Equity will entertain jurisdiction and afford relief against the
collection of
Page 152 U. S. 597
a judgment where there is a meritorious, equitable defense
thereto which could not have been set up at law or which the party
was, without fault or negligence, prevented from interposing.
The adjustment of demands by counterclaim or setoff, rather than
by independent suit, is favored and encouraged by the law, to avoid
circuity of action and injustice.
The insolvency of the party against whom a setoff is claimed is
a sufficient ground for equitable interference, and in Illinois and
some other states, the nonresidence of the party against whom the
setoff is asserted is also held to be sufficient ground
therefor.
It is settled in England, where the law differs in no material
respect from that of Illinois, that a garnishee order does not
effect a transfer of the debt to the garnishor or create the
relation of creditor and debtor between him and the garnishee.
It is a recognized principle that the rights of the garnishor do
not rise above or extend beyond those of his debtor; that the
garnishee shall not, by operation of the proceedings against him,
be placed in any worse condition than he would have been in had the
principal debtor's claim been enforced against him directly; that
the liability, legal and equitable, of the garnishee to the
principal debtor is a measure of his liability to the attaching
creditor, who takes the shoes of the principal debtor and can
assert only the rights of the latter.
The Court stated the case as follows:
The principal question presented by the record in this case is
whether a garnishee who occupies the double position of debtor to
the principal defendant in a definite or ascertained amount and
also that of a creditor of such principal debtor by way of
unliquidated damages arising out of the breach of contract in
existence when the garnishment proceedings were instituted can,
after an order at law subjecting the defined indebtedness to the
payment of the garnishor, invoke the aid of a court of equity to
restrain the garnisheeing creditor from enforcing the payment of
the amount due until the unliquidated damages can be ascertained
and set off against such indebtedness, on the ground that the
principal debtor is insolvent and a nonresident of the State in
which the garnishee resides, and in which the garnishment
proceedings are had? In other words, is the insolvency and
nonresidence of the principal debtor, to whom the garnishee is
indebted in a certain definite amount and against whom he has a
valid
Page 152 U. S. 598
claim for unliquidated damages growing out of a breach of
contract between them -- in existence at the commencement of the
garnishment proceedings -- a good ground for the exercise of
equitable jurisdiction, after an order or judgment at law declaring
the sum due the principal debtor applicable to the payment of the
garnishor, to stay the enforcement of such order or judgment until
the unliquidated damages due the garnishee can be ascertained and
set off against the amount certain owing by him to the principal
debtor?
The material facts and proceedings out of which this question
arises are as follows:
In November, 1883, the St. Louis Ore and Steel Company, of St.
Louis, Mo. (hereafter styled the "St. Louis Company") and the North
Chicago Rolling Mill Company, of Chicago, Illinois (hereafter
called the "Chicago Company"), were each engaged in the manufacture
of steel rails for railroads. The St. Louis Company was also a
miner of iron ore and the maker of pig metal. On November 6, 1883,
the St. Louis Company entered into a contract with the Missouri
Pacific Railroad Company for the sale and delivery to the railroad
company of 24,000 tons of steel rails, in quantities of 2,000 tons
per month from January to December, 1884, inclusive, for which the
railroad company agreed to pay for each monthly delivery of rails,
on receipt of bills of landing and invoice at the rate of $18 a ton
cash, and one ton of old rails for each ton delivered.
On November 19, 1883, the St. Louis Company entered into another
contract with the Missouri Pacific Railroad Company by which it
agreed to sell to the railroad company the further quantity of
18,000 tons of steel rails, to be delivered at the rate of about
1,500 tons per month, commencing January 1, and ending in December,
1884, for which the purchaser was to pay, for each delivery of
1,500 tons at the rate of $37.50 a ton, in cash, on the 20th day of
the month succeeding the delivery.
Having these engagements on its hands, the St. Louis Company, on
December 1, 1883, entered into a written contract with the Chicago
Company by which the latter agreed to furnish the former company
18,000 tons of No. 1 Bessemer
Page 152 U. S. 599
steel rails, to be delivered free on board the cars at Chicago,
in about equal amounts (1,500 tons), during each month of the year
1884 at the rate of $35 per gross ton (2,240 pounds), to be paid by
the St. Louis Company on the tenth day of each month for all rails
delivered during the previous month. The contract specified that
the rails to be furnished by the Chicago Company should weigh 52,
56, 59, or 63 pounds per lineal yard, as per templet to be
furnished by the St. Louis Company, and were to be drilled for
bolts at certain distances from the ends of the rails, according to
their weight.
The rails were to be consigned as directed by the St. Louis
Company, which was to furnish the cars for the prompt shipment
thereof from Chicago,
"and in the absence of the furnishing of cars upon which to load
said rails, enabling the said first party [the Chicago Company] to
make their deliveries as herein specified, then the said second
party [the St. Louis Company] shall make their settlements and pay
for said rails on the tenth day of the month, the same as though
said rails had been delivered, and the nondelivery of cars shall in
no way relieve the said second party from the prompt payment for
the rails on the tenth day of the month, as specified herein."
The rails, so far as delivered, were manufactured in varying
weights, upon orders given by the St. Louis Company.
On December 22, 1883, the Chicago Company entered into a
contract with R. M. Cherrie & Company, of Chicago, for the
purchase of 50,000 tons of iron ore, to be mined and shipped during
the year 1884 from the Pilot Knob Mine, in the State of Missouri,
owned and operated by the St. Louis Company. This ore was to be
delivered at the Chicago Company's works in quantities of from one
to seven thousand tons per month, as required by the Chicago
Company, and payment therefor was to be made on the fifteenth day
of each month for ore delivered during the previous month. This
contract, if not made by Cherrie & Company as agents of the St.
Louis Company, was guaranteed by the latter so far as the quality
of the ore and its delivery, were concerned.
Cherrie & Company became financially involved, and on July
3, 1884, made an assignment to one Jenkins for the benefit
Page 152 U. S. 600
of their creditors, of whom the St. Louis Company was a large
one. Upon the failure of Cherrie & Company, the St. Louis
Company assumed the former's ore contract with the Chicago Company,
and thereafter, between the 4th and 21st days of July, 1884,
delivered to the Chicago Company iron ore and pig metal to the
amount or value of $44,916.82, for which payment was to be made by
the Chicago Company on August 15, 1884.
On July 10, 1884, the St. Louis Company, being indebted to the
Chicago Company in the sum of $21,536.56 for steel rails delivered
during the previous month (June), made default in paying the same,
and the next day (July 11, 1884) informed the Chicago Company by
letter of its inability to pay for the June delivery of rails, and
asked, as a special favor, to let the matter rest for a little
while, as the Chicago Company had in its possession funds arising
from the sale of ore and pig metal which were being delivered
during the month of July. To this request no reply appears to have
been made.
On July 12, 1884, the St. Louis Company again wrote the Chicago
Company, expressing a doubt as to its ability to pay its debts
promptly, and suggesting an arrangement by which the receivers of
the Wabash Railroad Company should take certain rails and settle
directly with the Chicago Company. This arrangement was not,
however, consummated.
The St. Louis Company, being embarrassed and having made default
in paying the interest on its several issues of bonds secured by
mortgages, was on July 21, 1884, placed in the hands of a receiver
upon a bill filed against it in the United States Circuit Court for
the Eastern District of Missouri by Robert M. Olyphant, as trustee,
a citizen of New York, for the foreclosure of a second mortgage
upon its property. The bill alleged the insolvency of the St. Louis
Company, and, upon the day of its filing, E. A. Hitchock, the
president of the company, was appointed provisional receiver of its
property and assets, with instructions "to carry out and perform
the contracts of the company for the purchase and sale of steel
rails and to preserve and protect all its property." This
receivership was made permanent on August 7, 1884,
Page 152 U. S. 601
and the provisional instructions were renewed. Hitchcock
promptly qualified both as provisional and permanent receiver.
The receiver subsequently, on August 25, 1884, made a report to
the court in which, after referring to the several contracts of the
St. Louis Company with the Missouri Pacific Railroad Company for
the sale of steel rails, and with the Chicago Company and others
for the purchase of such rails, together with what had been done
thereunder, he stated that on July 30, 1884, he had received from
the railroad company an order for 2,045 tons of rails, to be
delivered in August; that he thereupon had placed with the Chicago
Company an order for 1,500 tons of the rails required, the price of
which, under the contract between the St. Louis Company and the
Chicago Company, would amount to about the sum of $52,000, and if
the rails were delivered in August, that sum would have to be paid
on September 10, 1884; that he had not in hand, and was not likely
to have, any funds with which to meet such payment; that he had,
after negotiations, failed to induce the railroad company to agree
to make payment for the rails on September 10, 1884; that the
railroad company had, furthermore, notified him that it was ready
to carry out its contract with the St. Louis Company according to
the terms thereof, but would no longer accept steel rails from
other makers in the performance of that contract; that he had
without success made overtures to be released from the contract of
the St. Louis Company for the sale and purchase of steel rails on
the basis of the difference between the then market price of such
rails, estimated at $31 per ton, and the contract prices, which
terms he regarded as just to all parties, but that these overtures
were not accepted. The receiver further reported that the Chicago
Company had notified him, by letter under date of August 6, 1884,
that it was ready and willing to carry out its contract of December
1, 1883, for the manufacture and delivery of steel rails upon the
terms of payment therein mentioned, and that for the failure of the
St. Louis Company to carry out the said contract it would claim
damages; that the Chicago Company requested an explicit statement
from him,
Page 152 U. S. 602
as receiver, whether he would be prepared to pay in cash on the
tenth of each month following the delivery of rails ordered by him
under said contract, to which he had replied that he was not in
possession of money sufficient to pay cash for such rails, but that
the court under whose orders he was acting had power to make
provision therefor; that to this the Chicago Company had replied
that it was ready and willing to furnish the rails as ordered, upon
being notified that he was prepared to pay therefor on the tenth of
the month following delivery.
The correspondence fully established the facts thus reported by
the receiver. It is further shown in the correspondence between the
receiver and the Chicago Company that the receiver proposed to pay
for the rails which might be ordered and delivered under the
contract with the St. Louis Company in receiver's certificates,
which the Chicago Company declined to receive. The receiver
admitting that he could not pay for the 1,500 tons ordered for the
next month, those rails were, for that reason, not manufactured by
the Chicago Company.
The Chicago Company received no orders for rails from the St.
Louis Company or its receiver for the month of July or for any
subsequent month during the year 1884. Nor did the receiver ever
notify the Chicago Company that he was prepared to pay for the
rails according to the terms of the contract between the two
companies.
On the day of the receiver's appointment, July 21, 1884, the
Joliet Steel Company, an Illinois corporation, commenced two
attachment suits in the Superior Court of Cook County, Illinois,
against the St. Louis Company, one for $7,777.07, the other for
$10,051.78, and on the same day, and in the same court, the Iron
Mountain Company, a Missouri corporation, commenced an attachment
suit against the St. Louis Company upon a claim for $19,782.60. No
property of the St. Louis Company was attached under the writs
issued in these suits, which were thereupon, and in conformity with
the statutes of Illinois, served upon the Chicago Company and R. E.
Jenkins, as assignee of R. M. Cherrie & Company, as garnishees,
and interrogatories were filed, for each of them to answer,
touching
Page 152 U. S. 603
their indebtedness to the St. Louis Company. The two suits of
the Joliet Company were removed in September, 1884, to the law side
of the United States circuit court for the Northern District of
Illinois. The Chicago Company made answer in November, 1884, and a
supplemental and amended answer on February 25, 1885, setting forth
the transactions and matters of account between itself and the St.
Louis Company, admitting an indebtedness to the latter for ore and
pig iron amounting to $44,916.82, and setting up counterclaims to
the amount of $56,807.50, which included the sum of $28,390.16 as
damages for the failure of the St. Louis Company to carry out the
steel rail contract, by receiving and paying for the rails in
compliance with the terms of that contract.
To this answer replication was made, and upon the issues formed
the cause was tried before a jury. The Chicago Company introduced
proof tending to establish its claim for the $28,390.16 as damages,
but upon motion of the plaintiff, this evidence was stricken out,
and the claim for damages was disallowed by the court on the ground
that, being unliquidated, it could not properly be set off at law.
The disallowance of the claim for damages left a balance of
$16,473.28 due by the Chicago Company to the St. Louis Company. A
verdict was directed for the plaintiff for that amount, and
judgment was rendered against the Chicago Company, January 13,
1886, for the sum of $16,473.28.
This garnishment proceeding was, under the Illinois statutes, in
the name of the St. Louis Company, and judgment was rendered in its
favor against the Chicago Company for the amount of the verdict for
the use of the Joliet Company and others entitled to share
therein.
In the garnishment proceedings under the attachment suit of the
Iron Mountain Company in the Superior Court of Cook County, a
similar judgment was rendered against the Chicago Company as
garnishee. By the laws of Illinois, the sum adjudged against the
Chicago Company as garnishee was a
quasi-trust fund for
the use of both attaching creditors -- the Joliet Company and the
Iron Mountain Company.
Pending the garnishment proceedings, on September 26,
Page 152 U. S. 604
1884, Robert M. Olyphant, as trustee, filed what is called an
"ancillary bill" in the United States circuit court for the
Northern District of Illinois against the St. Louis Company for the
purpose of reaching the assets of the company in that jurisdiction.
This bill recited the proceedings had, and the orders made, in the
original suit and asked the court to administer the assets of the
company in that jurisdiction.
The Chicago Company, having secured a stay of proceedings in
both of the garnishment cases, thereupon filed its bill or petition
on January 18, 1886, against the St. Louis Company, the Joliet
Company, and the Iron Mountain Company on the equity side of the
United States Circuit Court for the Northern District of Illinois
in the ancillary suit of
Olyphant v. St. Louis Company.
This bill or petition of the Chicago Company, after setting out the
rail and ore contracts, the default of the St. Louis Company in
failing to perform the rail contract, and the resulting damages to
the Chicago Company, the garnishment proceedings at law in the
state and federal courts, and the denial of its right therein to
set off its claim for damages against the St. Louis Company,
alleged that the St. Louis Company was insolvent and that, being
both insolvent and a nonresident, the Chicago Company was entitled
to relief in equity by having its damages liquidated and then set
off against the judgments in the attachment suits. The prayer was
for an injunction and relief by way of equitable setoff, and for
judgment over for any balance due it by the St. Louis Company.
The Iron Mountain Company filed its answer in March, 1887,
admitting that the claim on which its attachment suit was brought
against the St. Louis Company had been settled and disclaimed any
further interest in the proceedings.
The answer of the other defendants, while admitting most of the
allegations of the bill, denied that the St. Louis Company had
violated or failed to perform the rail contract or that the
complainant had any valid claim for damages against it; that if
there had been any breach of the rail contract, the claim for
unliquidated damages could not be the subject of setoff in equity
any more than in law; that if the claim were
Page 152 U. S. 605
valid, it arose out of transactions distinct from the subject
matter of the suit in which such setoff was claimed; that it did
not exist on July 21, 1884, when the garnishment process was
served; that from that date, the garnishor acquired a lien upon and
a right to the fund due from the garnishee, in the nature of an
equitable assignment, which could not be disturbed or affected by
any subsequent breach of the rail contract by the St. Louis
Company. A general replication was filed by the Chicago
Company.
While this suit of the Chicago Company for equitable relief was
pending, the St. Louis Company effected a compromise with its bond
creditors by issuing new mortgage securities in lieu of the old
bonds, and thereupon the Olyphant suits against the St. Louis
Company in the United States circuit courts for the Eastern
District of Missouri and for the Northern District of Illinois were
dismissed. The decree of dismissal of the Illinois suit provided,
however, that the petition of the Chicago Company should stand, and
be proceeded in as an original bill.
On April 9, 1887, the Joliet Steel Company assigned and
transferred its two judgments for $9,101.85 and for $10,760.41,
respectively, against the St. Louis Company, to David K. Ferguson,
who, as such assignee, thereafter, in May, 1888, applied to be
made, and was made, a party to the suit of the Chicago Company.
The cause came on for hearing in May, 1889, upon evidence as to
the breach of the rail contract by the St. Louis Company, and the
damages thence resulting to the Chicago Company, which was
substantially the same as that introduced at law in the garnishment
proceedings. The circuit court held that the equitable setoff
sought by the bill could not be allowed, for the reasons that the
judgment against the Chicago Company as garnishee was for money due
for pig iron and ore bought from the St. Louis Company, while the
claim for unliquidated damages grew out of the failure of the St.
Louis Company to receive rails under the contract of December,
1883, which had no connection with the one upon which the Chicago
Company was held as garnishee; that when the
Page 152 U. S. 606
Chicago Company was served as garnishee, no part of the claim
urged as a setoff had accrued; that the Chicago Company then had no
right of action for the recovery of that claim; that it was then
uncertain whether that company would make or lose money by the
further performance of the rail contract. The opinion of the court
concluded by saying:
"Without ruling upon other questions discussed by counsel, it is
sufficient to say that the claim for unliquidated damages growing
out of the failure of the St. Louis Company to receive rails under
the rail contract after the failure of that company, and after the
commencement of the suit in attachment, and the service of the writ
of garnishment upon the Chicago Company, was properly rejected by
the court in the trial of the action at law, and cannot now be set
off against the judgment rendered against the garnishee. The
intervening petition is dismissed, without prejudice to the right
of the Chicago Company to prosecute an action against the St. Louis
Company."
39 F. 308.
Page 152 U. S. 611
MR. JUSTICE JACKSON delivered the opinion of the court.
From the decree dismissing this bill the present appeal is
prosecuted, and the errors assigned by the appellant may be
embraced in the general proposition that the court below erred in
declining to adjudicate and determine the amount of the damages
sustained by the Chicago Company from the breach of the rail
contract, and set off the same against the judgment at law, and in
dismissing the bill, even though such dismissal was without
prejudice to the right of the Chicago Company to bring suit for the
recovery of such damages.
In addition to the reasons on which the court below denied
relief and dismissed the bill, it is urged by the appellees that
the equitable ground for relief --
viz., the insolvency of
the St. Louis Company -- ceased to exist before the final decree
was rendered. It is urged that its solvency was shown by the
Page 152 U. S. 612
settlement of its debts, and the dismissal of the foreclosure
suits against it, and the discharge of the receiver. There are
several answers to this suggestion:
First. The fact relied
upon to establish such restored solvency,
viz., the
compromise of the company's bonded indebtedness by issuing new
obligations secured by mortgage on all its tangible property, fails
to show any actual improved financial condition, such as would be
available to the Chicago Company in enforcing its claim for
damages.
Second, as appears in the record, there were
other claims against the St. Louis Company, which were not settled
by the compromise which terminated the foreclosure suits.
Third. The alleged restored solvency of the St. Louis
Company was not set up by supplemental pleading of any kind in this
suit, although there were ample time and opportunity to do so
between March, 1887, and May, 1889, when this cause was finally
heard; as a matter of defense arising after the case was at issue,
the restored solvency of the St. Louis Company must have been set
up by supplemental answer, or other appropriate pleadings. Story's
Equity Pleading § 393.
Fourth. Equitable
jurisdiction, having once rightfully attached, cannot be defeated
by matter subsequently arising which does not go to the merits of
the complainant's case. The state of facts existing when the bill
was filed must be looked to in determining the question of
equitable jurisdiction, which, in this case, is rested on the
ground of insolvency and nonresidence. The latter fact is not
questioned. As to the former, the Joliet Steel Company, by its
petition filed May 1, 1886, in the Olyphant foreclosure suit in the
Northern District of Illinois, asking that the receiver be required
to give bond, as such, in the sum of $50,000, to account for the
assets received in that jurisdiction, distinctly alleged that the
St. Louis Company was an insolvent, nonresident corporation, and on
the strength of its petition the receiver gave bond to cover the
assets within the jurisdiction of the Circuit Court of the United
States for the Northern District of Illinois, and the receiver
thereafter, with the consent of the Joliet Company, compromised the
claim of the St. Louis Company against Cherrie & Company, and
obtained securities and assets thereunder, which
Page 152 U. S. 613
were allowed to be removed from the jurisdiction of the court or
applied otherwise than to the debt of the Joliet Company.
It is not shown by the record that the St. Louis Company was
restored to a state of solvency before the final decree; but if
that fact had been properly shown, it was not set up as a defense
in the present suit, and it cannot now be invoked on behalf of the
Joliet Company or its assignee.
It admits of no question that the St. Louis Company made default
in the performance of the rail contract. It failed in the payment
of the sum of $21,536.56 on July 10, 1884, for steel rails
delivered in June. This default continued throughout the year 1884.
Neither the St. Louis Company nor its receiver gave any order or
orders for the manufacture of rails for July delivery. On the order
for 1,500 tons of rails given for August delivery, the receiver was
confessedly not prepared to pay, nor was any provision made by
which the Chicago Company could reasonably expect payment, therefor
on September 10, 1884. The receiver had made every possible effort
to raise funds by the sale of receiver's certificates, and had
failed. He had nothing to pay with, except "certificates," and the
Chicago Company had declined to take them. It was certainly not
bound to proceed with the manufacture and delivery of rails under
the August order, after being notified in advance that the receiver
was not prepared, and did not expect to be in funds, to pay for the
same unless certificates were accepted. For the reason that he had
nothing to pay with except "certificates," the receiver considered,
as he stated to the president of the Chicago Company, in a letter
dated September 26, 1884, that it would have been wrong to have
asked the Chicago Company to make and forward rails, without
immediate or prospective means of paying for the same. So no
further orders were given for rails, although the Chicago Company,
repeatedly, during August, September, and October, expressed its
readiness and ability to fill all orders when the receiver was
prepared to pay therefor according to the terms of the contract.
The Chicago Company, early in October, indicated its willingness to
reduce the price of the undelivered rails to $30 per ton, upon
prompt
Page 152 U. S. 614
settlement in cash according to the contract, but this
proposition was not accepted.
Under these circumstances, there was a clear breach of the rail
contract on the part of the St. Louis Company. The first default
occurred on July 10, 1884, in failing to pay the amount then due
the Chicago Company. It was further in default in not giving an
order to manufacture rails for July, which was continued during the
succeeding months of the year 1884. So that at the close of
December, 1884, when the time for the final performance of the
contract expired, there were about 10,618 tons of rails that the
St. Louis Company had failed to order, receive, and pay for at the
contract price of $35 per ton. Steel rails continued to decline
from July, 1884, to January, 1885, the price running down to $29.50
a ton between those dates.
It is claimed for the appellee that as the Chicago Company had
not rescinded and terminated the rail contract, for the July
breaches thereof -- if entitled so to do -- it was not in a
position to bring suit for damages when the garnishor's right
became fixed. This, however, does not affect the merits of this
case. The Chicago Company was not bound to treat the contract as at
an end upon the first breach thereof by the St. Louis Company. It
had a right to await the expiration of the time for its final
performance, and then make its claim for the entire breach. In the
view we take of the question, it is not material to determine at
what precise date there was such a breach as would entitle the
Chicago Company to damages upon the entire contract. The material
thing is that the contract for the breach of which the claim for
damages arises was in existence when the garnishment process was
served. It had then been broken in one particular, if not in more,
and, from the situation and embarrassed condition of the St. Louis
Company, there was almost a certainty that it would fail to perform
the contract in the future. The Chicago Company gave repeated
notices to the receiver of its readiness and willingness to fulfill
the contract on its part. It could only manufacture rails as they
were ordered and their weights specified. It notified the receiver
time and again that it
Page 152 U. S. 615
would claim damages. That it sustained damages to the extent of
the difference between the contract and the market price of steel
rails is clear beyond all controversy. The liability of the St.
Louis Company for these damages is equally clear, but the amount
thereof, being unliquidated, could not properly be set off in the
attachment proceeding at law. Under these circumstances and
conditions, has the Chicago Company any right to relief in equity,
by way of equitable setoff? Would it be just and equitable to
compel the garnishee to pay its indebtedness to the St. Louis
Company for the benefit of a stranger, and then be left to either
lose its valid claim for damages or follow its nonresident
insolvent debtor into another jurisdiction in the effort, more or
less experimental and expensive, to collect such claim? If the St.
Louis Company was the beneficial plaintiff in the judgment at law,
or the case stood alone between it and the Chicago Company, there
could be little or no doubt that a court of equity would, under the
facts stated, afford the latter relief by way of equitable
setoff.
Cross-demands and counterclaims, whether arising out of the same
or wholly disconnected transactions and whether liquidated or
unliquidated, may be enforced by way of setoff whenever the
circumstances are such as to warrant the interference of equity to
prevent wrong and injustice.
Again, it is well established that equity will entertain
jurisdiction and afford relief against the collection of a judgment
where in justice and good conscience it ought not to be enforced,
as where there is a meritorious equitable defense thereto which
could not have been set up at law or which the party was, without
fault or negligence, prevented from interposing. Illustrations of
these general principles are found in the cases of
Leeds v.
Marine Ins. Co., 6 Wheat. 565;
Scammon v.
Kimball, 92 U. S. 362;
Crim v. Handley, 94 U. S. 652;
Embry v. Palmer, 107 U. S. 3;
Knox Co. v. Harshman, 133 U. S. 154;
Marshall v. Holmes, 141 U. S. 589.
The adjustment of demands by counterclaim or setoff, rather than
by independent suit, is favored and encouraged by
Page 152 U. S. 616
the law to avoid circuity of action and injustice.
Railway Co. v.
Smith, 21 Wall. 255.
By the decided weight of authority, it is settled that the
insolvency of the party against whom the setoff is claimed is a
sufficient ground for equitable interference.
Leeds v.
Marine Ins. Co., 6 Wheat. 565;
Lindsay v.
Jackson, 2 Paige 581;
Gay v. Gay, 10 Paige 369;
Pond v. Smith, 4 Conn. 302;
Robbins v. Holley, 1
T. B. Mon. 194;
Hinrichsen v. Reinback, 27 Ill. 295;
Raleigh v. Raleigh, 35 Ill. 512;
Hall v. Kimball,
77 Ill. 161;
Chicago, Danville &c. Railroad v. Field,
86 Ill. 270;
Doane v. Walker, 101 Ill. 628;
Davis v.
Milburn, 3 Ia. 163;
Tuscumbia &c. Railroad v.
Rhodes, 8 Ala. 206;
Wray v. Furniss, 27 Ala. 471;
Keightly v. Walls, 27 Ind. 384;
Wulschner v.
Sells, 87 Ind. 71;
Laybourn v. Seymour (Minn.), 54
N.W. 941;
Rothschild v. Mack, 115 N.Y. 1;
Richards v.
La Tourette, 119 N.Y. 54;
Schuler v. Israel,
120 U. S. 506.
In
Schuler v. Israel, 120 U. S. 506, it
was said by Mr. Justice Miller, speaking for the Court, that:
"While it may be true that in a suit brought by Israel against
the bank, it could, in an ordinary action at law, only make plea of
setoff of so much of Israel's debt to the bank as was then due, it
could, by filing a bill in chancery in such case -- alleging
Israel's insolvency, and that, if it was compelled to pay its own
debt to Israel, the debt which Israel owed it, but which was not
yet due, would be lost -- be relieved, by a proper decree in
equity, and as a garnishee is only compelled to be responsible for
that which, both in law and equity, ought to have gone to pay the
principal defendant in the main suit, he can set up all the
defenses in this proceeding which he would have in either a court
of law or a court of equity."
It is suggested by the appellees that this was merely
"incidental to the point decided in that case," but the proposition
it announces is supported by sound principle and authority, and the
Illinois decisions are in full accord therewith.
In addition to insolvency, it is held by many well
considered
Page 152 U. S. 617
decisions, including those of Illinois, that the nonresidence of
the party against whom the setoff is asserted is good ground for
equitable relief.
Quick v. Lemon, 105 Ill. 578;
Taylor
v. Stowell, 4 Metc. (Ky.) 175;
Forbes v. Cooper, 88
Ky. 285;
Robbins v. Holley, 1 T. B. Mon. 18;
Edminson
v. Baxter, 4 Hayw. 112;
Davis v. Milburn, 3 Ia.
163.
It is not deemed necessary to review these cases and make
quotations from them. They fully establish the principles for which
they are cited. There is nothing in the Illinois statutes on the
subject of attachment and garnishment inconsistent with the
doctrine of the foregoing decisions. Applying the principle they
announce to the present case, it admits of no doubt that the
Chicago Company is entitled to the relief it seeks as against the
St. Louis Company. The question then remains whether the attachment
proceedings, or the garnishment process thereunder, resulting in
the order or judgment at law declaring the Chicago Company's
ascertained indebtedness liable to the payment of the Joliet
Company's judgment against the St. Louis Company, in any way
changes or defeats the equity or right of the Chicago Company to
the same relief?
The court below seems to have entertained the theory that while
the St. Louis Company may have failed to perform the rail contract,
the Chicago Company's right to claim damages for the entire breach
thereof had not accrued on July 21, 1884, when the garnishment
process was served and the garnishor's rights attached, and
furthermore that such claim, however meritorious as against the St.
Louis Company, could not form the subject of an equitable setoff,
especially as against a demand arising out of a disconnected
transaction. This proceeds upon the assumption, as appellees here
contend, that the garnishor, by the service of the garnishment,
acquired a lien upon or equitable right to the funds due from the
garnishee, which could not be disturbed or affected by any right or
equity subsequently accruing to the latter, as against the
principal debtor. The service of garnishment neither changed nor
interrupted the contractual relations existing between the
Page 152 U. S. 618
Chicago Company and the St. Louis Company. The rights and
equities existing and to arise out of those contractual relations
were in no way terminated or defeated by that service. The legal
operation and the effect of the garnishment proceedings, and of the
final order therein made, were only to impound what was legally and
equitably due from the garnishee after the adjustment of the claims
between the latter and the principal debtor and place it beyond the
control of the debtor and subject to collection for the benefit of
the attaching creditor. The claim made by the appellee that the
garnishment service operated as an equitable assignment to the
garnishor of the due indebtedness from the garnishee cannot be
sustained either upon reason or authority. The final order in that
proceeding does not have the legal effect and operation of
transferring the Chicago Company's due indebtedness to the St.
Louis Company and from the latter to the Joliet Company. The
Illinois statutes in relation to garnishment are substantially the
same as the generality of statutes on that subject, and contain no
provision sustaining the proposition that either the service of the
writ or the order made in the proceedings operates to transfer the
debt, but only binds it, and prevents the principal debtor from
receiving it.
The English law upon the subject of garnishment and its effect
differs in no material respect from that of Illinois, and in
Chatterton v. Watney, 17 Ch.D. 259, it was held that a
garnishee order did not have the effect of transferring the debt
from the garnishee.
In the case of
Ex Parte Chinery, 12 Q.B.D. 342, it was
held by Lord Justice Cotton that a garnishee order absolute was not
a final judgment against the garnishee, and did not make the
garnishor a creditor of the garnishee. In the subsequent case of
In re Combined Weighing and Advertising Machine Co., 43
Ch.D. 99, the effect of a garnishee order was again under
consideration, and it was held that the garnishee order did not
affect any transfer, legal or equitable, of the debt owing by the
garnishee or create the relation of creditor and debtor as between
the garnishor and the garnishee.
Page 152 U. S. 619
Cotton, L.J., said:
"A garnishee order attaching the debt, and enabling the person
who has obtained the order to give a good discharge, does not come
within the principle of equitable assignment,"
so as to make the garnishor a creditor of the garnishee. Bowen,
L.J. said:
"I cannot see that this statutory relation, which was created
originally by the common law procedure act of 1854, and was
perpetuated in the rules under the Judicature Act, is really a
relation involving the creation of a fresh debt. There cannot be
said to be any equitable debt. There is no assignment in equity,
and I cannot see that there is any legal debt. There is an order of
a court of common law that a sum equal to the original debt shall
be paid by the garnishee to the judgment creditor, or, as an
alternative, that execution may issue, but I think that the
relation which is created by that section, and the order made under
it, does not create a debt at all."
Fry, L.J. said:
"It is plain to my mind that there is no transfer of the debt.
It is equally plain to my mind that the garnishee order does not
make therefore the garnishor a creditor of the garnishee. What the
order does is this: it gives the garnishor certain statutory
rights. It enables the garnishor to say to the garnishee, 'You
shall not pay to your creditor the money which you owe him.' It
enables him to give a valid receipt and discharge for the money. It
enables him, in the event of the money's not being paid, to obtain
execution. He has all those rights, but there is no transfer of the
debt and he is not created a creditor."
The proposition here laid down is in harmony with the generally
recognized principle that the rights of the garnishor do not rise
above or extend beyond those of his debtor; that the garnishee
shall not, by operation of the proceedings against him, be placed
in any worse condition than he would have been in had the principal
debtor's claim been enforced against him directly; that the
liability, legal and equitable, of the garnishee to the principal
debtor is a measure of his liability to the attaching creditor, who
takes the shoes of the principal debtor, and can assert only the
rights of the latter.
Towner v. George, 53 Ill. 168;
Richardson v. Lester, 83 Ill. 55;
Henry
Page 152 U. S. 620
v. Wilson (Iowa), 51 N.W. 1157;
Huntington v.
Risdon, 43 Ia. 518.
From these propositions and authorities, it follows that the
Chicago Company is entitled to assert against the Joliet Company
the equitable setoff it could enforce against the St. Louis Company
in respect to its claim for damages.
It is hardly necessary to observe that the appellee Ferguson,
having taken an assignment from the Joliet Company
pendente
lite, occupies the same position as his assignor, and is
subject to the same equity. It is sought to defeat this right of
the Chicago Company by invoking in favor of the Joliet Company and
its assignee, Ferguson, the doctrine of relation, so as to antedate
the claim for damages. This cannot be done, for two reasons: first,
because the breach of contract, on which the claim for damages is
based, had in fact commenced before the garnishment writ was
served; second, if that had not been the case, the contract for the
nonperformance of which the right for damages arises was in
existence when the garnishment proceedings were instituted.
This unquestioned fact is very material, if not controlling of
the case. The court below did not give the fact that the claim for
damages arose under and by virtue of a contract in existence prior
to the date of the attachment its due weight and importance, as
will be seen by a brief reference to the authorities bearing upon
the question. Thus, in
Boston Type Co. v. Mortimer, 7
Pick. 166, the garnishee, when summoned, was indebted to the
defendant, but was at the same time liable, as accommodation
endorser of a note of the defendant, for a large amount, which
became due after the garnishment, and was protested for nonpayment
and paid by the garnishee before he made his answer. The court held
that the garnishee could set off against his indebtedness to the
principal defendant the amount of the note so paid, and, in giving
its decision, observed:
"Under these circumstances, we think he cannot be held as
trustee, for it would be against justice that he should be held to
pay a creditor of his debtor the only money by which he can
partially indemnify himself."
In the recent case of
Lannan v. Walter,
Page 152 U. S. 621
the court said:
"The answer of the trustee, on which it was discharged, is in
effect that at the time of the service of process, it had in its
deposits, to the credit of the defendants, $927.10, and that at the
same time it held three promissory notes, which it had discounted
for the benefit of the defendants, and on which they were
endorsers; that since said service, these notes have all matured;
that the liability of the endorsers has been made absolute by due
demand and notice. The makers and endorsers have all become
insolvent, and the notes remain in its hands, wholly unpaid, except
that a small sum has been received on one of them. The amount due
on each note is considerably more than $927.10. The counsel for the
trustee contends that it has the right to set off the sum of money
due from the defendants on any one of these notes against the
deposit. We regard it as settled that if, before final answer, the
debtor becomes indebted to the trustee on any contract entered into
before the service of the writ, the latter shall have a right of
setoff, and be chargeable only with the final balance, if one
should be due.
Boston Type Co. v. Mortimer, 7 Pick. 166;
Smith v. Stearns, 19 Pick. 20;
Nickerson v.
Chase, 122 Mass. 296;
Eddy v. O'Hara, 132 Mass. 56,
61; Pub.St. c. 183, § 27."
So, in
Farmers' & Merchants' Bank v. Franklin Bank,
31 Md. 404, the court, allowing a setoff which matured after action
brought, said:
"There is nothing in the attachment laws in this state to
justify the conclusion that it was designed, by allowing
garnishment to be made, to place the garnishee in a worse position
in reference to the rights and credits attached than if he had been
sued by the defendant. The attaching creditor seeks to have himself
substituted to the rights of his debtor, as against the garnishee,
and by laying his attachment he acquires no superior right to that
of his debtor. The right of condemnation must therefore be subject
to any such right of setoff or discharge existing at the time of
garnishment as would be available to the garnishee if he were sued
by the defendant. Any other rule would in many cases work gross
injustice, and might be subject to great abuse. . . . This right of
setoff or discharge, and
Page 152 U. S. 622
as against the attaching creditor, should not, however, extend
to any matter originating by the action of the garnishee subsequent
to garnishment, as otherwise it would be in the power of the
garnishee to defeat the right of condemnation, which should not, by
any means, be allowed."
In the first of the above-cited cases, the liability of the
garnishee was conditional and indeterminate at the time of the
service of the garnishment process, and his right to claim against
the principal debtor did not become fixed until long after the
service of process, so that the garnishee had no cause of action
against the principal debtor when the attachment writ was served;
also, in each of the other cases, the setoff allowed matured after
the service of garnishment, but arose under a contract entered into
before the service of the writ. In other words, the principle
established by these cases is that whatever rights the garnishee
may have under existing contracts with the principal debtor, he is
entitled to have the benefit thereof as against the attaching
creditor.
The latter clause of the quotation from the case of
Farmers'
& Merchants' Bank v. Franklin Bank, supra, lays down the
correct rule to be applied in cases of this character, and that
rule is that while the garnishee may not, after service of the
writ, by his own action acquire setoffs or counterclaims against
the principal debtor to the prejudice of the attaching creditor, he
may properly avail himself of all claims fairly arising out of
contracts with the principal debtor which were in existence when
the attachment was commenced, and under or out of which his claim
against the principal debtor arises.
From the foregoing considerations, we think the court below
should have ascertained the damages growing out of the failure to
perform the rail contract on the part of the St. Louis Company,
and, having ascertained the amount of such damages, the same should
have been allowed the complainant as a setoff against the sum of
$16,473.28 found to be due from it to the St. Louis Company, and
for which the garnishee order or judgment was rendered, and, if
that adjustment left
Page 152 U. S. 623
any balance due the complainant from the St. Louis Company, a
personal decree should have been rendered therefor.
The judgment of the court below is accordingly reversed, and
the cause remanded, with directions to proceed therein in
conformity with this opinion.
MR. CHIEF JUSTICE FULLER, having been of counsel, and MR.
JUSTICE WHITE, not having been a member of the Court when the case
was argued, took no part in its consideration and decision.
