In construing § 1 of the Act of August 13, 1888, which
provides that circuit and district courts shall not have cognizance
of suits to recover the contents of any promissory note or chose in
action in favor of an assignee or subsequent holder unless the suit
could have been prosecuted in such court if no assignment or
transfer had been made, this Court has held that:
A suit to recover the contents of a promissory note or other
chose in action is a suit to recover the amount due upon such note,
or the amount claimed to be due upon an account, personal contract,
or other chose in action.
A suit to foreclose a mortgage is within the inhibition of the
act, and can only be maintained where the assignor was competent to
file the bill.
The bill or other pleading must contain an averment showing that
the suit could have been maintained by the assignor if the
assignment had not been made.
A suit may be maintained between the immediate parties to a
promissory note as indorser or indorsee provided the requisite
diversity of citizenship appears as between them, or upon a new
contract arising subsequently to the execution of the original,
notwithstanding a suit could not have been maintained upon the
original contract, and in such case the original contract may be
considered to ascertain the amount of damages.
Although an action of fraud might be sustained upon the facts
involved in an action where the requisite diversity of citizenship
exists if the suit is in substance one to foreclose a mortgage, and
it appears by the bill that the fraud is a mere incident, the suit
is one within the meaning of § 1 of the Act of August 13,
1888, and will not lie in a federal court unless plaintiff's
assignor might have maintained the bill had no transfer been
made.
This was an appeal from a decree of the circuit court in favor
of the plaintiff, Charlotte E. Hoadley, a citizen of Massachusetts,
against Abraham L. Day and other defendants, among whom were Fred
H. Kolze, administrator of the estate of Friederich Kolze,
deceased, Lina Kolze, his widow, Louisa Kolze, his daughter, and
Charles E. Stade, trustee, all citizens of Illinois, foreclosing
three trust deeds given by Day to secure
Page 200 U. S. 77
promissory notes in the aggregate amount of $5,400. The appeal
was granted solely upon the question of jurisdiction.
The point involved requires a statement of facts at some length.
They are substantially as follows:
Friederich Kolze sold and conveyed certain real estate to Day by
warranty deed dated and acknowledged November 15, 1897, for a
stated consideration of $45,000 -- namely, $1,000 in cash and the
remainder in notes secured by trust deeds. To secure such notes,
Day executed three trust deeds to one Stade as trustee, conveying
the real estate in question, which were dated November 17, and
acknowledged and recorded November 24, 1897. Kolze thereupon
entrusted the notes and trust deeds to Stade, a nephew, in whom he
seemed to have great confidence, the notes being executed by Day to
his own order, and by him indorsed in blank.
On February 17, 1898, Stade took the notes and trust deeds
securing the same, and pledged them to Charlotte E. Hoadley as
collateral security to his own notes, upon which Hoadley then
advanced, or secured to be advanced, a large sum of money.
By deed dated and acknowledged November 23, 1897, but not
delivered or recorded until June 30, 1898, Day reconveyed the
premises to Kolze, and by deed of release, dated and acknowledged
October 27, 1898, and recorded October 29, 1898, Stade, as trustee,
fraudulently released said three trust deeds to Kolze, reciting a
consideration of $1 and other valuable considerations, and further
reciting that the notes secured thereby had been cancelled.
By deed dated October 29, 1898, Kolze, now deceased, and the
appellant Lina Kolze, his wife, conveyed said premises to Louisa
Kolze, their daughter, upon an expressed consideration of $12,000,
although the grantee was not a
bona fide purchaser, and
said conveyance was made to her to hold for the benefit of the
family.
For the ostensible purpose of securing the payment of the
purchase money, said Louisa Kolze executed a trust deed to
Page 200 U. S. 78
secure her promissory note of $10,000, to Percy V. Castle, as
trustee. This deed was dated October 27, 1898, acknowledged October
28, 1898, and recorded October 29, 1898, the appellant Fred H.
Kolze, as administrator of the estate of his father, being the
owner of said notes and trust deeds, subject, as was alleged, to
the rights of the plaintiff, Hoadley.
Subsequently, on or about April 21, 1899, the notes and trust
deeds of Day, upon default by Stade in the payment of his note,
were sold in accordance with the terms of the collateral note, and
were bought in by, and became the property of, the appellee
Hoadley.
The bill prayed that the release deed executed by Stade to
Friederich Kolze be declared fraudulent and void as against the
notes and trust deeds executed by Day and now owned by the
plaintiff; that the rights of all the defendants be declared
subject to those of the plaintiff under the notes and deeds held by
her; that a receiver be appointed and an account had, and the
defendants be decreed to pay whatever was due under the notes and
trust deeds, and, in default thereof, that the premises be sold and
the defendants be held liable for any deficiency upon such sale,
and that they all be foreclosed of their right of redemption.
The defendants moved to dismiss the amended bill for want of a
proper allegation of diversity of citizenship, which was overruled,
and thereupon defendants interposed a plea to the jurisdiction upon
the ground that the defendants were all citizens of the State of
Illinois; that the suit was brought by plaintiff as the assignee of
one William P. Smith, to whom the notes had been hypothecated by
Stade to secure his (Stade's) note, and also to secure Smith for
the faithful performance by Stade of a certain contract of
employment; that, upon the failure of Stade to pay his note and
carry out his contract, said mortgage notes and trust deeds signed
by Day were sold on or about April 21, 1899, and were bought in by
and became the property of the plaintiff; that Stade and Smith,
"the successive assignors" of the appellee, were citizens of
the
Page 200 U. S. 79
State of Illinois, the same state of which Day, the maker of the
notes, was also a resident, and that, by reason of the fact that
said suit could not have been prosecuted in a federal court if no
transfer or assignment had been made, the circuit court had no
jurisdiction of the case.
This plea was held to be insufficient, and the defendants,
failing to answer, were defaulted, and a decree thereafter entered
to the effect that Stade, as trustee, had fraudulently released the
trust deeds; that the trust deeds were valid as liens upon the
premises; that the rights of Louisa Kolze, subsequent grantee under
the warranty deed, as well as the deed of Kolze, were subject and
subsequent to the rights of the plaintiff as the owner of the notes
and deeds signed by Day; that the property be sold and the
defendants foreclosed of their equity of redemption.
Thereupon, defendants appealed to this Court solely upon the
question of jurisdiction.
Page 200 U. S. 82
MR. JUSTICE BROWN delivered the opinion of the Court.
The sole question presented by the record in this case is
whether this is a suit to recover the contents of a chose in action
in favor of an assignee, which could not have been prosecuted if no
assignment or transfer had been made.
By section 1 of the Act of August 13, 1888, it is provided that
no circuit nor district court shall
"have cognizance of any suit . . . to recover the contents of
any promissory note or other chose in action in favor of any
assignee, or of any subsequent holder . . . unless such suit might
have been prosecuted in such court to recover the said contents if
no assignment of transfer had been made."
This language is taken from the original Judiciary Act of 1789,
and has been in force, except for a few years, since the foundation
of the government.
In construing this clause, the decisions of this Court have
settled the following propositions:
1. That a suit to recover the contents of a promissory note or
other chose in action is a suit to recover the amount due upon such
note, or the amount claimed to be due upon an account, personal
contract, or other chose in action.
Sere v.
Pitot, 6 Cranch 332;
Deshler v.
Dodge, 16 How. 622,
57 U. S. 631;
Bushnell v.
Kennedy, 9 Wall. 387;
Shoecraft v.
Bloxham, 124 U. S. 730.
Page 200 U. S. 83
In
Corbin v. Black Hawk County, 105 U.
S. 659, a suit to compel the specific performance of a
contract was held to be within the statute, Mr. Justice Blatchford
observing (page 665):
"The contents of a contract, as a chose in action, in the sense
of section 629, are the rights created by it in favor of a party in
whose behalf stipulations are made in it which he has a right to
enforce in a suit founded on the contract, and a suit to enforce
such stipulations is a suit to recover such contents."
2. That a suit to foreclose a mortgage is within the inhibition
of the act, and can only be maintained where the assignor was
competent to file the bill.
Sheldon v.
Sill, 8 How. 441;
Blacklock v. Small,
127 U. S. 96.
3. That the bill or other pleading must contain an averment
showing that the suit could have been maintained by the assignor if
no assignment had been made.
Turner v. Bank of North
America, 4 Dall. 8;
Mollan v.
Torrance, 9 Wheat. 537;
Bradley v.
Rhines, 8 Wall. 393;
Anderson v. Watt,
138 U. S. 694,
138 U. S. 702;
Robertson v. Cease, 97 U. S. 649;
Brock v. Northwestern Fuel Co., 130 U.
S. 341.
4. That a suit may be maintained between the immediate parties
to a promissory note as indorser and indorsee, provided the
requisite diversity of citizenship appears as between them, or upon
a new contract arising subsequently to the execution of the
original, notwithstanding a suit could not have been maintained
upon the original contract. In such case, the original contract may
be considered to ascertain the amount of the damages.
Young v.
Bryan, 6 Wheat. 146;
Bank of
United States v. Moss, 6 How. 31;
Superior v.
Ripley, 138 U. S. 93;
Mollan v.
Torrance, 9 Wheat. 537;
Manufacturing Company
v. Bradley, 105 U. S. 175.
This is primarily a suit to foreclose certain mortgages. Instead
of setting up the mortgages, their maturity and nonpayment, and
their assignment to plaintiff, leaving to the defendants to plead
the release by Stade of October, 1898, as an extinguishment of the
mortgages, she has chosen to set forth the entire facts, to attack
the release as fraudulent as against
Page 200 U. S. 84
her, and to insist that the original notes and trust deeds are
valid in her hands, and to pray for a foreclosure of the same.
The gravamen of the suit and the object to be obtained are
unaffected by the form of her bill. The suit is still, in
substance, a suit to foreclose the trust deeds, and to remove the
release as a cloud upon her title to them.
It may be that an action for fraud might have lain against the
parties implicated, regardless of the citizenship of the parties
from whom the plaintiff traced her title, or possibly a bill in
equity to cancel the release deed of Stade and remove a cloud from
the title. But where a bill is filed to foreclose a mortgage, and
it appears by the bill itself that the mortgage has been
fraudulently released to the mortgagor by a deed of which plaintiff
had no notice, and the fraud is a mere incident, the bill is still
one to recover the contents of a mortgage, within the meaning of
the act, and will not lie in a federal court unless the plaintiff's
assignor might have maintained the bill if no assignment or
transfer had been made. It would advantage the plaintiff nothing to
obtain a cancellation of the release without also foreclosing the
mortgage in the same or a subsequent suit, while a right to
foreclose the mortgage could not be established without
incidentally avoiding the release.
In this aspect of the case, it would seem to me immaterial
whether the plaintiff derived her title directly from Stade, to
whom she had advanced money and afterwards purchased the notes and
trust deeds, as alleged in the bill, or through William P. Smith,
who had obtained the notes and trust deeds from Stade, his debtor,
since both Stade and Smith were citizens of the State of Illinois,
and the inhibition of the statute would apply in either case.
The case of
Blacklock v. Small, 127 U.
S. 97, is similar, and, we think, practically decisive
of the one under consideration. A suit was brought in the Circuit
Court for South Carolina by two daughters of John F. Blacklock, who
were citizens of Georgia, against certain defendants, who were
citizens of South Carolina. It seems that Blacklock had sold a
house and lot in
Page 200 U. S. 85
Charleston to the defendant Small, who had given back a bond and
mortgage to secure a portion of the purchase money; that Blacklock
subsequently assigned the bond to Alexander Robinson in trust, for
his (Blacklock's) children; that Small pretended to pay the bond by
making payment to Robinson in Confederate treasury notes; that,
upon receipt thereof, Robinson satisfied the mortgage and delivered
up the bond to Small; that Robinson, in receiving such payment,
violated his duty, and was guilty of a breach of trust; that Small,
in attempting to pay the debt in illegal currency, with full notice
of the trust, had not paid the debt; that the satisfaction of the
mortgage was void; that its lien was still subsisting, and that
Small was still liable for the amount due upon the bond. It was
held that, as the suit was one against Small, founded upon contract
-- namely, his bond and mortgage in favor of plaintiffs, who
claimed only under the assignment made by their father, John F.
Blacklock, to the defendant Robinson -- such suit would not lie,
inasmuch as plaintiffs' assignor, John F. Blacklock, was a citizen
of South Carolina and of the same state as Small. In answer to this
it was insisted that the suit should not be considered as one
founded upon the contract of Small, but as one for the delivery of
the bond and mortgage by Small to the plaintiffs, founded on their
wrongful detention, and that the foreclosure and sale of the
premises prayed for was merely ancillary and incidental. The
contention was held to be unsound, Mr. Justice Blatchford saying
that the bill was clearly one for a decree for the amount of the
bond and a sale of the mortgaged premises. In other words, the
foreclosure and sale were treated as the main objects of the bill,
and the breach of trust of Small as a mere incident. The cases of
Deshler v.
Dodge, 16 How. 622, and
Bushnell
v. Kennedy, 9 Wall. 387, were cited and
distinguished.
By analogy to
Blacklock v. Small, we think the gravamen
of this case must be treated as the foreclosure of the trust deeds
in question, and the prayer for a cancellation of the release given
by Stade to Friederich Kolze as a mere clearing of the way
Page 200 U. S. 86
to a decree establishing the title of the plaintiff to the notes
and trust deeds. As the plaintiff is thus compelled to trace her
title through Stade or Smith, who are both citizens of Illinois,
and neither of whom could have prosecuted this suit, she is
affected by the same incompetency.
The case of
Holmes v. Goldsmith, 147 U.
S. 150, on which the plaintiff relies, is not in point.
That was an action by a nonresident against the maker of a note,
who had signed it entirely for the benefit of the payee, who was
really the party for whose use it was made. The maker and payee
were citizens of the same state. The plaintiff, a
bona
fide holder, had paid full value for it to the payee, who had
indorsed it to him. It was held the court had jurisdiction; that
evidence showing the real relation of the parties was admissible,
and that the jurisdiction of the circuit court
"was properly put by the court below upon the proposition that
the true meaning of the restriction in question was not disturbed
by permitting the plaintiffs to show that, notwithstanding the
terms of the note, the payee was really a maker or original
promisor, and did not, by his indorsement, assign or transfer any
right of action held by him against the accommodation makers."
The decree of the circuit court is therefore reversed, and
the case remanded to that court, with instructions to dismiss the
bill.
