1. To prevent disruption of his business by suits of hostile
creditors and to cause the assets to be nursed for the benefit of
all concerned, a debtor in Pennsylvania, where the law permits
appointment of a receiver for the business of a corporation but not
for that of an individual, caused a corporation to be formed in
Delaware and conveyed to it all of his property in exchange for
substantially all of it shares and its covenant to assume payment
of his debts. Three days later, joined with a simple contract
creditor, he sued the corporation in a federal court in
Pennsylvania, invoking jurisdiction on the ground of diversity of
citizenship, and, with the consent of the corporation, obtained on
the same day a decree appointing receivers and enjoining executions
and attachments.
Held:
(1) That the conveyance and the receivership were fraudulent in
law as against nonassenting creditors. P.
287 U. S.
353.
(2) A creditor who, shortly after the decree, brought an action
resulting in a judgment against the debtor in a Pennsylvania state
court was entitled to an order either for payment out of the assets
held by the receivers or for leave to issue execution. P.
287 U. S.
357.
(3) Refusal to grant relief in either of these forms was an
abuse of discretion.
Id.
2. A conveyance made with intent to hinder and delay creditors,
though with no intent to defraud them, is illegal under the Statute
of Elizabeth (13 Eliz., c. 5) and under the Uniform Fraudulent
Conveyance Act, adopted in Pennsylvania. P.
287 U. S.
354.
3. In any case not covered by the Uniform Fraudulent Conveyance
Act, in Pennsylvania, the Statute of Elizabeth is still the
governing rule.
Id.
4. It is a general rule in the federal courts that a creditor
who seeks appointment of receivers must first reduce his claim to
judgment and exhaust his remedy at law. P.
287 U. S.
355.
5. Departures from this rule, though allowed in some cases where
the defendant acquiesces, are to be jealously watched. P.
287 U. S.
356.
55 F.2d 234 reversed.
Page 287 U. S. 349
Certiorari, 286 U.S. 538, to review the affirmance of an order
refusing permission to levy an execution from a state court upon
property in possession of receivers appointed by the federal
court.
Page 287 U. S. 351
MR. JUSTICE CARDOZO delivered the opinion of the Court.
The petitioner, a judgment creditor of Herbert P. Robinson, made
application in due form to a United States
Page 287 U. S. 352
District Court in Pennsylvania praying that leave be granted him
to levy an execution upon property in the possession of receivers
appointed by that court. An order refusing such leave was affirmed
by the Circuit Court of Appeals for the Third Circuit. 55 F.2d 234.
The case is here on certiorari.
From the record and the admissions of counsel, these facts
appear: Herbert P. Robinson was engaged in business in Philadelphia
as a dealer in lumber. He was unable to pay his debts as they
matured, but he believed that he would be able to pay them in full
if his creditors were lenient. Indeed, he looked for a surplus of
$100,000 if the business went on under the fostering care of a
receiver. Most of the creditors were willing to give him time. Two
creditors, including the petitioner, were unwilling, and threatened
immediate suit. Thus pressed, the debtor cast about for a device
whereby the business might go on and the importunate be held at
bay. He had to reckon with obstructions erected by the local law.
The law of Pennsylvania does not permit the appointment of a
receiver for a business conducted by an individual, as
distinguished from one conducted by a corporation or a partnership.
Hogsett v. Thompson, 258 Pa. 85, 101 A. 941. To make such
remedies available, there was need to take the title out of
Robinson and put it somewhere else. The act responded to the need.
On January 9, 1931, the debtor brought about the formation of a
Delaware corporation, the Miller Robinson Company. On the same day,
he made a conveyance to this company of all his property, real and
personal, receiving in return substantially all the shares of stock
and a covenant by the grantee to assume the payment of the debts.
Three days later, on January 12, 1931, in conjunction with a simple
contract creditor, he brought suit against the Delaware corporation
in the federal court, invoking the jurisdiction of that court on
the ground of diversity of
Page 287 U. S. 353
citizenship. The bill of complaint alleged that creditors were
pressing for immediate payment; that one had entered suit and was
about to proceed to judgment; that the levy of attachments and
executions would ruin the goodwill and dissipate the assets, and
that the business, if protected from the suits of creditors and
continued without disturbance, could be made to pay the debts and
yield a surplus of $100,000 for the benefit of stockholders. To
accomplish these ends, there was a prayer for the appointment of
receivers, with an accompanying injunction. The corporation filed
an answer admitting all the averments of the bill and joining in
the prayer. A decree, entered the same day, appointed receivers as
prayed for in the complaint, and enjoined attachments and
executions unless permitted by the court. Four days thereafter, on
January 16, 1931, the petitioner began suit against Robinson in the
Court of Common Pleas, and on February 4, 1931, recovered a
judgment against his debtor for $1,007.65 upon a cause of action
for money loaned. On February 26, 1931, he submitted a petition to
the United States District Court in which he charged that the
conveyance from Robinson to the corporation and the ensuing
receivership were parts of a single scheme to hinder and delay
creditors in their lawful suits and remedies, and he prayed that he
be permitted to issue a writ of
fieri facias against the
chattels in the possession of the receivers, and to sell them so
far as necessary for the satisfaction of his judgment. The petition
was denied, and the denial affirmed upon appeal.
The conveyance and the receivership are fraudulent in law as
against nonassenting creditors. They have the unity of a common
plan, each stage of the transaction drawing color and significance
from the quality of the other; but, for convenience, they will be
considered in order of time, as if they stood apart. The sole
purpose of the conveyance was to divest the debtor of his title
and
Page 287 U. S. 354
put it in such a form and place that levies would be averted.
The petition to issue execution and the answer by the receivers
leave the purpose hardly doubtful. Whatever fragment of doubt might
otherwise be left is dispelled by the admissions of counsel on the
argument before us. One cannot read the opinion of the Court of
Appeals without seeing very clearly that like admissions must have
been made upon the argument there. After a recital of the facts,
the court stated, in substance, that the aim of the debtor was to
prevent the disruption of the business at the suit of hostile
creditors and to cause the assets to be nursed for the benefit of
all concerned. Perceiving that aim and indeed even declaring it,
the court did not condemn it, but found it fair and lawful. In this
approval of a purpose which has been condemned in Anglo-American
law since the Statute of Elizabeth (13 Eliz. c. 5), there is a
misconception of the privileges and liberties vouchsafed to an
embarrassed debtor. A conveyance is illegal if made with an intent
to defraud the creditors of the grantor, but equally it is illegal
if made with an intent to hinder and delay them. Many an
embarrassed debtor holds the genuine belief that, if suits can be
staved off for a season, he will weather a financial storm, and pay
his debts in full.
Means v. Dowd, 128 U.
S. 273,
128 U. S. 281.
The belief, even though well founded, does not clothe him with a
privilege to build up obstructions that will hold his creditors at
bay. This is true in Pennsylvania under the Uniform Fraudulent
Conveyance Act, which became a law in that state in 1921. Purdon's
Pennsylvania Digest, Title 39, § 357. It is true under the
Statute of Elizabeth (13 Eliz. c. 5), which, in any case not
covered by the later act, is still the governing rule. Purdon's
Pennsylvania Digest, Title 39, § 361;
McKibbin v.
Martin, 64 Pa. 352, 356;
Stern's Appeal, 64 Pa. 447,
450. Tested by either act, this conveyance may not stand.
Hogsett v. Thompson, supra; Montgomery
Page 287 U. S. 355
Web Co. v. Dienelt, 133 Pa. 585, 19 A. 428;
Atlas
Portland Cement Co. v. American Brick & Clay Co., 280 Pa.
449, 124 A. 650;
In re Elletson Co., 174 F. 859,
aff'd, 183 F. 715;
Kimball v. Thompson, 4 Cush.
441, 446;
Dearing v. McKinnon Dash & Hardware Co., 165
N.Y. 78, 58 N.E. 773;
Means v. Dowd, supra.
The conveyance to the corporation being voidable because
fraudulent in law, the receivership must share its fate. It was
part and parcel of a scheme whereby the form of a judicial remedy
was to supply a protective cover for a fraudulent design.
Harkin v. Brundage, 276 U. S. 36;
Decker v. Decker, 108 N.Y. 128, 135, 15 N.E. 307. The
design would have been ineffective if the debtor had been suffered
to keep the business for himself.
Hogsett v. Thompson,
supra. It did not gain validity when he transferred the
business to another with a capacity for obstruction believed to be
greater than his own. The end and aim of this receivership was not
to administer the assets of a corporation legitimately conceived
for a normal business purpose and functioning or designed to
function according to normal business methods. What was in view was
very different. A corporation created three days before the suit
for the very purpose of being sued was to be interposed between its
author and the creditors pursuing him, with a restraining order of
the court to give check to the pursuers. We do not need to
determine what remedies are available for the conservation of the
assets when a corporation has been brought into existence to serve
legitimate and normal ends. Ordinarily a creditor who seeks the
appointment of receivers must reduce his claim to judgment and
exhaust his remedy at law. The Uniform Fraudulent Conveyance Act
may have relaxed that requirement in many of the states (Purdon's
Pennsylvania Digest, Title 39, §§ 351, 359, 360;
cf. New York Debtor and Creditor Law, Article 10,
Consol.Laws, c. 12;
American Surety Co.
Page 287 U. S. 356
v. Conner, 251 N.Y. 1, 166 N.E. 783), but the rule in
the federal courts remains what it has always been (
Pusey &
Jones Co. v. Hanessen, 261 U. S. 491,
261 U. S. 497;
Scott v. Neely, 140 U. S. 106;
Hollins v. Brierfield Coal & Iron Co., 150 U.
S. 371,
150 U. S. 379;
Matthews v. Rodgers, 284 U. S. 521,
284 U. S.
529). True indeed it is that receivers have at times
been appointed even by federal courts at the suit of simple
contract creditors if the defendant was willing to waive the
irregularity and to consent to the decree. This is done not
infrequently where the defendant is a public service corporation
and the unbroken performance of its services is in furtherance of
the public good.
Re Metropolitan Railway Receivership,
208 U. S. 109,
208 U. S. 111.
It has been done at times, though the public good was not involved,
where legitimate private interests might otherwise have suffered
harm.
United States v. Butterworth-Judson Corp.,
269 U. S. 504,
269 U. S. 513;
Kingsport Press v. Brief English Systems, 54 F.2d 497,
500;
Harkin v. Brundage, supra, p.
276 U. S. 52. We
have given warning more than once, however, that the remedy in such
circumstances is not to be granted loosely, but is to be watched
with jealous eyes.
Michigan v. Michigan Trust Co.,
286 U. S. 334,
286 U. S. 345;
Harkin v. Brundage, supra. Never is such a remedy
available when it is a mere weapon of coercion, a means for the
frustration of the public policy of the state or the locality. It
is one thing for a creditor with claims against a corporation that
is legitimately his debtor to invoke the aid of equity to conserve
the common fund for the benefit of himself and of the creditors at
large.
Hollins v. Brierfield Coal & Iron Co.,
150 U. S. 371,
150 U. S. 380.
Whatever hindrance and delay of suitors is involved in such a
remedy may then be incidental and subsidiary. It is another thing
for a debtor, cooperating with friendly creditors, to bring the
corporation into being with the hindrance and delay of suitors the
very aim of its existence. The power to intervene before the
legal
Page 287 U. S. 357
remedy is exhausted is misused when it is exercised in aid of
such a purpose. Only exemplary motives and scrupulous good faith
will wake it into action.
The receivership decree assailed upon this record does not
answer to that test. We have no thought in so holding to impute to
counsel for the debtor, or even to his client, a willingness to
participate in conduct known to be fraudulent. The candor with
which the plan has been unfolded goes far to satisfy us, without
more, that they acted in the genuine belief that what they planned
was fair and lawful. Genuine the belief was, but mistaken it was
also. Conduct and purpose have a quality imprinted on them by the
law.
There remains a question of procedure. The prayer of the
petitioner was that he be permitted to issue execution upon his
judgment in the state court.
Cf. 55 U.
S. Sampson, 14 How. 52. If there had been any
substantial doubt that the conveyance and the receivership were
voidable obstructions, the federal court might have refused to
permit the tangle to be unraveled in the courts of the state. It
might have retained the controversy in its own grasp and made a
decision for itself. But, in truth, there was no substantial doubt
as to the quality of conveyance and receivership, no genuine issue
to be tried. In such circumstances, the petitioner was entitled to
an order in the alternative either for the payment of his judgment
out of the assets in the hands of the receivers or in default
thereof for leave to issue execution. The refusal to grant relief
in one or other of these forms is a departure from the bounds of
any legitimate discretion which is not without redress.
The decree is reversed, and the cause remanded to the District
Court for further proceedings in conformity with this opinion.