Hollins v. Brierfield Coal & Iron Co., 150 U.S. 371 (1893)

The facts in this case were 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 <> the company, the unsecured indebtedness being alleged t<> amount to about $200,000. The bill further averred that up p. 373to 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 bondholders, 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

e conveyance to Plumb, as trustee, was absolutely7 void; that a large amount was still due on the stock; they asked to ave 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 p. 374the 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 appealed to this court.

In this case Mr. Justice Swayne, for this court, states the rule with great force and clearness. He says: “ The capital stock of an incorporated company is a fund set apart for the payment of its debts. It is a substitute for the personal liability which subsists in private copartnerships. When debts are incurred, a contract arises with the creditors that it shall not be withdrawn or applied, otherwise than upon their demands, until such demands are satisfied. The creditors have a lien upon it in equity. If diverted, they may follow it as far as it can be traced, and subject it to the payment of their claims, except as against holders who have taken it bona fide for a valuable consideration and without notice. It is publicly pledged to those who deal with the corporation, for their security. Unpaid stock is as much a part of this pledge, and as much a part of the assets of the company, as the cash which has been paid in upon it. Creditors have the same right to look to it as to anything else, and the same right to insist upon its payment as upon the payment of any other debt due to the company. As regards creditors, there is no p. 375distinction between such a demand and any other asset which may form a part of the property and effects of the corporation.” See also Upton v. Tribilcock, 91 U. S. 45; Scovill v. Thayer, 105 IT. S. 143, 150; Hundley v. Stutz, 139 U. S. 417, 427; Fogg v. Blair, 139 IT. S. 118.

In Holt v. Bancroft, 30 Alabama, 193, 204, the right of a partnership creditor to come into equity without first exhausting his legal remedies is expressly decided. In Case p. 377v. Beauregard, 101 U. S. 688, 691, a creditor at large of a partnership filed a bill to subject firm assets to his debt; on the hearing his bill was dismissed. He then filed a second bill for the same cause of action, alleging, in addition to the matters set forth in the former bill, the recovery of a judgment, the issue of an execution and return of nulla Iona. It was held that the former decree was as res adjudicata a bar to the second suit. The case necessarily involved the determination of the question whether on the first bill the creditor could have had relief or not, and the court sustained the proposition that he could. In the opinion of the court, Mr. Justice Strong discusses learnedly and at length the reason of the rule requiring the creditors to exhaust their legal remedies before seeking the aid of a court of equity. He says: “ But, without pursuing this subject farther, it may be said that whenever a creditor has a trust in his favor, or a lien upon the property for the debt due him, he may go into equity without exhausting legal processes or remedies. Tappan v. Evans, 11 N. H. 311; Holt v. Bancroft, 30 Alabama 193. Indeed, in those cases in which it has been held that obtaining a judgment and issuing an execution is necessary before a court of equity can be asked to set aside fraudulent dispositions of' a debtor’s property, the reason given is that a general creditor has no lien. And when such bills have been sustained without a judgment at law, it has been to enable the creditor to obtain a lien either by judgment or execution. But when the bill asserts a lien or a trust, and shows it can be made available by aid of a chancellor, it obviously makes a case for his interference.”

The plaintiffs were simple contract creditors of the company ; their claims had not been reduced to judgment, an they had no express lien by mortgage, trust deed, or other- p. 379wise. 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 IL S. 603, 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 p. 380ordinarily 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 IT. 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. Defences 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 defences 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 defence, 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 defence existing to the bills as framed, an objection to the right of these p. 381plaintiffs to proceed on the ground that their legal remedies had not been exhausted, it was a defence 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. 8. 505; Brovin 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.

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 Jurlsprudence, § 1046, they “are not in any true and complete p. 382sense trusts, and can only be called so by way of analogy or metaphor.”

Again, in the case of the 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. 594) thus stated the law; “It was contended that the property of the Toledo and Wabash Railway Company was a trust fund for all p. 384its 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.”

In the case of Hawkins v. Glenn, 131 U. S. 319, 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 defence 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 wb 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, an that, therefore, statutes of limitation do not commence to run p. 385in respect to them until the retention of the money has become adverse by a refusal to pay upon due requisition.”

These two causes present the same questions on the same state °f facts. They were heard in the lower court and in this court as practically one case, and will therefore be considered p. 388and determined together. The suits were brought by the appellant as assignee of letters patent No. 248,646, granted to Charles Gordon, October 25,1881, for “an improved apparatus for cooling and drawing beer,” against the respective appellees for the alleged infringement of the patent. The defences interposed by the answer of each respondent were, want of patentable novelty in the invention covered by the letters patent, the anticipation thereof by certain prior devices, and non-infringement. The latter defence was not insisted on, either in the court below or in this court, the main defence relied on being that of anticipation by a prior apparatus used for the same purpose before the date of the Gordon invention. Upon this question much proof was taken on both sides.

“This is the same patent which was involved in the suits of Magin v. McKay and Magin v. Welker, decided by me in this court August 20, 1885, 24 Fed. Rep. 743. In the opinion in those cases, the material parts of the specification and the four claims are set forth, and the operation of the apparatus is described. It was there held that, so far as claims 1 and 4 were concerned, the invention was anticipated by an apparatus put in use by one Meinhard, in Rochester, New York, in the summer of 1877, and which was continued in use about four years. A description was given of that apparatus, and it was held, on the evidence, that it was practical and successful, and embodied the same principle as that of Gordon ; that it was continued in use for nearly two years after Gordon obtained his patent; and that, although it did not contain the non-conducting jacket surrounding the outer wall of the cold-air passage, which was a feature in claim 3 of the patent, there was no patentable invention in adding a non-conducting jacket to the elements found in claim 1, or to those found in claim 4. p. 389Infringement of claim 2 was not alleged in those cases. The bills were dismissed on the ground of the prior existence of the Meinhard apparatus.

These two claims are substantially the same, the only difference between them being that the fourth claim includes the p. 390lower chamber F, which is not specifically mentioned as an element of the combination in the first claim.

It is purely a question of fact, to be determined from the testimony in the cases, whether the anticipating Meinhard apparatus actually existed, as alleged by the appellees. They have established by a number of respectable witnesses that p. 391such, an apparatus was in practical use by Meinhard a year or more prior to the date of the Gordon invention. This testimony is sought to be impeached or contradicted by the appellant, but after a careful examination thereof, we think he fails to break down or discredit the proof by which the anticipating device is established.

This St. Louis apparatus had a beer-supply pipe, connecting the upper ice-box and the barrel or keg in the lower chamber, p. 392enclosed in a metallic case, four inches in diameter, which was filled with sand or gravel, through which the drippings from the upper ice-box percolated. The metallic case, thus filled, was designed for cooling the beer that remained in the supplypipe by means of the drippings from the upper ice-box, which flowed down through the same, and to some extent it accomplished the desired purpose. The principal was well known at that time, and at the date of the Gordon invention, that cold air from an upper ice-box or chamber would descend through an enclosed connection to a lower chamber. The Gordon invention, by means of an open air chamber surrounding the supply pipe, sought to put this principle to a practical purpose. He dispensed with the sand or gravel, such as filled the metallic case around the supply pipe in the St Louis apparatus, and left that space open, so that the cold air, as well as the drippings from the upper ice-box, might be conducted through the same. In other words, he simply emptied the metallic case of the St. Louis apparatus of its sand or gravel so as to leave that metallic case open, and allow the cold air from the upper box to flow down through the same. This change in the apparatus does not rise to the dignity of invention such as would entitle him to a patent. The purpose to be accomplished was not patentable, and the particular means devised to secure that purpose did not involve invention. Carver v. Hyde, 16 Pet. 513, 519; LeRoy v. Tatham, 14 How. 156; Corning v. Burden, 15 How. 252; Barr v. Duryee, 1 Wall. 531; Fuller v. Yentzer, 94 U. S. 288 ; Knapp v. Morss, ante, 221.