Mellen v. Moline Malleable Ion Works
131 U.S. 352 (1889)

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U.S. Supreme Court

Mellen v. Moline Malleable Ion Works, 131 U.S. 352 (1889)

cg:131 U.S. 352*

ct:Mellen v. Moline Malleable Iron Works, 131 U.S. 352 (1889)

Mellen v. Moline Malleable Iron Works

No. 250

Argued April 16, 1889

31 U.S. 352

APPEAL FROM THE CIRCUIT COURT OF THE UNITED

STATES FOR THE NORTHERN DISTRICT OF ILLINOIS

Syllabus

A suit instituted by a creditor of a corporation, on his own behalf and on behalf of other unsecured creditors, to set aside a conveyance of its real estate and a mortgage of its personal property, both made by the corporation in trust to secure certain preferred creditors, including among them a director of the corporation, and also to procure a dissolution of the corporation and the closing up of its business, is a suit brought to remove an encumbrance or lien or cloud upon the title to such property within the meaning of § 8 of the Act of March 3, 1875, 18 Stat. 472, c. 137, which authorizes a circuit court of the United States to summon in an absent defendant and to exercise jurisdiction over his rights in the property in suit within the jurisdiction of the court.

Page 131 U. S. 353

It is not necessary that the creditor of an insolvent corporation should obtain judgment on his claim and take out execution and exhaust his remedies at law in order to invoke the jurisdiction of a court of equity in his favor to remove an encumbrance or cloud or lien upon the title of the corporation's property under the Act of March 3, 1875, 18 Stat. 470, c. 137.

An adjudication that a particular case is of equitable jurisdiction is not void, even if erroneous, and cannot be disturbed by a collateral attack.

A sale of the trust property which is in dispute in a cause pending in a court of equity, made by the receiver by order of court and after full compliance with its directions as to notice, is not open to attack by one who is subsequently summoned into the suit if there has been no fraud, no sacrifice of the property, or no improvidence, since the proceeds of the sale take the place of the property, and all his rights in the latter are transferred to the former.

The proceedings in this case to remove the encumbrance upon the property of the Moline Iron Works, which are set forth and described in the opinion of the Court, conformed to the requirements of the Act of March 3, 1875, 18 Stat. 470.

Purchasers of property involved in a pending suit may be admitted as parties, in the discretion of the court, but they cannot demand as of absolute right to be made parties, nor can they complain if they are compelled to abide by whatever decree the court may render, within the limits of its power, in respect to the interest their vendor had in the property purchased by them pendente lite.

This is an appeal from a final decree sustaining a plea in bar to a suit brought by the appellants, and dismissing their bill of complaint for want of equity.

On the 23d of June, 1883, the Moline Malleable Iron Works, an Illinois corporation, doing business at Moline, in that state, executed a deed, which was duly acknowledged and recorded, conveying to Charles F. Hemenway several lots or parcels of land in that city. The deed recites that S. W. Wheelock and A. L. Carson had been induced by the grantor, which was in need of money to carry on its business, to guarantee, by endorsing, its commercial paper to the extent of $49,000 (of which $48,500 was then outstanding and unpaid), by the promise to protect the same by a lien on those premises, and that George H. Hill of Ohio, and the J. S. Keator Lumber Company had been induced by it to guaranty, in the same way, other of its commercial paper, the former to the extent of $20,000, and the latter to the extent of $1,000. It also recites

Page 131 U. S. 354

that the grantor had agreed with each of the guarantors to meet said paper as it fell due, so that neither of them should be subjected to any liability, loss, costs, damage, or expense by reason of having severally made such guarantees or endorsements. The conveyance to Hemenway was in trust to secure and protect said guarantors, respectively, against all liability arising form such endorsements, with power in the trustee, upon the request of either guarantor, or of his legal representatives -- if at the time of such request there existed any liability upon the part of the person so requesting -- to foreclose the deed and sell and convey the property, and out of the proceeds, after paying the expenses of foreclosure and sale and reasonable solicitors' fees, to pay the guarantors all costs, damages, and expenses to which they may have been subjected,

"it being the intention that the property conveyed hereby shall be understood to be for and shall stand for security to each of the parties aforesaid, viz., Wheelock, Carson, Hill and Keator Lumber Company, alike in proportion to the ultimate liability to which each may be subjected, and that they shall receive the benefit and protection pro rata according to the extent of their liability, and in proportion thereto."

As part of the same transaction, the Moline Malleable Iron Works executed its chattel mortgage, which was duly acknowledged and recorded, conveying to Hemenway, upon like trusts and conditions, certain personal property in Illinois, consisting in part of malleable iron, manufactured and in process of manufacture by the grantor.

The Moline Malleable Iron Works made default in the payment of the notes and in the performance of its obligations as set forth in the trust deed and chattel mortgage.

On the 12th of April, 1884, George H. Hill sold and conveyed his entire interest in the trust deed and chattel mortgage, and in the said indebtedness of $20,000 to the appellant Mellen, in trust for the sole use and benefit of the appellant Sophia H. Boyd.

The present suit was commenced by an original bill, exhibited May 5, 1884, by said Mellen and Boyd, citizens of Ohio, against the Moline Malleable Iron Works, Hemenway, the Moline Malleable Iron Works, Hemenway, Wheelock,

Page 131 U. S. 355

Stephen T. Walker, Carson, late partners as J. S. Keator & Son, all citizens of Illinois. The bill shows that Hill was compelled to pay and did pay off the debt of $20,000, with the interest accruing on the several notes, aggregating that sum.

It states that in a suit in equity, instituted in the Circuit Court of the United States for the Northern District of Illinois on the second day of July, 1883, by the National Furnace Company, a corporation of Wisconsin, in behalf of itself and other general unsecured creditors of the Moline Malleable Iron Works, against the last-named corporation, George H. Hill and others, the said trust deed and chattel mortgage were assailed as null and void, as against the general creditors of the Moline Malleable Iron Works, upon the following grounds:

"First. Because they constitute a partial assignment for the benefit of creditors, by which said corporation seeks to prefer the endorsers therein named in preference to the other creditors of the corporation, which said attempt your orator is advised and believes is fraudulent and unlawful under the statutes of the State of Illinois."

"Second. Because the said assignment does not purport to put the said assignee in possession of said property, and the said assignee has not actually taken possession thereof, and has not given bond to the county court of Rock Island County, as provided by law in the case of assignments for the benefit of creditors, and it is not intended to file such bond or distribute the said assigned property under the provisions of the statutes in such cases made and provided."

"Third. That the two assignments constitute a part of the same transaction, and that the chattel mortgage upon the personal property therein described is void as against the creditors of the said corporation because the said corporation has been and still is allowed by the said assignee to manage, control, and use the property therein described in the usual and ordinary course of business, to the same extent and in the same manner as the same were used by the said corporation before the execution of the said chattel mortgage. "

Page 131 U. S. 356

"Fourth. Because the said documents operate, and were designed to operate, to hinder and delay the creditors of the said Moline Malleable Iron Works in the collection of their debts."

"Fifth. Because, as against the fair and honest creditors of the said corporation, the preference sought to be given to the said Hill and the said Carson, two of the directors of the said corporation, is null and void."

"Sixth. For divers other reasons your orator has been advised that all of the aforesaid acts and doings of the said Moline Malleable Iron Works, as against your orator and the other bona fide creditors of said corporation, are null and void."

The object of that suit, as the bill in the present case avers, was to obtain a decree dissolving the Moline Malleable Iron Works as a corporation, closing up its business, ascertaining the amount, as well of its assets applicable to the payment of debts, as the extent to which its directors and officers were liable to creditors, and adjudging that the said conveyances executed by that corporation were fraudulent and void as to the National Furnace Company and other creditors.

It is further alleged that the debt of the last-named corporation was not, nor was any part of it, due when it brought said suit, and was not secured by any attachment or other process against the property of the debtor corporation; that it had not exhausted its legal remedies for the collection of its debt, and had no lien or claim to the property covered by said trust deed or mortgage; and, consequently, that the court could not and did not acquire jurisdiction to make any valid decree affecting the interest of said Hill.

The relief sought in the present suit, by original bill, was the foreclosure of said trust deed and chattel mortgage, the sale of the property, and the disposition of the proceeds according to the rights of the parties for whose protection those instruments were executed, and this without reference to the proceedings and final decree in the suit of National Furnace Co. v. Moline Malleable Iron Works, etc.

The defendants, Stillman W. Wheelock, A. L. Carson, Charles

Page 131 U. S. 357

F. Hemenway, J. S. Keator and Benedict C. Keator filed a plea in bar of this suit. As the correctness of the decree below depends entirely upon the sufficiency of that plea, it is here given in full:

"That long prior to the time when said George H. Hill sold and conveyed to said complainant Mellen in trust, for the use and benefit of said Sophia H. Boyd, his interest in said trust deed and chattel mortgage, as alleged in said bill of complaint, to-wit, on the second day of July, 1883, the said National Furnace Company, in its own behalf and on behalf of all the creditors of the Moline Malleable Iron Works, exhibited its original bill of complaint in this honorable court, and made parties defendant thereto said Moline Malleable Iron Works, Stillman W. Wheelock, George H. Hill Amaziah L. Carson, Charles F. Hemenway, Henry H. Hill Stephen T. Walker, Walter J. Entriken, and the J. S. Keator Lumber Company, thereby stating, among other things, that said National Furnace Company was a creditor of said Moline Malleable Iron Works, and that at the time when the said Moline Malleable Iron Works executed the said trust deed and chattel mortgage it was insolvent, and its indebtedness was largely in excess of its capital stock, and that its officers and directors had assented to the creation of its indebtedness, and that the said conveyances were fraudulent and void as against creditors of said Moline Malleable Iron Works, and therein and thereby prayed, among other things, that a receiver might be appointed to take charge of and manage the property of the said corporation under the orders of this Court, and that the said trust deed and chattel mortgage might be held and adjudged fraudulent and void as against said National Furnace Company and creditors of said Moline Malleable Iron Works, to which said bill these defendants put in their several answers, and said Moline Malleable Iron Works, Henry H. Hill and Stephen T. Walker interposed their several demurrers; that after exhibiting said bill of complaint, to-wit, on the 1st day of August, 1883, upon the application of said National Furnace Company, for the preservation of the property of the said corporation pending the said suit, and for the benefit of all parties interested

Page 131 U. S. 358

therein and in the proceeds thereof, this honorable court entered an order in said cause, as appears of record in this Court, appointing one Robert E. Jenkins receiver of the said Moline Malleable Iron Works, and of its property and directing him to take and hold possession thereof under the orders of this honorable court and directing the said Moline Malleable Iron Works to transfer and convey to said receiver its entire property, both real and personal, and to deliver up to said receiver the possession thereof, and that thereupon the said Moline Malleable Iron Works did transfer, convey, and deliver up to said receiver its property and the possession thereof, and said receiver did enter into and take possession thereof."

"That thereafter, and long prior to the time when said George H. Hill sold and conveyed to said complainant Mellen his interest in said trust deed and mortgage, to-wit, on the 28th day of November, 1883, the defendant Stillman W. Wheelock, by leave of this honorable court, filed his cross-bill of complaint in the aforesaid cause, made parties defendant to said cross-bill said Moline Malleable Iron Works, the National Furnace Company, George H. Hill Charles F. Hemenway, and said Carson, and therein stated, among other things, that in the year 1880, the said Moline Malleable Iron Works requested that he and the said Carson should become guarantors for it upon its commercial paper, and promised to give them security from any liability to loss by reason thereof by liens on its property, and that at this request, and in reliance upon this promise, they became guarantors for it from time to time to the amount of about fifty thousand dollars (50,000); that afterwards, on November 12, 1882, a resolution was adopted by said corporation authorizing its officers to execute proper instruments to secure them from loss, and that thereafter at the request of said Wheelock, said corporation executed said trust deed and mortgage, and that neither Wheelock nor Carson was in any way interested in or connected with said company when they incurred this liability at its request; that after the said resolution of November 12, 1882, was adopted by said company, said George H. Hill who

Page 131 U. S. 359

was a stockholder and director, became a guarantor for said company, and that by and through his influence as an officer of said company, he was named a beneficiary under said trust deed and mortgage; that the said company was then largely indebted in excess of its capital stock, and that said George H. Hill had assented to the creation of this indebtedness, and was liable to its creditors for this excess, and that said trust deed and mortgage were a valid security to said Carson and the J. S. Keator Lumber Company, but that said Hill was not entitled to have and receive the security thereof; that the said property covered by the said trust deed and chattel mortgage was rapidly depreciating in value, and should be sold as soon as possible, and praying, among other things, that the said trust deed and chattel mortgage might be declared valid; that the said receiver might be directed to sell immediately the property described in said trust deed and mortgage, together with the other property of said company, and the proceeds of the sale of the property described in said trust deed and mortgage might be applied in satisfaction of and relieve said Wheelock, Carson, and J. S. Keator Lumber Company from the liabilities assumed by them as endorsers for said Moline Malleable Iron Works, and the balance disbursed pro rata among the creditors of said company; that thereupon, to-wit, on the 28th day of November, 1883, it was ordered by this honorable court, as appears of record in this court in said cause, that said National Furnace Company, the Moline Malleable Iron Works, Hemenway, Carson, and George H. Hill plead, answer, or demur to the said cross-bill on or before the 20th day of December, 1883, and that a copy of said order be served on said Hill on or before December 5, 1883, and that, in case said Hill did not appear and plead, answer or demur to said cross-bill as aforesaid, the same should be taken as confessed by him; that said order was duly served on said Hill on the 1st day of December, 1883, to-wit, long prior to the marking of the said assignment to said Mellen; that the said defendants the National Furnace Company, Hemenway, and Carson answered said cross-bill, as directed by said order, but that said Hill and said Moline Malleable Iron Works failed to

Page 131 U. S. 360

appear in said cause and to plead, answer, or demur to said cross-bill therein as directed by said order; that thereafter, to-wit, on the 22d day of December, 1883, the said receiver filed his petition in said cause, alleging among other things, that the property of said Moline Malleable Iron Works in his possession as such receiver (and including therein the said property covered by said trust deed and chattel mortgage) was rapidly depreciating in value, and that for the interests of all persons who might be interested therein, and to realize anything for the creditors therefrom, it should be sold at once, and praying that he might be authorized to offer the said property for sale, and that thereupon it was ordered, on said petition being filed, by this honorable court, as appears of record in said cause in this Court, that the said receiver should offer and advertise for sale, in the manner directed by said order, all of said property, and should report bids therefor to this Court."

"That thereafter, to-wit, on the 20th of February, 1884, said receiver filed in said cause his report, stating therein, in substance, that he had advertised and offered said property for sale in the manner and as directed by said order, and that the highest bid received by him therefor was that of Stillman W. Wheelock, in the amount of thirty thousand dollars ($30,000); that it was thereupon ordered by this honorable court, as appears of record in this court, that all persons should show cause, by the 28th day of February, 1884, why said bid of said Wheelock should not be accepted, and that thereafter, to-wit, on the 3d day of March, 1884, it was ordered by this honorable court in said cause, as appears of record in this court, that the said bid of said Wheelock for said property be accepted, and that said receiver sell and convey the same to him, and that thereupon said receiver did sell and convey the said property to said Wheelock in accordance with said order."

"That thereafter, to-wit, on the 3d day of March, 1884, it appearing to this honorable court that said George H. Hill resided beyond the jurisdiction of this Court, it was ordered by this honorable court, as appears of record in this Court, that said George H. Hill do appear and plead, answer or demur to

Page 131 U. S. 361

the said original and supplemental bill of complaint in said cause on or before the 15th day of April, 1884, and that a copy of said order should be served upon said Hill on or before the 15th day of March, 1884, and that, in case he did not appear, plead, answer, or demur to said bill as directed, the same should be taken as confessed by him, and that thereafter, to-wit, long prior to the time when said Hill sold and conveyed to said Mellen his interest in said trust deed and mortgage, a certified copy of said order was served on said Hill and thereafter, to-wit, on the 22d day of April, 1884, said Hill not appearing, and pleading, answering or demurring to said original and supplemental bill, as directed by said order, it was ordered by this honorable court in said cause, as now appears of record therein in this court, that said original and supplemental bill be taken as confessed by said Hill; that thereafter, to-wit, on the 23d day of April, 1884, long prior to the filing of the said bill of complaint by said William S. Mellen, said Hill not having appeared and pleaded, answered or demurred, to said cross-bill, by the order of this court entered in said cause, and now appearing of record in this court, it was ordered that the said cross-bill of said Wheelock be taken as confessed by said George H. Hill and afterwards, to-wit on the 26th day of June, 1884, the said cause came on to be heard upon the said original and supplemental bills of complaint, and answers and replications thereto, and upon the said cross-bill of said Wheelock, and the answers and replications thereto, and upon the testimony taken in said cause, and a final decree was then rendered therein, which now appears of record in this court, and it was therein found by this honorable court, among other things, that the indebtedness of said Moline Malleable Iron Works was in excess of its capital stock in the sum of $75,000; that the said trust deed and chattel mortgage were valid, insofar as they gave to said Wheelock, Carson, and the J. S. Keator Lumber Company a first lien on the property therein described, and that said George H. Hill was not entitled to any lien or security by reason of said trust deed and mortgage, and that the same were invalid as to him, because the liabilities of said company

Page 131 U. S. 362

in excess of its capital stock were incurred while he was one of the directors and its vice-president, and with his knowledge and assent thereto, and because he was named in said trust deed and chattel mortgage as a beneficiary thereunder through his influence and control over said corporation as an officer thereof, and it was thereby decree, among other things, that said Wheelock, Carson, and the J. B. Keator Lumber Company were entitled to have and receive the proceeds derived from the sale of the property conveyed by said trust deed and mortgage in part satisfaction of the sums paid by them for said company."

"All of which matters and things these defendants do aver and plead in bar to said bill of complaint, and do pray judgment of this honorable court whether they should make any further answer to said bill of complaint, and to be hence dismissed, with their costs and charges in this behalf most wrongfully sustained."

This plea was sustained, the present bill was taken for confessed by the Moline Malleable Iron Works and Walker, for want of plea, demurrer, or answer, and the suit was dismissed for want of equity.

Page 131 U. S. 364

MR. JUSTICE HARLAN, after stating the facts in the foregoing language, delivered the opinion of the Court.

Was the decree in the suit instituted by the National Furnace Company (to be hereafter called the "Furnace Company")

Page 131 U. S. 365

against the Moline Malleable Iron Works (to be hereafter called the "Iron-Works") and others, declaring that Hill was not entitled to a lien or security by reason of the trust deed and chattel mortgage of June 23, 1883, void for want of jurisdiction in the court that rendered it? This is the principal question in the present case. It solution depends upon the construction of the eighth section of the Act of March 3, 1875, determining the jurisdiction of the circuit courts of the United States. 18 Stat. 472, c. 137, § 8.

That section authorizes an order to be made directing an absent defendant in any suit brought in a circuit court of the United States to enforce any legal or equitable lien upon or claim to, or to remove any encumbrance or lien or could upon, the title to real or personal property within the district where such suit is brought -- such defendant not being an inhabitant of or found therein, and not voluntarily appearing in the suit -- to appear, plead, answer, or demur by a designated day. The order must be served upon the absent defendant, if practicable, wherever found, and upon the person, if any, in charge or possession of the property. If such personal service be not practicable, the order must be published in such manner as the court may direct, not less than once a week, for six consecutive weeks. If the defendant does not appear, plead, answer, or demur within the time limited or within such further time as may be allowed, the court -- proof being made of service or publication of the order, and of the performance of the directions therein contained -- may

"entertain jurisdiction and proceed to the hearing and adjudication of such suit in the same manner as if such absent defendant had been served with process within the said district."

"But," the act declares,

"said adjudication shall, as regards said absent defendant or defendants without appearance, affect only the property which shall have been the subject of the suit, and under the jurisdiction of the court therein, within such district."

A defendant not personally notified as provided in the act may within one year after final judgment enter his appearance in the suit, whereupon the court must make an order setting aside the judgment and permitting him to plead, on payment of such costs as shall

Page 131 U. S. 366

be deemed just, the suit then to proceed to final judgment, according to law. The previous statute gave the above remedy only in suits "to enforce any legal or equitable lien or claim against real or personal property within the district where the suit is brought," while the act of 1875 gives it also in suits brought "to remove any encumbrance or lien or cloud upon the title to" such property. Rev.Stat.

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