Hollins v. Brierfield Coal & Iron Co. - 150 U.S. 371 (1893)
U.S. Supreme Court
Hollins v. Brierfield Coal & Iron Co., 150 U.S. 371 (1893)
Hollins v. Brierfield Coal and Iron Company
Argued October 27, 30, 1893
Decided November 20, 1893
150 U.S. 371
The trustee of a mortgage upon the real estate of an Alabama corporation commenced a suit in the circuit court of the United States for the foreclosure of the mortgage. In his bill, he set up that some stockholders were liable for unpaid assessments on their stock, and, while asking for a foreclosure of the mortgage and sale of the property, he prayed that other creditors of the corporation might be permitted to intervene and become parties, and have their claims adjudicated and that a full administration be had of the estate. About three months after the commencement of that suit, a contract creditor who had not reduced his claim to judgment filed his bill in equity in the same court, suing for his own benefit and that of all creditors who should become parties, asking to have the mortgage declared void, to have the property sold, and the proceeds applied to the payment of the debts of the creditors, parties to the suit, and for a liquidation. The plaintiff in the second suit did not intervene in the foreclosure suit. In due course, a decree was entered in the foreclosure suit for the sale of the property. The court then uttered a decree dismissing the creditor's bill upon the merits. Held that this was error, and that the bill should have been dismissed for want of jurisdiction.
Simple contract creditors of a corporation whose claims have not been reduced to judgment and who have no express lien on its property have no standing in a federal court of equity to obtain the seizure of their debtor's property and its application to the payment of their debts.
This rule is not affected by the fact that a statute of the state in which the property is situated and in which the suit is brought authorizes such a proceeding in the courts of the state, because the line of demarcation between equitable and legal remedies in the federal courts cannot be obliterated by state legislation.
This rule is not affected by the fact that when such a suit is brought in a federal court, another suit is pending there for the foreclosure of a mortgage upon the property of the corporation.
In such case, the defense that the rights of the plaintiff at law should have been exhausted before commencing proceedings in equity is a defense which must be made in limine, and if not so made, the court of equity is not necessarily ousted of jurisdiction.
Neither the insolvency of a corporation nor the execution of an illegal
trust deed, nor the failure to collect in full all stock subscriptions, nor all together give to a simple contract creditor of the corporation any lien on its property, or charge any direct trust thereon.
Case v. Beauregard, 101 U. S. 688, Sanger v. Upton, 91 U. S. 56, and Terry v. Anderson, 95 U. S. 628, distinguished and shown not to conflict with the subsequent cases of Wabash, St. Louis & Pacific Railway Railway v. Ham, 114 U. S. 587; Fogg v. Blair, 133 U. S. 534, and Hawkins v. Glenn, 131 U. S. 319.
When a corporation becomes insolvent, the equitable interest of the stockholders in the property and their conditional liability to creditors place the property in a condition of trust first for creditors and then for stockholders, but this is rather a trust in the administration of the assets after possession by a court of equity than a trust attaching to the property as such for the direct benefit of either creditor or stockholder.
The facts in this case are 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 of the company, the unsecured indebtedness being alleged to amount to about $2000,000. The bill further averred that up
to 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 bond holders, 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 the conveyance to Plumb, as trustee, was absolutely void; that a large amount was still due on the stock. They asked to have 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
the 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 have appealed to this Court.