A contract creditor who has not reduced his claim to judgment
has no standing in a circuit court of the United States, sitting as
a court of equity, upon a bill to set aside and vacate a fraudulent
conveyance.
Scott v. Neely, 140 U. S. 106,
affirmed and applied.
Holland v. Challen, 110 U. S. 15, and
Whitehead v. Shattuck, 138 U. S. 146,
distinguished.
The fact that a court of chancery may summon a jury cannot be
regarded as the equivalent of the right of a trial by jury, secured
by the Seventh Amendment to the Constitution.
Page 149 U. S. 452
When a suit over which a state court has full jurisdiction in
equity is removed to a circuit court of the United States on the
ground of diverse citizenship, and it appears that the courts of
the United States have no jurisdiction in equity over such a
controversy, the cause should be remanded to the state court,
instead of dismissing it for want of jurisdiction.
R. C. Cates, D. Andrews, and L. L. Cates, as individuals and as
composing the firms of Luke Cates & Company and Andrews, Cates
& Company, made their deed of assignment for the benefit of
creditors December 7, 1886, whereby they conveyed their property to
assignees therein mentioned, to be converted into money and applied
to the payment of their debts, certain creditors being preferred.
J. H. Allen, T. W. West, and J. C. Bush, citizens, respectively, of
Louisiana, Missouri, and Alabama, and doing business in New Orleans
as general commission merchants and cotton factors, under the name
of Allen, West and Bush, filed their bill of complaint, December 8,
1886, in the chancery court of Lee County, Mississippi, against R.
C. Cates, L. L. Cates, D. Andrews, and the assignees mentioned in
the assignment, alleging an indebtedness to the complainants of
more than $16,000 on open account, and charging that the assignment
above mentioned was fraudulent in law and in fact made without any
valuable consideration, and with the fraudulent intent to hinder,
delay, and defraud the complainants and other creditors, and that
the same ought to be set aside, and the property assigned subjected
to the payment of complainants' demand. The bill also charged that
one of the assignees, who at the time of the filing of the bill was
in possession of a large part of the assigned property, was
insolvent, and that it would be dangerous to allow him to remain in
the possession and control thereof; that he was in possession of
the books of account and choses in action of the assignors, and was
proceeding to collect the same; that there was danger that they
would be lost to complainants and the other creditors, and that
irreparable injury might thereby result. The bill prayed for
answers under oath, and that on final hearing the assignment might
be decreed to be void and set aside; that all the property
Page 149 U. S. 453
covered by the assignment might be subjected to the payment of
complainants' debts, and then to the payment of such other demands
as might be brought before the court; for an injunction; for a writ
of sequestration; for a receiver; that the filing of the bill be
held to give complainants the first lien on the effects of the said
debtors in the hands of the assignees, or either of the parties, or
any other person, and for general relief. A writ of sequestration
was issued, and the sheriff took possession of the property, and a
number of other creditors were subsequently admitted as
co-complainants.
On December 15, 1886, Allen, West and Bush and their
co-complainants filed their petition to remove the cause into the
United States District Court for the Northern District of
Mississippi, exercising the jurisdiction of a circuit court of the
United States, and bond was given, and the cause removed
accordingly. Receivers were thereafter appointed, and on April 15,
1887, the Tishomingo Savings Institution, a preferred creditor, was
made a defendant. A demurrer was filed, alleging as grounds that
there was no equity on the face of the bill; that the claims of
complainants had not been reduced to judgment; that they had no
lien, and were not entitled to file a bill under the law, and for
want of proper parties. This demurrer was overruled, and defendants
answered. Evidence was taken and hearing had, and on October 28,
1887, the court adjudged the assignment to be fraudulent and void,
and set the same aside; found the sum of $17,732.71 to be due
Allen, West and Bush; decreed that indebtedness to be a first lien
and charge on the assets of Andrews, Cates & Company, and
ordered the receiver to pay said sum out of the proceeds of the
sales and collections of and from the assets of that firm. Various
other orders were entered in that behalf and with reference to
other funds and appropriations for the claims of other creditors
which it is unnecessary to notice. The report of the receiver
showed amounts paid to Allen, West, and Bush for nearly
$14,000.
Page 149 U. S. 456
MR. CHIEF JUSTICE FULLER, after stating the facts in the
foregoing language, delivered the opinion of the Court.
Complainants were simple contract creditors, who had not reduced
their claims to judgment and therefore had no standing in the
United States circuit court, sitting as a court of equity, upon a
bill to set aside and vacate a fraudulent conveyance. The suit was
originally brought in the state court, under sections 1843 and 1845
of the Code of Mississippi of 1880, which provided that the
chancery courts of that state should have jurisdiction of bills
exhibited by creditors who have not obtained judgments at law, or,
having judgments, had not had executions returned unsatisfied, to
set aside fraudulent conveyances of property or other devices
resorted to for the purpose of hindering, delaying, or defrauding
creditors, and might subject the property to the satisfaction of
the demands of such creditors as if the complainants had had
judgment, and execution thereon returned "No property found," and
that
"the creditor in such case shall have a lien upon the property
described therein from the filing of his bill, except as against
bona fide purchasers before the service of process upon
the defendant in such bill."
These sections were considered in
Scott v. Neely,
140 U. S. 106, and
it was therein determined that the circuit courts of the United
States in Mississippi could not, under their operation, take
jurisdiction of a bill in equity to subject the property of the
defendants to the payment of a simple contract debt in advance of
any proceeding at law, either to establish the validity or amount
of the debt or to enforce its collection. It was there shown that
the Constitution of the United States, in creating and defining the
judicial power of the general government, had established the
distinction between law and equity, and that equitable relief in
aid of demands cognizable in the courts of the United States only
on their law side could not be sought in the same action, although
allowable in the
Page 149 U. S. 457
state courts by virtue of state legislation,
Bennett v.
Butterworth, 11 How. 669;
Thompson
v. Railroad Companies, 6 Wall. 134;
Scott v.
Armstrong, 146 U. S. 499,
146 U. S. 512,
and that the Code of Mississippi, in giving to a simple contract
creditor a right to seek in equity, in advance of any judgment or
legal proceedings upon his contract, the removal of obstacles to
the recovery of his claim caused by fraudulent conveyances of
property, whereby the whole suit involving the determination of the
validity of the contract and the amount due thereon is treated as
one in equity, to be heard and disposed of without a trial by jury,
could not be enforced in the courts of the United States because in
conflict with the constitutional provision by which the right to a
trial by jury is secured.
The principle that a general creditor cannot assail, as
fraudulent against creditors, an assignment or transfer of property
made by his debtor until the creditor has first established his
debt by the judgment of a court of competent jurisdiction, and has
either acquired a lien upon the property or is in a situation to
perfect a lien thereon and subject it to the payment of his
judgment upon the removal of the obstacle presented by the
fraudulent assignment or transfer is elementary. Wait on Fraud.Con.
sec. 73, and cases cited. The existence of judgment, or of judgment
and execution, is necessary -- first as adjudicating and definitely
establishing the legal demand, and second as exhausting the legal
remedy.
This was well settled in Mississippi prior to the enactment in
question. In
Partee v. Mathews, 53 Miss. 140, it was ruled
by the supreme court that no creditor but one who has a lien by
judgment or otherwise in full force at the time the bill is filed
can attack in equity a transfer of property as fraudulent, and
that, as between equitable and legal assets, the creditor must
exhaust legal means, by the issue of execution and its return
nulla bona in order to reach the first, while as to the
latter, a judgment which acts as a lien on the property sought to
be charged would be sufficient as the basis of a bill.
In
Fleming v. Grafton, 54 Miss. 79, the subject was
very much considered, and the English and American authorities
Page 149 U. S. 458
cited to a large extent, and the opinion concludes:
"Courts of equity are not ordinarily tribunals for the
collection of debts. Some special reason must be offered by the
creditor before they will extend aid to him. If he is a judgment
creditor, he must show that he has a lien, either by judgment, if
the statute gives such lien; if it arises from the execution, he
must show that one has been issued; or, if it arises from a levy of
the writ, that must have been made."
In
Scott v. Neely, it was said by MR. JUSTICE FIELD,
speaking for the court:
"In all cases where a court of equity interferes to aid the
enforcement of a remedy at law, there must be an acknowledged debt,
or one established by a judgment rendered, accompanied by a right
to the appropriation of the property of the debtor for its payment,
or, to speak with greater accuracy, there must be, in addition to
such acknowledged or established debt, an interest in the property,
or a lien thereon, created by contract or by some distinct legal
proceeding.
Smith v. Railroad Co., 99 U. S.
398,
99 U. S. 401;
Angell v.
Draper, 1 Vern. 398, 399;
Shirley v. Watts, 3 Atk.
200;
Wiggins v. Armstrong, 2 Johns.Ch. 144;
McElwain
v. Willis, 9 Wend. 548, 556;
Crippen v. Hudson, 13
N.Y. 161;
Jones v. Green, 1 Wall. 330.
. . . It is the existence, before the suit in equity is instituted,
of a lien upon or interest in the property, created by contract or
by contribution to its value by labor or material, or by judicial
proceedings had, which distinguishes such cases for the enforcement
of such lien or interest from the case at bar."
The mere fact that a party is a creditor is not enough. He must
be a creditor with a specific right or equity in the property, and
this is the foundation of the jurisdiction in chancery, because
jurisdiction on account of the alleged fraud of the debtor does not
attach as against the immediate parties to the impugned transfer
except in aid of the legal right.
Doubtless new classes of cases may by legislative action be
directed to be tried in chancery, but they must, when tested by the
general principles of equity, be of an equitable character or based
on some recognized ground of equity interposition. This will be
found to be true of the decisions in
Page 149 U. S. 459
Holland v. Challen, 110 U. S. 15;
Whitehead v. Shattuck, 138 U. S. 146, and
like cases.
The fact that section 1845 aims to create a lien by the filing
of the bill does not affect the question, for in order to invoke
equity interposition in the United States courts, the lien must
exist at the time the bill is filed and form its basis, and to
allow a lien resulting from the issue of process to constitute such
ground would be to permit state legislation to withdraw all actions
at law from the one court to the other, and unite legal and
equitable claims in the same action, which cannot be allowed in the
practice of the courts of the United States, in which the
distinction between law and equity is matter of substance, and not
merely of form and procedure. And as the ascertainment of the
complainants' demand is by action at law, the fact that the
chancery court has the power to summon a jury on occasion cannot be
regarded as the equivalent of the right of trial by jury secured by
the Seventh Amendment.
Whitehead v. Shattuck, 138 U.
S. 146;
Buzard v. Houston, 119 U.
S. 347.
The result is that this decree must be reversed, as the case
comes directly within
Scott v. Neely, from the rule laid
down in which we have no disposition to recede. It is suggested
that the bill might to sustained under the prayer for general
relief, as brought for the administration of the assets under the
assignment, but such relief would not be agreeable to the case made
by the bill, which was directed to the setting aside of that
instrument. The circuit court was therefore in error in proceeding
in the case.
The bill was originally filed in the state court, and removed
December 15, 1886, under the Act of March 3, 1875, 18 Stat. 470, c.
137, on the ground of diverse citizenship. By the fifth section of
that act, if, in any suit
"removed from a state court to a circuit court of the United
States, it shall appear to the satisfaction of said circuit court
at any time after such suit has been brought or removed thereto
that such suit does not really and substantially involve a dispute
or controversy properly within the jurisdiction of said circuit
court, . . . the said circuit court shall proceed no further
therein, but shall dismiss
Page 149 U. S. 460
the suit, or remand it to the court from which it was removed,
as justice may require, and shall make such order as to costs as
shall be just."
Under the Act of March 3, 1887, 24 Stat. 553, c. 373, a circuit
court may remand a case upon deciding that it was improperly
removed. So far as citizenship and amount were concerned, the
plaintiffs were entitled to file their petition for removal; but
the nature of the controversy was such that the suit was not
properly cognizable in the circuit court for the reasons heretofore
given. While there are cases where the courts of the United States
may acquire jurisdiction by removal from state courts when
jurisdiction would not have attached if the suits had been
originally brought therein, those are cases of jurisdiction over
the parties, and not of jurisdiction based upon the subject matter
of the litigation, and furnish no rule for the disposition of cases
such as that before us. But it is not to be concluded where diverse
citizenship might enable the parties to remove a case but for the
objection arising from the nature of the controversy, that if such
removal has been had, the suit must be dismissed on the ground of
want of jurisdiction. On the contrary, we are of opinion that it is
the duty of the circuit court under such circumstances to remand
the cause. The circuit court has jurisdiction to determine whether
or not the case was properly removed, and this Court has
jurisdiction to pass upon that determination.
In
Thompson v. Railroad
Companies, 6 Wall. 134, an ordinary action at law
was brought in the state court and removed to the United States
court, where a bill in equity was substituted by leave of court,
and the suit progressed as a suit in chancery. It was held that the
distinctions between the two kinds of proceeding could not be
obliterated by state legislation, and the decree was reversed, and
the cause remanded, with directions to dismiss the bill without
prejudice. In the case before us, a bill in equity, sustainable in
the state court, was removed by the complainants under the act of
1875, and it was the duty of the circuit court, upon ascertaining
that it was improperly removed, to remand the case. Under the acts
of Congress, that court was not compelled to dismiss the case,
Page 149 U. S. 461
but might have remanded it, and we may therefore direct it to do
now what should have been done in the first instance.
Mansfield, Coldwater &c. Railway v. Swan, 111 U.
S. 379.
It will be for the state court to determine what orders should
be made, if any, in regard to the amounts complainants have
received under the decrees of the circuit court. As the removal was
upon the application of appellees, they must be cast in the
costs.
The decree of the circuit court is accordingly reversed,
with costs against the appellees, and the cause remanded to the
circuit court, with directions to render judgment against them for
costs in that court and to remand the cause to the Chancery Court
of Lee County, Mississippi, and it is so ordered.
MR. JUSTICE BROWN, with whom concurred MR. JUSTICE JACKSON,
dissenting.
This was a bill in equity filed in the state court by creditors,
to set aside an alleged fraudulent assignment under a provision of
the Mississippi Code which gives the chancery court of that state
jurisdiction of bills by creditors who have not obtained judgments,
or, having judgments, have not had executions returned unsatisfied,
to set aside fraudulent conveyances of property, or other devices
resorted to for the purpose of defrauding creditors. The case was
removed to the circuit court of the United States under the act of
1875, the second section of which provides
"That any suit of a civil nature at law or in equity now pending
or hereafter brought in any state court where the matter in dispute
exceeds, exclusive of costs, the sum or value of five hundred
dollars, . . . in which there shall be a controversy between
citizens of different states, . . . either party may remove said
suit,"
etc.
In the opinion of the Court, this case is controlled by that of
Scott v. Neely, 140 U. S. 106, in
which it was held that the circuit courts of the United States in
Mississippi could not, under this provision of the Code of that
state, take jurisdiction
Page 149 U. S. 462
of a bill in equity to subject the property of the defendants to
the payment of a simple contract debt of one of them in advance of
any proceedings at law either to establish the validity and amount
of the debt or to force its collection, for the reason that in such
proceedings, the defendant is entitled, under the Constitution, to
a trial by jury of the existence or amount of the debt. While I
freely concede the general rule to be as stated -- that a bill of
this kind will not be entertained without a prior judgment and
execution at law -- I am unwilling to admit that the federal courts
are incompetent to administer a state law which provides that such
a bill may be filed by a simple contract creditor, where the
requisite diversity of citizenship exists, and the requisite amount
is involved. In a case where such a bill was filed in the state
court, the statute then in force gave to either party the absolute
right of removal of the suit to the federal court upon the clear
assumption that the federal court had the same power to administer
the law that the state court had. I freely concede that if the
state system of jurisprudence should invest the court of chancery
with an ordinary common law jurisdiction, as, for example, with
jurisdiction of an action upon a promissory note, such cause, when
removed to the federal court, would simply be placed on the common
law side, and be tried by a jury. But in this case, the
jurisdiction of the federal court, as a court of chancery, may be
supported not only upon the ground that the proof of the debt is
merely an incidental feature of the bill, but upon the further
ground, stated in the statute, that "the creditor in such case
shall have a lien upon the property described therein from the
filing of his bill," etc., a fact which, in
Case v.
Beauregard, 101 U. S. 688, was
held to obviate the necessity of a prior judgment and
execution.
I had always supposed it to be a cardinal rule of federal
jurisprudence that the federal courts are competent to administer
any state statute investing parties with a substantial right. As
was said in
Ex Parte
McNiel, 13 Wall. 236,
80 U. S.
243:
"A state law cannot give jurisdiction to any federal court, but
that is not a question in this case. A state law may give
Page 149 U. S. 463
a substantial right of such a character that, where there is no
impediment arising from the residence of the parties, the right may
be enforced in the proper federal tribunal, whether it be a court
of equity of admiralty or of common law. The statute in such cases
does not confer the jurisdiction. That exists already, and it is
invoked to give effect to the right by applying the appropriate
remedy. This principle may be laid down as axiomatic in our
national jurisprudence. A party forfeits nothing by going into a
federal tribunal. Jurisdiction having attached, his case is tried
there upon the same principles, and its determination is governed
by the same considerations, as if it had been brought in the proper
state tribunal of the same locality."
So, also, in
Davis v. Gray,
16 Wall. 203,
83 U. S.
221:
"A party, by going into a national court, does not lose any
right or appropriate remedy of which he might have availed himself
in the state courts of the same locality. The wise policy of the
Constitution gives him a choice of tribunals."
So also, in the case of
Broderick's
Will, 21 Wall. 503,
88 U. S. 520,
it is said that
"while it is true that alterations in the jurisdiction of the
state courts cannot affect the equitable jurisdiction of circuit
courts of the United States so long as the equitable rights
themselves remain, yet an enlargement of equitable rights may be
administered by the circuit courts as well as by the courts of the
state."
In the case of
Holland v. Challen, 110 U. S.
15, a statute of Nebraska providing that an action might
be brought and prosecuted to a final decree by any person claiming
title to real estate, whether in actual possession or not, against
any person claiming an adverse estate or interest therein for the
purpose of determining such estate and interest, and quieting
title, was held to be enforceable in the federal courts although it
dispensed with the general rule of equity that in order to maintain
a bill to quiet title, it was necessary that the party should be in
possession and that his title should have been established by law.
The statute under consideration merely dispenses with the general
rule of courts of equity that in order to maintain a creditors'
bill, a prior judgment and execution at law is necessary, and the
case appears to me to be directly in point.
Page 149 U. S. 464
In this case, the court of equity proceeds to establish the debt
not as a personal judgment against the debtor, which may be sued
upon in any other court, but for a purpose special to that case, in
order to reach property which has been fraudulently conveyed and to
appropriate it to the payment of the debt. If the object of the
proceeding were the establishment of a debt for all purposes which
should become
res adjudicata in other proceedings and be
suable elsewhere as an established claim against the debtor, or
were not a mere incident to the chancery jurisdiction, I can
understand why the constitutional provision might apply. But in
this case, I see no more reason for requiring a common law action
to establish the debt than in case of the foreclosure of a
mortgage, or the enforcement of a mechanic's lien, where proof of
an existing debt is equally necessary to warrant a decree. In
Stewart v. Dunham, 115 U. S. 61, a
bill in equity was filed by creditors in the Chancery Court of
Mississippi under this statute, was removed to the circuit court of
the United States, and was prosecuted to a decree in that court,
although it is but just to say that no question seems to have been
made with regard to the jurisdiction in this particular. The same
may be said of
Dewey v. West Fairmount Gas Coal Co.,
123 U. S. 329, in
which a bill under a similar statute of West Virginia was sustained
in an opinion by Mr. Justice Matthews. Indeed, proceedings under
these statutes, which are common to many of the states, are in the
nature of an equitable attachment, and operate to impound the
debtor's property for the payment of the claim.
The logical consequence of the position assumed by the Court in
this case is that it is compelled to remand the case for a reason
entirely outside of the removal acts, and thus to deny to the
removing party the benefit of the act. I understand the duty
imposed by the fifth section of the act -- to remand a cause which,
it appears, "does not really and substantially involve a dispute or
controversy properly within the jurisdiction of said circuit court"
-- to be limited to disputes or controversies not within the
jurisdiction of the circuit court by reason of the requisite
citizenship's not really existing, or being collusively obtained,
as in
Hawes v.
Oakland, 104
Page 149 U. S. 465
U.S. 450, or where, upon an examination of the record, the
requisite amount is found not to have been involved, as in
Walter v. Northeastern Railroad, 147 U.
S. 370.
I have never known of a federal court's admitting its inability
to do justice between the parties, and remanding the case upon that
ground. In
Thompson v. Railroad
Companies, 6 Wall. 134, it appeared only that a
civil action removed from a state court, which was essentially a
common law action, could not be proceeded with in a federal court
as an equity case -- a proposition I certainly should not deny.
Indeed, in that case it was said that
"as the action was a purely legal one, if they [the plaintiffs]
could have maintained it in their names in the state courts, they
had an equal right to maintain it in their names when it arrived in
the federal court."
The only error was in not proceeding with it as a common law
action in the federal court.
I am authorized to state that MR. JUSTICE JACKSON concurs in
this dissent.