1. As between two courts of concurrent and coordinate
jurisdiction, the court which first obtains jurisdiction and
constructive possession of property by the filing of a bill is
entitled to retain it without interference, and cannot be deprived
of its right to do so because it may not have obtained prior
physical possession by its receiver of the property in dispute; but
where the jurisdiction is not the same or concurrent, and the
subject matter in litigation in the one is not within the
cognizance of the other, or there is no constructive possession of
the property in dispute by the filing of a bill, it is the date of
the actual possession of the receiver that determines the priority
of jurisdiction. P.
276 U. S.
43.
2. A stockholders' suit having been brought in a state court to
protect the assets of a corporation from wasteful and dishonest
management and to restore them, when in safe condition, to the
corporation after election of a new management, the attorney for
the corporation fraudulently procured a postponement of a motion
for receivers by agreeing in the state court that nothing would be
done in the interim to affect the
status quo, the real
intention being to secure a prior receivership in the federal
court. To this end, during the continuance, a collusive creditors'
suit was begun against the corporation by a nonresident, a receiver
was appointed with the corporation's consent, the bill, answer, and
consent being filed simultaneously, and the receiver took custody
of the corporate property.
Page 276 U. S. 37
Soon afterwards, receivers appointed by the state court,
explaining he facts to the federal court, applied for a surrender
of the property, which was denied, although the parties there at
that time were limited to the corporation and the plaintiff, both
charged with knowledge of the fraud, and although, due to the
insolvency of the corporation, the proceeding in the state court
could by amendment have been given the effect of a creditors' bill.
The federal court proceeded to administer the corporate estate,
receiver's receipts were issued and paid, some of the property was
sold, some distribution made to creditors, and the rights of
innocent creditors who had become parties were involved.
Held:
(1) The means by which the state court was induced to delay
exercise of its jurisdiction to appoint receivers and the failure
to reveal the facts to the federal court constituted a fraud on
both courts. P.
276 U. S.
56.
(2) Vindication of the cause of comity and good faith as between
the two courts should not be limited to punitive proceedings
against the lawyer whose pledge to the state court was broken. P.
276 U. S.
54.
(3) Although the difference in character between the two suits
as brought was such as to have enabled the federal court to retain
jurisdiction of the property but for the fraud, when it learned of
the fraud, the parties before it being both guilty, it was bound in
good faith and comity to accord the state court an opportunity to
exercise its jurisdiction, even to the taking of the property. P.
276 U. S.
56.
(4) Notwithstanding the subsequent change of situation, through
the administration of the estate in the federal court and the
introduction of innocent parties, comity still required that the
federal court, after paying reasonable compensation to its officers
for work done by them, should surrender the property still in its
custody to the state court receivers, but on condition that that
court first confirm all that was done in the sale, disposition, and
distribution of assets as though done by its own decree, and so
shape its pleadings, etc., that the case in that court might
proceed, as a creditors' bill, to a liquidation of all debts and
distribution of remaining assets. P.
276 U. S. 57
(5) Failing the making of such an order by the state court and
its production in the federal court in a seasonable time, the
pending administration in the federal court should continue. P.
276 U. S. 58.
3. As a general rule, a creditors' bill can be brought only by a
judgment creditor after a return of
nulla bona. P.
276 U. S.
52.
4. When a receiver has been irregularly appointed in a suit by a
simple contract creditor with consent of the defendant, and the
Page 276 U. S. 38
administration has proceeded so far that it would be detrimental
to all concerned to discharge the receiver, the receivership has
been permitted to continue because not seasonably objected to. P.
276 U. S.
52.
5. A receiver is an officer of the court, and should be as free
from "friendliness" to any party as should the court itself. P.
276 U. S.
55.
6. A conclusion of fact made by the district court upon hearing
the witnesses will not be accepted here when the agreed
stenographic report and other circumstance in the case show it to
be clearly erroneous. P.
276 U. S.
53.
13 F.2d 617 reversed.
Certiorari, 273 U.S. 682, to a decree of the circuit court of
appeals affirming an order of the district court, which denied an
application by the petitioners here for surrender into their
custody, as receivers appointed by a state court, of property in
the custody of the respondent, as receiver appointed by the
district court.
See post, p. 604.
MR. CHIEF JUSTICE TAFT delivered the opinion of the Court.
This case presents a controversy between state court receivers
and the receiver of a federal court over the possession of the
property and assets of the Daniel Boone Woolen Mills Corporation.
It is here by certiorari to the judgment of the Circuit Court of
Appeals for the Seventh Circuit affirming a decree of the District
Court for the Northern District of Illinois. The receivers in the
state court were appointed on the prayer of what was called a
stockholder's bill. The receiver in the federal court was appointed
on the prayer of what was called a creditor's bill. The receiver in
the federal court was appointed
Page 276 U. S. 39
first; but the bill in equity upon which the state court
receivers were appointed was filed five days before the bill in the
federal court. The receivers in the state court filed a motion in
the federal court, requesting that the property in the hands of the
federal court receiver be transferred to the state court receivers,
on the ground that the state court, by the earlier filing of the
bill in that court, had acquired constructive possession, and its
receivers were entitled therefore to actual possession of the
property.
The Daniel Boone Woolen Mills was a corporation of the State of
Illinois engaged in the manufacture of woolen cloth in Illinois,
with its principal place of business there, but with additional
plants in other states. It had 187,000 shares of stock, owned by
1,500 individual stockholders, resident in many states. It had been
so badly managed during the year 1924, and its indebtedness had
been so much increased, that a surplus of $500,000 had been changed
into a deficit of more than $2,000,000. Nevertheless, at the end of
1924, it was alleged by all parties that its assets exceeded its
liabilities by $1,000,000, although the event has proved the fact
to be otherwise, and administration under receivership shows the
debts much to exceed its assets. The mismanagement had led its
president and its treasurer, both named Gumbinski, to resign, and
they were replaced by Joseph Byfield, as president, and Frank
Solomon, as vice-president. These two officials had not been able
to secure the financial support necessary to meet the expenditures
and conduct the business. On February 14, 1925, therefore, Harry
Hurwitz, a stockholder of the company, filed a bill in the Superior
Court of Cook County, Illinois, in his own behalf and in that of
all other stockholders of the corporation, "and all other firms or
corporations who might be interested in the litigation, and who
might seek to intervene or contribute to the expense thereof."
Page 276 U. S. 40
The averment of the bill was that, during 1924, those in control
had used for their own purposes the assets of the corporation, and
it became the duty of the new officers to bring suit to recover the
property thus abstracted, embezzled, or wasted, but that nothing
had been done. It averred the solvency of the company, but alleged
that it was not able to pay its current expenses, that the business
ought to be maintained and conducted in order to make up in salable
form a great deal of material on hand uncompleted, and that, in
order to save the property in the interest of the stockholders and
others, a receiver should be appointed who should continue the
business. The prayer was for an injunction forbidding those engaged
in the management from imposing any lien or mortgage on the
property. In effect, the bill asked for the appointment of
receivers, with authority to take possession of the property, carry
on the business, and subsequently, after getting the property into
proper condition, to provide for and call a stockholders' meeting
and a transfer of the property back to a new management.
On the 19th of February, five days later, a bill was filed in
the United States District Court for the Northern District of
Illinois by the United States Worsted Sales Company, a corporation
of the State of New York, claiming to be a simple non-judgment
creditor of the Woolen Mills in the sum of $6,000. The plaintiff
brought the bill on its own behalf and on behalf of all the
creditors of the Woolen Mills who would join in the prosecution.
Its averments in respect to ownership and the disastrous operation
of the company were much the same as those of the bill by Hurwitz
in the state court. It specifically averred that the Woolen Mills
was not insolvent, but that it had been impossible to secure money
with which to carry it on; that there was grave danger of the
recovery of judgment and the levy of executions, and of a race for
undue preferences, and that, in the preservation of the property,
it was
Page 276 U. S. 41
necessary to appoint a receiver to continue the business, make
up the uncompleted material, and then to dispose of the property as
the court might deem wise, by sale or otherwise, in the interest of
all the creditors and of the stockholders. It asked authority for
the receiver to apply in either federal or state courts of other
states in which the various factories of the Woolen Mills were
situate for ancillary receiverships. It further asked an injunction
against judgments and executions of all creditors and an order
requiring them to file their claims with the receiver.
Application for receivers in the state court in the Hurwitz suit
had been made upon the filing of the bill, and notice given to the
defendant Woolen Mills that the motion would be presented on
February 16, 1925, the bill having been filed February 14th. Upon
application of one Cowan, the attorney for the Woolen Mills
Corporation, the hearing on the motion for a receivership on the
16th was postponed until February 21st, and meantime the bill in
the federal court for a receiver was filed on February 18th. On the
same day, the Woolen Mills Corporation entered its appearance in
the district court, filed its answer admitting the averments of the
bill, and consented to the appointment of a receiver. The
appointment of Brundage as receiver was made on the following
day.
On the 25th of February, the Superior Court of Cook County
entered an order allowing one Max Goldenberg, a stockholder, to
file in the Hurwitz suit his intervening petition, which did not in
effect change the nature of the relief asked, but elaborated a
description of details of the conspiracy of the Gumbinskies to loot
the Woolen Mills Company, and of a conspiracy of the Woolen Mills
management to evade the jurisdiction of the state court by delay in
the appointment of receivers there and by the collusive answer and
consent of the Woolen Mills to the
Page 276 U. S. 42
appointment of a federal court receiver. This intervening
petition was adopted on March 13th by Hurwitz as an amendment to
his original bill. On February 28th, the superior court entered its
order appointing the Union Bank and Harkin as receivers of the
property. In that order, the superior court found that it had had
jurisdiction of the subject matter and the parties, and it
empowered its receivers to prosecute and defend without further
order all existing actions by or against the Woolen Mills
Corporation, and enjoined the corporation, its officers and
directors, from incumbering or pledging or creating any liens
against the property, moneys, accounts, and assets of the Woolen
Mills Corporation during the receivership. On March 13th the state
court receivers filed a motion in the district court in this cause
setting forth their appointment as receivers in the state court and
the history of the litigation, charged that the district court was
without jurisdiction to appoint a receiver of the Woolen Mills
Corporation or of its property, assets, or records, and prayed for
an order upon Brundage, as its receiver, to turn over this property
now in his possession to them.
The question mainly argued in the district court and in the
circuit court of appeals and here was whether the state court,
solely by the filing of a stockholder's bill for the appointment of
a receiver, obtained constructive possession of the property and
assets of the Woolen Mills Corporation. Upon this motion, evidence
was taken disclosing at length the circumstances of the
postponement in the state court, the filing of the bill in the
federal court, and the appointment of the receivers there. Of these
we shall hereafter consider the effect. The district court held
that the controversy in the federal court was different from that
in the state court, as shown by a comparison of the two bills; that
the bill in the federal court was a creditor's bill, whereas that
in the state court was
Page 276 U. S. 43
a stockholder's bill; that the interests of the creditors were
prior, and necessarily underlay those of the stockholders, and that
the stockholder's bill in the state court would have been
ineffective, because, in such a case, the court had no power to
enjoin creditors from judgment and execution against the assets,
whereas the jurisdiction in the creditor's bill gave power to
preserve by injunction the estate, and thus prevent undue
preference among creditors. It was therefore concluded that the
creditor who brought the bill was entitled to the receiver as
prayed, and that the appointment of the receiver gave the federal
court jurisdiction, which the state court receivers could not be
permitted to disturb.
The principle which should govern in a conflict of jurisdiction
like this has been a number of times stated by this Court. As
between two courts of concurrent and coordinate jurisdiction, the
court which first obtains jurisdiction and constructive possession
of property by filing the bill is entitled to retain it without
interference and cannot be deprived of its right to do so, because
it may not have obtained prior physical possession by its receiver
of the property in dispute; but where the jurisdiction is not the
same or concurrent, and the subject matter in litigation in the one
is not within the cognizance of the other, or there is no
constructive possession of the property in dispute by the filing of
a bill, it is the date of the actual possession of the receiver
that determines the priority of jurisdiction.
Moran v.
Sturges, 154 U. S. 256,
154 U. S.
283-284;
Palmer v. Texas, 212 U.
S. 118;
Wabash Railroad v. Adelbert College,
208 U. S. 38,
208 U. S. 54;
Farmers' Loan & Trust Co. v. Lake Street Railroad Co.,
177 U. S. 51,
177 U. S. 61,
and
Adams v. Mercantile Trust Co., 66 F. 617. The
difficulty in the application of the rule is in determining whether
the conflicting jurisdictions are actually concurrent and the same.
A doubtful question, too, is whether the bill is of such a
Page 276 U. S. 44
character that its filing is the taking of constructive
possession of the property.
In
Palmer v. Texas, the suit in the state court was an
action by the state to forfeit the charter of the corporation and
wind up its affairs. The suit in the United States court was an
action by a stockholder to liquidate the corporation. Both were
substantially alike in purpose. The state court had proceeded so
far as to appoint receivers of the property, and had merely delayed
their taking possession until the case might be examined on appeal
in the court above. The state court was held to be in constructive
possession all the time, and was given priority of jurisdiction
over the property as against the receivers of a federal court who
had taken actual possession under a subsequent bill.
In
Farmers' Loan & Trust Co. v. Lake Street Railroad
Co., the suit in the federal court was an action to foreclose
a mortgage, and the one in the state court sought to enjoin the
foreclosure. In that case, the controversies were held to be
substantially the same, and the filing of the bill in foreclosure
in the federal court was held to be a constructive possession of
the property.
In
Moran v. Sturges, on the other hand, the controversy
was between the jurisdiction of a state court in winding up a
corporation and the distribution of its assets which included
navigable vessels and the jurisdiction of the federal court which
had taken actual possession of the vessels to enforce the
collection of maritime liens on them. It was held that, as the
state court had no capacity to take jurisdiction of the maritime
liens and enforce them, there was not concurrent jurisdiction, and
therefore the court which first obtained actual possession of the
vessels by its receiver was entitled to retain it without
interference.
In
Empire Trust Co. v. Brooks, 232 F. 641, a suit was
pending in the state court for the dissolution of a
Page 276 U. S. 45
corporation and the distribution of its assets under a state
statute, but it had made no order appointing a receiver and had not
taken actual possession of the property at the time the suit was
brought. A subsequent suit was brought against the corporation in
the federal court to foreclose a mortgage upon the property and a
receiver was appointed who took possession of the property, and it
was held in a carefully reasoned opinion that the federal court, by
receivership, had acquired priority of jurisdiction with respect to
the property mortgaged, on the ground that the issues and subject
matter of the two suits were not essentially the same, and that
there was no conflict of jurisdiction.
See also De La Vergne
Refrigerating Machine Co. v. Palmetto Brewing Co., 72 F. 579,
584-585.
We conclude that, if the decision of this motion turned on the
question of priority of jurisdiction on the face of the two bills,
it could not be said that the courts were exercising concurrent
jurisdiction. The creditor's bill conferred on the court the power
to enjoin the judgments and executions of creditors and the
establishment of undue preferences among the creditors, whereas, in
the stockholder's bill, no such remedy was asked, and could hardly
be afforded without amendment and further allegation and prayer. Of
course, as it has now turned out, because the corporation has
proven to be insolvent, it would not have been difficult or be
difficult now in the state court bill, by an amendment, to give the
stockholder's bill the effect of a creditor's bill, with the
receivers in possession. Indeed, it would seem to be its duty to do
so.
These considerations, based upon the face of the pleadings in
both actions, would have justified the conclusions reached in the
district court and in the circuit court of appeals were it not that
the evidence submitted by the receivers of the state court upon the
motion here under consideration discloses a fraud upon the state
court by which the appointment of receivers therein was delayed in
order that the federal receiver could be appointed.
Page 276 U. S. 46
There were two parties among the stockholders in the Boone Mills
Corporation. Gumbinski and his associates had been ousted in
November, 1924, because of charges made public against them of
concealment and defalcation and mismanagement. It became a subject
of newspaper comment and of great publicity because of the large
number of stockholders and the wide distribution of the shares.
Byfield and Solomon, who, as already said, had been made in
November, 1924, president and vice-president, controlled the
majority of the stock. Hurwitz as a stockholder, acting for the
minority stockholders, filed the stockholder's bill and made the
application for receivers to the Superior Court of Cook County. The
application much affected the credit of the corporation, and it was
regarded between the stockholders as an important question who
should be receiver and by what court he should be appointed.
Mr. Cowan was one of a firm of lawyers that acted for the
defendant the Woolen Mills Corporation, and was himself a member of
the executive committee of the board of directors of that company.
Mr. Byfield admits that he talked with Mr. Cowan some time before,
and had expressed his opposition to anything but a federal
receivership. The application for a receiver in the state court on
the stockholder's bill was set for February 16, 1925. When the
motion was called on that day, what followed is recited in the
record as agreed upon by the parties. We have inserted it in the
margin.
*
Page 276 U. S. 47
An examination of the evidence following this postponement, much
of which had to be drawn from the Byfield party and their
attorneys, satisfies us that the facts were as follows:
The delay in hearing the motion for a receiver in the state
court was procured by Mr. Cowan, the attorney for
Page 276 U. S. 48
the Boone Mills Corporation, for the purpose, if possible, of
securing the appointment of a receiver in the federal court. One
Grand was a stockholder of the corporation and lived in St. Louis,
and represented other stockholders, all of whom were of the Byfield
party. As soon as the motion was continued in the state court, a
conference was held between Cowan, Byfield, and Solomon. It had
been said that this conference was to be held with a view of
securing money to carry on the corporation, and that this was the
reason for asking the delay in the state court. But we think the
evidence of Mr. Solomon shows clearly that the conference was for
the purpose of seeing whether
Page 276 U. S. 49
a receivership in the federal court could be secured in advance
of the probable appointment in the state court.
Mr. Cowan telephoned to Mr. Grand to come to his office with the
expectation that, because of his diverse citizenship, he could file
a stockholder's bill in the federal court. Grand suggested that a
law firm of which Stern and Johnston were members should be
selected. One of that firm, either Mr. Stern or Mr. Johnston,
expressed the opinion that, instead of a stockholder's bill, a
creditor's bill should be filed, because on such a bill they were
more
Page 276 U. S. 50
likely to get the receivership. Then the question arose who
should be made the plaintiff, Grand, the St. Louis stockholder, not
filling the requirement in such a suit. Cowan and others, with Vice
President Solomon, examined the list of creditors of the company to
see who could be induced to bring the creditor's bill. It was found
that one Philipson, who was the agent of the United States Worsted
Sales Company, a corporation and citizen of New York, had a claim
for $6,000, and also that Stern was a personal friend of the agent.
Accordingly, Solomon asked Philipson to turn his claim over to
Stern for the protection of the company and creditors and
stockholders of the Boone Mills Corporation, saying that the
purpose of having a receiver appointed in the federal court was to
prevent the appointment of a receiver in the state court. Philipson
replied that he would be willing to do so, provided he got the
consent of his home office. The statement was made to him
"somewhere along the road" that there would be no expense involved
to Philipson's company. Philipson telephoned his company and got
their consent. Then Mr. Johnston, the partner of Mr. Stern, drafted
the bill in accordance with such information as he says he had had
for 30 days and such information as he obtained from Cowan and the
other men who were interested. The bill was filed. The answer of
the company on the authority of its directors admitting all the
facts and consenting to the appointment of a receiver was filed
upon the same day with the filing of the bill. Counsel for the
Worsted Sales Company knew this would be done. It is unnecessary to
rehearse the evidence of the persons engaged in this combination to
secure in the federal court the earlier receivership, but it is
very clear that the whole suit in which the receiver was appointed
was brought to secure that end before the action of the state
court, and that the prime actor in the whole matter,
Page 276 U. S. 51
which it does not do injustice to say had elements of a
conspiracy, was the Daniel Boone Mills Company. Cowan was its
lawyer and a member of the executive committee of its directors. He
sought and procured the continuance in the state court. He
continued to act as that company's attorney in his dealings with
Grand and in the conferences between Stern and Johnston. When the
form of the bill was changed from a stockholder's bill to a
creditor's bill, they all, including Cowan, hunted for a
nonresident creditor to consent to file the bill. The whole work
was the result of Cowan's active agency. Cowan secured the delay in
the state court by what on his part for his company was an
agreement that nothing in the interim should be done to affect the
litigation in the state court and that the
status quo
should be maintained. Cowan does not really deny this, though he
says he did not think he went so far. What he said in court cannot
be contested, because it is a stenographic report. The Woolen Mills
Corporation was advised that the creditor's bill to be filed could
not be sustained, because the nominal plaintiff was not a judgment
creditor, but was a simple non-judgment creditor (
Lion Bonding
& S. Co. v. Karatz, 262, U.S. 77,
262 U. S. 85),
and that that defect could only be remedied and immediate court
action secured by an answer of the company admitting the averments
of the bill and consenting to a receivership (
Pusey & Jones
Co. v. Hanessen, 261 U. S. 491,
261 U. S.
500). So, simultaneously with the filing of the bill,
the answer and consent were filed in the federal court. The
complainant in the bill was as much the company's agent and tool in
bringing the bill as was the Woolen Mills Corporation's own
attorney in filing the answer, and, in this aspect, the suit was
collusive. The complainant, the Worsted Sales Company, was
therefore charged with knowledge of the fraud by which delay had
been secured in the state court. The other agents whom defendant
company employed to
Page 276 U. S. 52
bring about the result even if they did not know the means taken
to secure the delay, were affected with knowledge of it, because
they were acting for the Woolen Mills Company in this transaction
in its pursuit of a federal court receivership. We do not impute to
Stern or Johnston actual knowledge of Cowan's fraudulent method of
securing a postponement in the state court when they filed the bill
of complaint. Cowan says he did not tell them. Johnston denies
knowledge of it, and there is no evidence that they were informed.
But, as explained, their client, the Worsted Sales Company, the
complainant, was charged with knowledge of it. The district court
did not know these facts when the bill was filed and the receiver
was appointed, but they were all brought to its attention when the
motion of the state receivers was made and heard and evidence
adduced March 13, 1925.
We do not wish what we have said to be taken as a general
approval of the appointment of a receiver under the prayer of a
bill brought by a simple contract creditor simply because it is
consented to at the time by a defendant corporation. The true rule
in equity is that, under usual circumstances, a creditor's bill may
not be brought except by a judgment creditor after a return of
"
nulla bona" on execution. When a receiver has been thus
irregularly appointed on such a bill without objection, and the
administration has proceeded to such a point that it would be
detrimental to all concerned to discharge the receiver, the
receivership has been permitted to continue because not seasonably
objected to.
Pusey & Jones Co. v. Hanessen,
261 U. S. 491,
261 U. S. 497,
261 U. S. 500;
In re Metropolitan Ry. Receivership, 208 U. S.
90,
208 U. S.
109-111;
United States v. Butterworth
Corporation, 269 U. S. 504,
269 U. S.
513.
In refusing the motion of the state court receivers for
surrender of the property and assets of the Woolen Mills, the
district court said:
"It must be borne in mind that the state court did not act until
nine days after the appointment in this Court,
Page 276 U. S. 53
and then upon different pleadings. The statement in the state
court of the attorney for the defendant, even if given the extreme
meaning claimed for it (a meaning which, in my opinion, is not
warranted by the evidence) could not operate to invalidate the
proceedings of this Court. At most, it amounted to an agreement, a
violation of which would have been a contempt of the state court.
If it has the force of an injunction, it would not render void the
action in the federal court."
Again, the same court said, speaking of the state court:
"The court had taken no action which brought defendant's
property within its custody, and it was not until March 13, 1925,
that it was claimed in this Court that there was any agreement in
the state court beyond the terms of the order of February 16, 1925.
In the meantime, the federal court here and in other districts
proceeded with the administration of the affairs of the defendant
corporation. As Judge Lurton said, it would lead to absurd results
and inflict unwarranted injury upon innocent parties if the alleged
oral agreement of the attorney in the state court, of which there
was no record, can be invoked to invalidate the proceedings
here."
We differ radically from the trial court as to the purpose and
effect of the conduct of Cowan in securing the postponement of the
hearing for a receiver in the state court. Ordinarily we should
acquiesce in a conclusion of fact by the court that heard the
witnesses in such a case, but here the evidence of what was said in
the state court is on a stenographic report agreed upon by the
parties, and the other circumstances make the necessary inferences
therefrom clear.
Nor can we take the view that, when the motion of the state
court receivers applied for surrender there were then in the
federal court case innocent parties upon whom surrender to the
state court of the property would work any hardship, for no
creditor had come into the case except the complainant, which by
its actual relation to the
Page 276 U. S. 54
proceeding was charged with knowledge of the means by which a
receivership had been obtained. In respect to the effect of the
evidence, the language of the circuit court of appeals shows it
took a different view of the facts from that of the district
court:
"That the conduct of debtor's first counsel (not the counsel
appearing in this court) was far from commendable is unfortunately
most apparent. It is happily not a frequent occurrence that an
attorney for a debtor seeks the creditor and urges him to bring
suit against his client, or turns over his client's list of
creditors to an attorney soliciting business, to say nothing of the
violated pledge to the judge and opposing counsel. Moreover, good
faith required this counsel to have advised the federal district
court of the pendency of the state court proceedings."
"The case is one where, in their determination to control the
receivership, counsel proceeded with such speed and zeal that the
code of professional ethics was entirely ignored and forgotten.
Counsel should avoid these hurried
ex parte applications
for friendly receivers. In fact, there should be no 'friendly
receiverships.' Whenever possible, notice should be given to any
and all interested parties. When the debtor corporation appears,
however, and consents to such appointment, the court must rely on
counsel to inform it as to all the facts. If essential facts are
deliberately withheld, counsel may well forfeit his right to
practice further, or be otherwise disciplined."
"Notwithstanding the prejudice which this conduct has created,
we have approached the question with the understanding that the
client's rights, rather than attorney's conduct, must be the basis
for the determination of this litigation."
But we do not agree with either of the courts below that the
vindication of the cause of comity and good faith as between the
two courts should be limited to punitive
Page 276 U. S. 55
proceedings against the lawyer in the state court whose pledge
to that court was broken.
In this country, in which in every state we have courts of
concurrent jurisdiction under the federal and the state authority,
it is of the highest importance that conflict of jurisdiction
should be avoided. It can only be avoided by forbearance and
comity, and by enforcing upon the parties and counsel engaged the
utmost good faith and the fullest disclosure in one jurisdiction
with reference to what are the exact facts relevant to litigation
in a corresponding case in the other. This is especially true with
respect to receiverships. The desire of those who represent an
embarrassed corporation to seek a refuge from active and urgent
creditors under the protecting arm of an officer of the court leads
to strenuous efforts to frame a case which may, under equity
practice, justify a receiver. More than this, circumstances which
should have no influence lead the parties in interest to prefer one
court to another in the selection of the person to be appointed as
receiver, with the hope on behalf of those in charge of the
embarrassed corporation that the appointment may fall to one whose
conduct will be in sympathy with, rather than antagonistic to, the
previous management of the corporation, in the hands of which the
embarrassment has arisen. As the court of appeals says, there
should be no "friendly" receiverships, because the receiver is an
officer of the court, and should be as free from "friendliness" to
a party as should the court itself. Nor should there be any
competition or rivalry on the part of the two courts themselves in
regard to assuming jurisdiction. The temptation of the exercise of
power and patronage in the selection of receivers and the
management of great businesses under the court should not be a
feather's weight in prompting court action. Each court should
examine with nicety the question of the right of the parties to
have
Page 276 U. S. 56
a receiver, and should advise itself in regard to the
circumstances making it its duty to exercise this delicate
jurisdiction. If the court finds that, by misrepresentation or by a
false pledge, another court has delayed action by which the
possession of the
res would have been taken before the
application in hand was made, it should insist that the parties and
counsel who have misled the other court must give that court full
opportunity to remedy the wrong done. What was done here in
delaying the state court and inducing the federal court to act
without a full disclosure of what had been done in the state court
was a fraud not only upon the state court, but upon the federal
court itself, and, when the federal court learned the method by
which its jurisdiction to appoint a receiver had been invoked, it
should have denied to those who were guilty the further use of its
jurisdiction until after the state court had been given an
opportunity to exercise the jurisdiction which it was entitled to
exercise, even to taking possession of the property. As we have
already said, there was, when the district court herein came to
know the facts, no party before it who was not to be charged with a
knowledge of how its jurisdiction had been secured.
It is quite true, as already said, that, if there had been no
chicanery in the delay of the proceeding in the state court, the
difference between the two proceedings would have justified the
retention of the jurisdiction by the federal court. But the two
proceedings, while not the same, were closely related, and the
proceeding in the state court must, by the subsequent insolvency,
have resulted in reframing in the state court the pleadings so as
to make it a creditor's bill. Hence they were closely enough
related to call upon the federal court to refuse thereafter to
continue jurisdiction through its receiver, and to surrender
custody of the
res to the receivers of the state court.
Such action we deem to have been that which the comity
Page 276 U. S. 57
and the good faith of a federal court owed to the state
court.
But now the condition has changed, and the rights of innocent
creditors who have since become parties are involved, the court and
the receiver have proceeded to administer the property, have found
it necessary to issue receiver's certificates, and have paid them,
have sold some of the property and have made some distribution to
the creditors. It would be in some ways easier to allow the
settlement to go on as it is, but this would not comport with the
obligation of a federal court to observe and emphasize the highest
good faith and comity towards state courts in matters where the two
have concurrent jurisdiction. We therefore shall direct the
district court to reverse its action in denying the motion to
surrender through its receivers the property of the estate still in
its custody to the state court receivers. But the surrender should
be only on condition that the state court receivers produce an
order from the state court confirming all that has been done in the
sale of the property, the disposition of the assets, and the
distribution thereof as if it had been by its own decree, and shall
so shape the pleadings and its orders that the case may proceed in
the state court as a creditor's bill and a liquidation of all the
debts, to enable it to proceed to the complete distribution of all
remaining assets in liquidation, as it would have had to do, in
view of the insolvency, in a continued administration under the
stockholder's bill. The federal court should, before surrender, fix
and pay the compensation due to its officers for the work done by
them, and, in doing so, should take care to fix the compensation
within limits which are plainly reasonable. After this and other
preliminaries are attended to, all the assets then in the hands of
the receiver of the federal court shall be turned over for further
and complete distribution in the suit in the Superior Court of Cook
County. If such an order of the state court as is
Page 276 U. S. 58
herein prescribed is not entered in that court and produced in
the federal court in a seasonable time, the pending administration
in the federal court under the creditor's bill shall continue.
The decrees of the circuit court of appeals and of the district
court are reversed, and the case is remanded to the district court
for further proceedings in conformity with this opinion.
*
"Mr. Gesas: If the court please, this is a bill filed by a
stockholder, seeking the appointment of a receiver, for the Boone
Woolen Mills, Inc. A notice was served on the company, and Mr.
Cowan, who appears here this morning, advises me that the company
desires a continuance."
"Mr. Cowan: The situation, if the court please, is this, without
going into the merits of the bill: whether or not the bill sets up
such grounds as would warrant this Court in entering a
receivership, there are certain important matters now coming before
the board of directors of this company which involves some very
large amount of finances and which will be seriously interfered
with if this Court undertakes to hear the application for a
receivership. I think those negotiations will be concluded within a
week, and the rights of the complainant under this bill will not be
affected in any way at all by allowing this matter to go over for a
matter of a week or ten days. I would prefer not to argue the
motion this morning, but if counsel insists upon it, of course, it
will be necessary for me to do it."
"Mr. Gesas: I think the first thing the record should disclose
is whether or not these gentlemen are appearing here for the
company; there is no appearance on file."
"The Court: Yes; that is right."
"Mr. Gesas: I appear here for the complainant."
"Mr. Cowan: I appear for the company, and will file my
appearance in due time."
"Mr. Gesas: In your individual capacity?"
"Mr. Cowan: The firm of Barrett & Barrett, with which I am
associated."
"Mr. Gesas: Now, if the court please, in this matter, without
going into the full matters, there has been a considerable fight,
as your honor happens to see, from this photographic newspaper, in
which it is a fight between the former directors against the
present directors and the present directors against the former
directors --"
"The Court: And their compliments were passed back and
forth?"
"Mr. Gesas: Yes, if the court please, and there has been a loss
of over $3,000,000 in one year in the operation of this business,
which practically has been neglected on account of no action taken
by these directors, and if any continuance is granted here at all,
it must be -- well, I think the court has a right to hear this
matter; that the issues, if any at all are involved, should be
tried by this Court, not the newspapers, so that the goodwill which
the stockholders have in this business, and the value of that
goodwill, if there is any left after this terrible fight, between
the old directors and the new directors, should be placed in
status quo, and if there is any continuance granted, I
think it ought to be done with the understanding that the status
will not be changed, and that the issues be not tried in the
newspapers, but by this Court."
"The Court: Yes, but of course, I cannot control the newspapers,
you understand."
"Mr. Gesas: Your honor can control the
status quo."
"The Court: Yes, with that understanding, but the suggestion
that individuals should not seek publicity, of course --"
"Mr. Gesas: The situation is this --"
"Mr. Cowan: Just a minute. Mr. Gesas complains about trying the
case in the newspapers; one of the parties, who is charged with
fraud in this bill, published half a page of an advertisement, and
it was paid for, I assume, by --"
"Mr. Gesas: Here it is."
"Mr. Cowan [continuing]: That is something over which we have no
control, and which we didn't mail; there has been a $2,000,000
libel suit against the present president of the company, so that I
don't think we could be charged with trying our case in the
newspapers."
"Mr. Gesas: I am not making any direct charge at this moment, as
to either the present directors or the former directors, as to
their activities, except to say that both are guilty of seeking
this publicity."
"Mr. Cowan: Now, the question of publicity --"
"Mr. Gesas: Just a minute. May I suggest, if the court please,
there is a considerable emergency in this way; from what I
understand, a form letter was sent out by the present president in
which he advises the stockholders of the terrible condition he
finds the company in at the present time, with the payroll and
other expenses which run about one hundred thousand dollars a week;
that any great delay in this matter is going to be very harmful to
the rights of the parties; of course, we are willing to grant a
reasonable continuance, and if this matter goes over to about
Friday or Saturday of this week, I should imagine that ought to be
a reasonable time, and not have a continuance for one week or ten
days. We are here to ascertain our status --"
"Mr. Cowan: I have no objection to its going over to Friday or
Saturday, but personally I think, if you let it go until Monday
--"
"The Court: There is no court Monday; that is what the clerk
tells me. You see, Washington's Birthday is on the 22d, and we
observe it on the 23d -- the day following."
"Mr. Cowan: Saturday morning, all right."
"Mr. Gesas: Saturday morning, and everything remains in
status quo?"
"The Court: Yes; Saturday morning, without further notice."
"Mr. Gesas: And any notices, or affidavits, that you are going
to present --"
"The Court: Yes; have them served on the other side, naturally;
either side."
"Mr. Cowan: All right, Saturday morning."
"The Court: Yes."
Which were all the proceedings had in the above-entitled cause,
on this date. Signed and sworn to by the court reporter,
Cleary.