1. The appointment of a receiver upon the application of a
creditor is not an act of bankruptcy, except in cases of
insolvency. P.
294 U. S.
447.
2. A contract by which a corporation, in consideration of moneys
to be advanced and services to be rendered, assigned designated
accounts receivable and agreed to collect them, turn over the
proceeds, as collected, to the assignee, and pay the assignee, as
compensation for the advances and services, a specified percentage
rate on the net face of the accounts, remains binding on receivers
appointed by a federal court to carry on the corporation and its
business as a going concern if it was valid and binding on the
corporation. P.
294 U. S.
447.
3. The fact that such a contract seems hard and oppressive
because of the heavy interest rate exacted of the corporation will
not authorize the federal court of equity to ignore it or modify
its terms if the contract is free from mistake or fraud and valid
by
Page 294 U. S. 443
state law, and if the party claiming under it intervened in the
receivership case not to seek equity but merely for the protection
of his legal rights under the contract. P.
294 U. S.
448.
4. The maxim "He who seeks equity must do equity" presupposes
that equitable, as distinguished from legal, rights have arisen
from the subject matter in favor of each of the parties, and it
requires that such rights shall not be enforced in favor of one who
affirmatively seeks their enforcement, except upon condition that
he accord to the other his correlative equitable rights. P.
294 U. S.
449.
5. The maxim "He who comes into equity must come with clean
hands" does not apply to one who comes in perforce to secure the
fruits of a perfectly valid, albeit a hard, contract. P.
294 U. S.
451.
6. This maxim, when applicable, requires that the party affected
shall be denied relief
in toto. P.
294 U. S.
451.
7. Where, because of an error
in limine, the merits and
measure of a claim on the facts and law applicable have not been
inquired into by the two lower federal courts, this Court may
reverse the decrees of both and remand to the District Court for
further proceedings in accordance with the opinion. P.
294 U. S.
453.
72 F.2d 471 reversed.
Certiorari, 293 U.S. 552, to review the affirmance of a decree
of the District Court which allowed only in part a demand made by
the present petitioner on the receivers of a corporation. The
corporation became bankrupt while the case was pending in the court
below, and the trustee in bankruptcy was substituted for the
receivers.
MR. JUSTICE SUTHERLAND delivered the opinion of the Court.
This writ brings here for consideration certain questions in
respect of the enforcement of a contract between petitioner and
Griggsby-Grunow Company (hereinafter referred to as the company)
made October 5, 1933. The
Page 294 U. S. 444
contract purports to be one for the purchase of designated
accounts receivable for which petitioner promised to pay 100% of
the actual net amounts thereof, less a charge for interest on the
purchase money outstanding and less compensation for certain
services rendered or to be rendered by petitioner. Fifty percent of
the actual net amounts was to be paid in cash upon acceptance of
the accounts, and the remainder, with specified deductions and
additions, was to be paid immediately upon payment of the accounts.
All original checks, drafts, notes, etc., received by the company
in full or partial payment of any of the accounts so purchased were
to be delivered to petitioner at its office on the day of their
receipt. Attorneys' fees, costs and expenses incurred by petitioner
were to be paid by the company. Compensation for services was to be
at the rate of 83 1/2% of one-thirtieth of 1% of the net face
amount of accounts for each day from the date of purchase. Total
charges against the company, as estimated by the parties, would
equal about 20% per annum upon the outstanding balance of cash
advances up to November 24, 1933.
Among other services, petitioner agreed to furnish to the
company specified information upon request in respect of customers;
to furnish information and advice as to the most desirable method
of keeping books, records, and accounts of the company; to give,
upon request, financial and business advice; to obtain and have on
hand at all times funds to make prompt remittance for acceptable
accounts; to supply forms needed for assignment of accounts; to put
its credit and collection department at the disposal of the
company, and to furnish advice and opinions as to the form and
legality of the company's sales contracts with its customers.
On November 24, 1933, in a suit brought by a creditor against
the company, a federal District Court for the Northern District of
Illinois appointed receivers to preserve the property and assets of
the company. The company was
Page 294 U. S. 445
solvent, having assets greatly exceeding its liabilities, and
the receivers were directed to continue the business as a going
concern and to do all things necessary to that end and to preserve
the property. They were directed to take charge of all assets,
books of account, etc.; to employ and discharge and fix
compensation of employees, agents, etc.; to collect, sell, and
liquidate accounts, etc., and to purchase on credit or otherwise
such supplies and equipment as might be necessary to continue the
business as a going concern. All persons were enjoined from
interfering with the receivers in their possession of the property,
the administration of their trust, or in the performance of the
duties imposed upon them.
The receivers refused to pay over to petitioner anything
collected on the assigned accounts unless directed to do so by the
court. Subsequently, such direction being given, the receivers from
time to time paid to petitioner various sums which, together with
an amount collected by the petitioner itself, finally liquidated
the amount due petitioner up to the time when the receivers were
appointed. This liquidation was effected between the date of the
receivership and December 29, 1933, a period of 35 days. Petitioner
had already (on November 29, 1933) intervened in the receivership
proceeding with a petition seeking compliance on the part of the
receivers with the terms of its contract, and, after the
liquidation to the extent stated above had been effected,
petitioner continued the proceeding under its petition, demanding
payment at the contract rate of a sum aggregating at the end of the
35-day period, $4,394.48, together with reasonable attorneys' fees
and costs. No accounts were purchased or assigned after the
receivership, and the only obligation which remained was to carry
out the terms of the contract insofar as they affected the accounts
already assigned.
The gross sum which petitioner received under the contract for
the time prior to the receivership was equal to
Page 294 U. S. 446
the estimated 20% per annum on the moneys actually advanced to
the company. The amount which it was claimed had accrued during the
35-day period was equivalent to an average of about 28.3% per annum
from the date of the appointment of the receivers. The petition
asked for reasonable attorneys' fees, without specifying any
amount. The only testimony on the subject was that of an attorney
who said the sum of $7,800 was reasonable.
The District Court entered a decree in favor of petitioner for
$1,087.93, being at the rate of 7% instead of 28.3% per annum, upon
the outstanding balances. That court denied all further relief on
the sole ground that petitioner's demand was inequitable, and that,
in making it, petitioner had not come into equity with clean hands.
The decree was affirmed by the Circuit Court of Appeals.
P. R.
Mallory & Co. v. Griggsby-Grunow Co., 72 F.2d 471, 473.
The basis of that court's decision cannot be better stated than in
its own words:
"The insistence of appellant upon its claim for the full rate of
interest plus attorneys' fees at a preposterous rate, when it
appeared that there was no more business to be done under the
contract because of the receivership of the Company, savors too
much of the exaction of the pound of flesh from the creditors of
the insolvent company to be enforceable in a court of equity. If
this case arose in an action at law between the original parties,
it may well be that the court could not refuse to enforce the
contract according to its strictest terms. But where the creditor
goes beyond the practice of the parties under the original contract
and tries to enforce rights never asserted against the other
contracting party, and in addition tries to collect counsel fees
exceeding 177% of the maximum amount claimed against the receiver
who is attempting to salvage the assets for the benefit of the
other creditors who have a substantial interest in the estate of
the debtor, we cannot
Page 294 U. S. 447
feel that a court of equity is any place for him to press his
demands."
February 18, 1934, while the appeal was pending in the Court of
Appeals, a petition in bankruptcy was filed in the federal District
Court against the company, and this was followed by an adjudication
of bankruptcy and the selection, April 16, 1934, and qualification,
later, of the respondent McKey as trustee in bankruptcy.
Subsequently, upon the application of both parties, McKey was
substituted in the Court of Appeals as appellee.
In connection with the discussion which follows, two
considerations are to be borne in mind: 1. When the receivers were
appointed November 24, 1933, the company was solvent, having assets
exceeding its liabilities in the sum of $13,000,000, and there is
nothing in the record to suggest that this condition of solvency
did not continue until after the completion of the 35-day period
here involved. 2. What effect, if any, an act of bankruptcy might
have had upon the life or operation of the contract we need not
determine, since it is plain that the appointment of a receiver
upon the application of a creditor is not an act of bankruptcy
except in cases of insolvency. Title 11, U.S.C. § 21(a), as amended
May 27, 1926, Title 11, U.S.C. Supp. VII, § 21(a)(5);
Nolte v.
Hudson Nav. Co., 8 F.2d 859, 866;
Meek v. Beezer, 28
F.2d 343, 345;
In re Edward Ellsworth Co.,, 173 F. 699,
700, 701;
In re Guardian Building & Loan Assn., 53
F.2d 412, 415.
The effect of the contract was to bind the company as agent of
petitioner to collect the purchased accounts and deliver to the
latter the proceeds in kind from day to day as fast as they were
collected. The receivers were equally bound.
The extent of the benefit which accrued to the company by reason
of the advantages which evidently were expected to result from the
opportunity to avail itself of the
Page 294 U. S. 448
use of a large part of the proceeds of the accounts in advance
of their payment, and from the services of petitioner, is not a
matter for judicial inquiry. The parties dealt at arm's length. The
contract was voluntarily executed by the board of directors of the
company. It is not suggested that there was any mistake or any
fraud or overreaching on the part of petitioner. The contract, it
is conceded, is valid under the statutes of Illinois as construed
by the Supreme Court of the state,
Tennant v. Joerns, 329
Ill. 34, 160 N.E. 160, and, so far as the record discloses, it was
performed on the part of petitioner in all respects up to at least
the appointment of the receivers.
But the court below refused to be bound by the law of Illinois,
upon a theory which it had advanced in a former case,
In re
Chicago Reed & Furniture Co., 7 F.2d 885 -- namely, that a
state law cannot
"abrogate the rule that courts of equity will not lend their aid
to enforce contracts which upon their face are so manifestly harsh
and oppressive as to shock the conscience."
With that view as here applied we are unable to agree.
The contract was in force when the receivers were appointed, and
it continued effective until the expiration of 35 days thereafter,
at which time it was brought to an end. During that period, if
there were no default on petitioner's part, the contract, insofar
as it remained unperformed, was enforceable against these receivers
as theretofore it had been against the company.
Merchants'
& Manufacturers' Securities Co. v. Johnson, 69 F.2d 940,
945;
compare Fosdick v. Schall, 99 U. S.
235,
99 U. S.
251.
The mere fact that a party is obliged to go into a federal court
of equity to enforce an essentially legal right arising upon a
contract valid and unassailable under controlling state law does
not authorize that court to modify or ignore the terms of the legal
obligation upon the claim,
Page 294 U. S. 449
or because the court thinks, that these terms are harsh or
oppressive or unreasonable. A party may stand upon the terms of a
valid contract in a court of equity as he may in a court of
law.
"If he asks no favors, he need grant none. But if he calls upon
a court of chancery to put forth its extraordinary powers and grant
him purely equitable relief, he may with propriety be required to
submit to the operation of a rule which always applies in such
cases, and do equity in order to get equity."
Fosdick v. Schall, supra at p.
99 U. S. 253.
The petitioner here did not seek equitable relief. It sought an
enforcement of its legal rights, and, as said by the Supreme Court
of Pennsylvania,
"Legal rights are as safe in chancery as they are in a court of
law, and, however strong an appeal may be to the conscience of a
chancellor for equitable relief, he is powerless to grant it if the
one from whom it must come will be deprived of a legal right."
Colonial Trust Co. v. Central Tr. Co., 243 Pa. 268,
276, 90 A. 189, 191. The maxim "he who seeks equity must do equity"
presupposes that equitable, as distinguished from legal, rights,
substantive or remedial, have arisen from the subject matter in
favor of each of the parties, and it requires that such rights
shall not be enforced in favor of one who affirmatively seeks their
enforcement except upon condition that he consent to accord to the
other his correlative equitable rights. But it is well settled,
this Court said in
Hedges v. Dixon County, 150 U.
S. 182,
150 U. S. 189,
"that a court of equity, in the absence of fraud, accident, or
mistake, cannot change the terms of a contract."
Missouri, Kansas & Texas Trust Co. v. Krumseig,
172 U. S. 351,
dealt with the precise question now under consideration. The
situation presented there was the converse of that presented here,
but the applicable principle is the same. There, suit was brought
in equity in a state court to cancel a mortgage and certain notes
secured thereby
Page 294 U. S. 450
on the ground that they embodied a contract bad for usury under
a state statute. The suit was removed to a federal District Court.
That court granted the relief which was sought, conditionally, and
its decree was affirmed by the Circuit Court of Appeals. The state
law declared such a contract to be wholly void. Both courts,
however, invoking the equitable maxim "he who seeks equity must do
equity," held that the plaintiff could not have the relief except
on the generally recognized equitable condition that he pay to the
lender the money loaned together with legal interest. This Court,
rejecting the view of the lower courts that a federal court, in the
exercise of its jurisdiction, cannot be deprived of the power or
relieved of the duty to enforce and apply the established principle
of equity embodied in the maxim, said (pp.
172 U. S.
358-359):
"We think it a satisfactory reply to such a proposition that the
complainants in the present case were not seeking equity, but to
avail themselves of a substantive right under the statutory law of
the state. . . . With the policy of the state legislation, the
federal courts have nothing to do. If the states . . . think that
the evils of usury are best prevented by making usurious contracts
void, and by giving a right to the borrowers to have such contracts
unconditionally nullified and cancelled by the courts, such a view
of public policy, in respect to contracts made within the state and
sought to be enforced therein, is obligatory on the federal courts,
whether acting in equity or at law. The local law, consisting of
the applicable statutes as construed by the supreme court of the
state, furnishes the rule of decision."
Compare Brine v. Insurance Co., 96 U. S.
627.
Again, in
Columbus v. Mercantile Trust Co.,
218 U. S. 645,
218 U. S. 662,
this Court declined to apply the maxim in favor of a plaintiff who
had failed to prove his case against a
Page 294 U. S. 451
defendant who had filed a cross-bill for defensive relief,
holding that the maxim applied only against one who had
affirmatively sought equitable relief.
It seems to be conceded -- or, if not, it must be -- that in an
action at law against the receivers, the court would have been
bound to enforce the contract under review strictly in accordance
with its terms. And, not to go beyond the case in hand, the rule is
not otherwise where plaintiff, precluded by judicial order from
proceeding at law, is obliged to submit the determination of his
strictly legal rights to a chancery court because it has plenary
control of the remedy.
The maxim that "he who comes into equity must come with clean
hands," which the District Court invoked and made the basis of its
decision, for reasons similar to those already stated, is equally
inapplicable. Certainly no unconscionable or inequitable conduct
can be attributed to petitioner because it undertook to secure the
fruits of a perfectly valid, albeit a hard, contract in the only
court to which it could apply without being subject to a charge of
contempt. Moreover, the maxim, if applicable, required the District
Court to halt petitioner at the threshold and refuse it any relief
whatsoever, not to compromise with it, as the court did, by
allowing a part of what was claimed. It seems plain enough that in
no aspect of the case is any equitable principle involved.
The decisions of the court below in the present case and in the
Reed & Furniture Co. case,
supra, are
contrary to every other decision called to our attention, or that
we have been able to find involving a similar situation. A case
practically the same as that presented here is
Merchants' &
Manufacturers' Securities Co. v. Johnson, supra. The contracts
there involved were identical with the one here, and were likewise
governed by the law of Illinois denying to a corporation the
defense of usury. A receiver had been
Page 294 U. S. 452
appointed to continue the business of the corporate parties to
the contract. In deciding the case, the Court of Appeals of the
Eighth Circuit emphasized the fact that the receiver was appointed
(as the receivers were here) not to wind up the affairs of the
corporations, but to carry on their business as going concerns, and
it held that he succeeded to their property subject to the contract
rights which obtained at the time of his appointment. "He had no
greater or different rights than those that might have been
asserted by the companies." Reversing a decree of the District
Court, the Court of Appeals directed the entry of a decree in favor
of the securities company for the full amount claimed, that amount
to constitute a special lien upon all accounts receivable still
unpaid and upon the proceeds of the same in the hands of the
receiver.
In re International Raw Material Corp., 22 F.2d
920, involved a contract which, although not in identical terms,
was in principle the same as that here under consideration. That
court, resting upon a New York statute denying to a corporation the
defense of usury, enforced the contract against a trustee in
bankruptcy. It considered and definitely rejected the doctrine
announced in the
Reed & Furniture Co. case, holding
there was no justification for nullifying the agreement of the
parties because the interest and commissions deliberately arranged
were too large to satisfy the ideas of a court.
See also,
to the same effect,
In re Gotham Can Co., 48 F.2d 540;
Ramsey v. Marlin Firearms Corporation, 14 F.2d 314;
Estes v. E. B. Estes & Sons, 24 F.2d 756.
We see no escape from the logic of these decisions.
The receivers alleged as a defense, apparently by way of
recoupment, that they had expended a large sum of money in making
collection of the accounts which inured to the benefit of
petitioner by assuring to it a return of its advances. The District
Court found that the receivers, among other things, had expended
$35,000 in advertising
Page 294 U. S. 453
in order to maintain the good will of the company and preserve
its receivables as live and valuable assets, and seemed to think
that the petitioner had been benefited thereby. No suggestion,
however, is made by either of the lower courts or by the respondent
as to how much of these expenditures should be borne by petitioner,
and the record affords no information by which the amount can be
calculated. Even less does it appear how much, if any, of these
expenditures related to the assigned accounts.
Whether, upon further and more definite evidence, under all the
circumstances and consistently with the provisions of the contract,
petitioner may be held for any part of these expenditures we do not
determine.
Both lower courts refused to allow any amount for attorneys'
fees, apparently on the ground, which we have rejected, that to do
so would be contrary to equitable principles. The contract seems to
contemplate a reasonable allowance for such fees, but the amount,
if any, remains to be fixed by the District Court upon
consideration of all pertinent facts relating to services rendered
by the attorneys after the date of the receivership, and with due
relation to its ultimate determination upon the merits.
As already appears from what has been said, the decrees below
rest wholly on the untenable assumption that petitioner's rights
are subject to denial or curtailment in virtue of equitable
principles applicable only against one who affirmatively has sought
equitable relief, and here that was not the case. The question, or
extent, of petitioner's legal rights, relieved of this assumption,
has been neither determined nor considered upon the facts or the
applicable law. The duty and responsibility of that consideration
and determination lie primarily with the lower courts, and, in the
light of the peculiar circumstances disclosed by the record, should
not, we think, be assumed in the first instance by this Court. To
the end that such duty and responsibility may be discharged, we
conclude
Page 294 U. S. 454
that the decrees of both courts should be reversed, and the
cause remanded to the District Court for further proceedings in
conformity with the foregoing opinion.
294
U.S. 442|>*
We refrain from expressing any opinion as to the effect of any
change of circumstances, due to the receivership and liquidation of
petitioner's claims during the period in question, upon the amount,
if any, of petitioner's recovery, or any opinion in respect of the
law applicable thereto.
Reversed.
|
294
U.S. 442|
* This disposition of the case finds precedent in a large number
of decisions of this Court, among which the following are cited as
examples:
Owensboro v. Owensboro Waterworks Co.,
191 U. S. 358,
191 U. S. 372;
Wilson Cypress Co. v. Del Pozo, 236 U.
S. 635,
236 U. S.
656-657;
Brown v. Fletcher, 237 U.
S. 583,
237 U. S. 586;
Gerdes v. Lustgarten, 266 U. S. 321,
266 U. S. 327;
Twist v. Prairie Oil Co., 274 U.
S. 684,
274 U. S. 692;
United States v. Brims, 272 U. S. 549,
272 U. S. 553;
Grant v. A. B. Leach & Co., 280 U.
S. 351,
280 U. S. 363.