1. A bill of complaint brought by a shareholder for the
appointment of receivers to liquidate an insolvent building and
loan association, allegations of diversity of citizenship and
requisite jurisdictional amount being unchallenged, is within the
jurisdiction of the federal District Court. Jud.Code, § 24; 28
U.S.C. § 41(1). P.
294 U. S.
180.
2. Whether a shareholder of the insolvent corporation, rather
than a judgment creditor, may properly bring the suit, and whether
under the state law the present shareholder has the status of a
creditor, are questions which go to the propriety of the action of
the court as a court of equity, and not to its jurisdiction as a
federal court. P.
294 U.S.
181.
3. Objection to the equity jurisdiction of the District Court
may be waived by the parties by consent or by failure to make it
seasonably. P.
294 U.S.
181.
4. The authority of the federal District Court to hear and make
disposition of a cause within its jurisdiction is not subject to
collateral attack, nor to diminution or control by state statutes,
and error in the exercise of that jurisdiction can be remedied only
by appeal. P.
294 U. S.
182.
5. A shareholder in an insolvent Pennsylvania building and loan
association brought a bill of complaint in the federal District
Court for that State, alleging diversity of citizenship and the
requisite jurisdictional amount and praying for the appointment of
receivers to liquidate the business and for an injunction
restraining creditors and others from interfering with or taking
possession of the property. Statutes of Pennsylvania provided a
procedure for the liquidation of such associations, under the
direction of a Secretary of Banking and substantially similar to
receivership proceedings in the federal courts. There was no
contention that the state procedure was inadequate, or would not be
diligently and honestly followed.
Held, upon the petition
of the Commonwealth invoking its discretion, the District Court
should have relinquished its jurisdiction in favor of the state
administration of the corporate assets by the state officer. Pp.
294 U. S. 182,
294 U. S. 186.
Page 294 U. S. 177
6. The public interest require that federal courts of equity
exercise their discretionary power with proper regard for the
rightful independence of state government in carrying out their
domestic policy. P.
294 U. S.
185.
7. A federal court of equity should be slow in the exercise of
jurisdiction when it involves an unnecessary interference by
injunction with the lawful action of state officers. P.
294 U. S.
185.
8. In the present case, the District Court may retain
jurisdiction only for the purpose of directing the surrender of the
assets and property with all convenient speed to the state officer,
the receivers to retain only sufficient of the assets to pay their
reasonable fees and any obligation lawfully incurred by them, and
for the purpose of promptly discharging the receiver and settling
their accounts, whereupon the suit should be dismissed. P.
294 U. S. 186.
72 F.2d 509 reversed.
Certiorari, 293 U.S. 547, to review a judgment affirming a
judgment of the District Court, 4 F. Supp. 779, denying the
Commonwealth's petition for leave to intervene in a proceeding for
the liquidation of an insolvent building and loan association and
for an order directing the federal court receivers to surrender the
assets to the state Secretary of Banking.
MR. JUSTICE STONE delivered the opinion of the Court.
In this case, certiorari was granted, directed to the Court of
Appeals for the Third Circuit, to resolve questions of public
importance growing out of the rival claims of a federal District
Court and the Department of Banking of the Commonwealth of
Pennsylvania; each asserts authority to liquidate the business and
affairs of an insolvent
Page 294 U. S. 178
building and loan association organized under the laws of
Pennsylvania.
On February 9, 1933, a New York shareholder in Mortgage Building
& Loan Association, a Pennsylvania corporation, on behalf of
himself and other shareholders, filed a bill of complaint in the
District Court for Eastern Pennsylvania, naming the association as
defendant and alleging that it was the result of the merger of
several building and loan associations, in one of which the
plaintiff in the suit was a shareholder, and that he had refused to
participate in the merger and had demanded of the association
cancellation and payment of his shares. The bill alleged the
insolvency of the association and a threatened race of diligence by
its creditors to satisfy their claims from the assets of the
corporation, and prayed the appointment of receivers for the
corporation, the liquidation of its business and assets, and the
usual injunction restraining creditors and others from interfering
with or taking possession of its property. Thereupon, on the same
day and on the appearance of the defendant corporation, which
interposed no objection, the District Judge appointed temporary
receivers. No notice of the application was given to the
corporation's creditors or other shareholders, or to the Department
of Banking of the Commonwealth. On the following day, the
corporation filed its answer, admitting the material allegations in
the bill of complaint, and joining in its prayer.
On that day, the Secretary of Banking informally requested the
District Judge not to make the appointment of the receivers
permanent, and to allow the property of the defendant to be
surrendered to the Secretary, to be liquidated and administered in
accordance with the state statutes. On March 27, 1933, the
Commonwealth filed its petition in the District Court, asking leave
to intervene in the pending equity proceeding and for an order
directing the receivers to surrender the assets
Page 294 U. S. 179
of the defendant association to the state Secretary of Banking.
In addition to the matters already stated, the petition alleged the
further facts, which are admitted or established: that the
association, organized as a building and loan association, is
subject to the supervision of the State Department of Banking, as
provided by the Banking Act of June 15, 1923, P.L. 809; that the
statutes of the Commonwealth afford a complete, comprehensive, and
economical scheme for liquidation by the Secretary of Banking of
such a building and loan association, when insolvent or in a
financial unsound condition; that § 21 of the statute, providing
that the Secretary, after notice and hearing, may, with the consent
of the Attorney General, take possession of the business and
property of a building and loan association when it appears to be
in an "unsafe or unsound condition to continue business,"
specifically authorizes the Secretary to take possession of the
property of the association when it is "in the hands of a receiver
appointed by any court;" that, upon taking such possession, the
Secretary is required, by § 22 to issue and file his certificate to
that effect; that, pursuant to the requirements of the statute, the
Secretary, after the prescribed hearing, had found the defendant
insolvent and in the hands of a receiver, and that, with the
consent of the Attorney General, he had on February 17, 1933, duly
made and filed his certificate, "taking possession" of the property
and appointing a special deputy as agent to assist in liquidating
the defendant's business and property.
The District Court denied the petition of the Commonwealth, and
later appointed the temporary receivers, with another, as permanent
receivers, who are respondents here. It treated the case as though
it were one of the rival claims of a state and a federal court to
jurisdiction over the same subject matter and property,
see
Harkin v. Brundage, 276 U. S. 36, and
held that the jurisdiction of
Page 294 U. S. 180
the District Court had attached when the bill of complaint was
filed, and that it was the duty of the court, under the laws and
the Constitution of the United States, to retain that jurisdiction
and to proceed with the liquidation to the exclusion of the state
authorities. 4 F. Supp. 779. The Court of Appeals for the Third
Circuit affirmed upon like grounds. 72 F.2d 509.
The Attorney General of the Commonwealth argues here, as he did
in both courts below: (a) that the federal court is without
jurisdiction to direct the liquidation in a suit brought against
the corporation by a shareholder, since both parties are subject
to, and bound by, the local law, which provides for liquidation of
a domestic corporation exclusively through the agency of a state
supervisory officer, and (b) that, in any event, the court, in its
discretion, should have refused the appointment of receivers, or,
having appointed them, it should have granted the petition of the
Commonwealth and directed the receivers to surrender the property
of the association to the state official.
1. The statutes of the United States, as incorporated in the
Judicial Code, c. 231, § 24(1), 36 Stat. 1087, 1091, provide that
District Courts shall have original jurisdiction
"of all suits of a civil nature at common law or in equity, . .
. where the matter in controversy exceeds, exclusive of interest
and costs, the sum or value of $3,000, and . . . is between
citizens of different States."
We do not doubt that the allegations in the present bill of
complaint are sufficient to establish the jurisdiction of the
District Court as a federal court -- that is to say, it properly
invokes the power and the authority, conferred upon the District
Court by the Constitution and statutes of the United States, to
entertain the suit. The bill alleges diversity of citizenship and
the requisite jurisdictional amount, both of which allegations
stand unchallenged,
See Philadelphia,
Wilmington
Page 294 U. S. 181
& Baltimore R. Co. v. Quigley, 21 How. 202,
62 U. S. 214;
Deputron v. Young, 134 U. S. 241,
134 U. S. 251;
Healy v. Ratta, 292 U. S. 263,
292 U. S. 271,
and prays relief which a federal court of equity is competent to
give,
see Duignan v. United States, 274 U.
S. 195,
274 U. S.
199.
Although, as will presently appear, the District Judge, in the
exercise of his discretion, might appropriately have given notice
to the officers of the Department of Banking of the application for
the appointment of receivers, such notice was not prerequisite to
the exercise of its jurisdiction.
See Harkin v. Brundage,
supra; In re Metropolitan Railway Receivership, 208 U. S.
90.
Cf. Marin v. Augedahl, 247 U.
S. 142.
The objection that the suit was brought by a shareholder of the
insolvent corporation rather than by its judgment creditor,
see
Burnrite Coal Briquette Co. v. Riggs, 274 U.
S. 208, as well as the opposing contention that, under
Pennsylvania law, the present shareholder has the status of a
creditor,
see Nice Ball Bearing Co. v. Mortgage Building &
Loan Association, 310 Pa. 560, 166 A. 239, need not now be
considered. Even if valid, it does not go to the jurisdiction of
the District Court as a federal court, but only to the propriety of
its action as a court of equity.
See Smith v. McKay,
161 U. S. 355,
161 U. S.
358-359;
Blythe v. Hinckley, 173 U.
S. 501,
173 U. S. 507;
Pusey & Jones Co. v. Hanessen, 261 U.
S. 491,
261 U. S. 500;
Twist v. Prairie Oil & Gas Co., 274 U.
S. 684,
274 U. S. 690.
Unlike the objection that the court is without jurisdiction as a
federal court,
see Mansfield, Cold Water & Lake Michigan
Ry. Co. v. Swan, 111 U. S. 379,
111 U. S. 382,
the parties may waive their objections to the equity jurisdiction
by consent,
Hollins v. Brierfield Coal & Iron Co.,
150 U. S. 371,
150 U. S. 380;
Re Metropolitan Railway Receivership, supra, 208 U. S.
109-110, or by failure to take it seasonably,
Brown,
Bonnell & Co. v. Lake Superior Iron Co., 134 U.
S. 530,
134 U. S.
535-536;
Southern Pacific R. Co. v. United States
(No. 1), 200 U. S. 341,
200 U. S. 349.
Even if
Page 294 U. S. 182
the present objection be regarded as valid and as one which, in
some circumstances, the court should take
sua sponte at
any stage of the proceedings, despite the waiver by the parties,
compare Harkin v. Brundage, supra, 276 U. S. 52;
Lewis v.
Cocks, 23 Wall. 466,
90 U. S. 470,
the District Court was not without jurisdiction as a federal court,
for these are questions which it is competent to decide. It was
therefore invested with authority to hear and make disposition of
the cause, which is not open to collateral attack,
see Bryan v.
Kennett, 113 U. S. 179,
113 U. S. 198;
Johnson v. Manhattan R. Co., 289 U.
S. 479,
289 U. S. 496,
or subject to diminution or control by state statutes,
See United States v.
Howland, 4 Wheat. 108,
17 U. S. 115;
Neves v.
Scott, 13 How. 268,
54 U. S. 272;
Mississippi Mills v. Cohn, 150 U.
S. 202,
150 U. S.
204-206;
Mason v. United States, 260 U.
S. 545,
260 U. S. 557.
Error in the exercise of that jurisdiction can be remedied only by
appeal.
See Smith v. McKay, supra, 168 U. S.
358-359.
2. The question remains whether, in the special circumstances of
the case, the District Court rightly retained its jurisdiction. The
relief prayed in the bill of complaint is equitable in its nature,
and the prayer was addressed to the sound discretion which is the
controlling guide of judicial action in every phase of a suit in
equity. The relief sought, an injunction and the appointment of
receivers, was aimed at the prevention of irreparable injury, from
the waste of the assets of the insolvent corporation which would
ensue from a race of creditors to secure payment of their claims by
forced sale of the corporate property. By local statutes, elaborate
provision is made for accomplishing the same end, through the
action of a state officer, in substantially the same manner and
without substantially different results from those to be attained
in receivership proceedings in the federal courts.
*
Page 294 U. S. 183
There is no allegation or contention that the procedure thus
provided is inadequate, or that it will not be diligently and
honestly followed. In such circumstances, the discretion of the
District Court, invoked by the petition of the Commonwealth, should
have been exercised to relinquish the jurisdiction in favor of the
statutory administration of the corporate assets by the state
officer.
The question is not the ordinary one of comity between a federal
and a state court, each asserting jurisdiction over the same
subject matter and the same property and where there are shown no
special reasons addressed to the discretion of the court first
acquiring jurisdiction for relinquishing its jurisdiction in favor
of the other.
Compare McClellan v. Carland, 217 U.
S. 268,
217 U. S.
281-282;
Page 294 U. S. 184
Hyde v. Stone,
20 How. 170,
61 U. S. 175;
Chicot County v. Sherwood, 148 U.
S. 529,
148 U. S. 534;
In re Chetwod, 165 U. S. 443,
165 U. S. 460,
with Harkin v. Brundage, supra; Rogers v. Guaranty Trust
Co., 288 U. S. 123;
Kansas City Pipe Line Co. v. Fidelity Title & Trust
Co., 217 F. 18;
First National Bank of Memphis v.
Horuff, 65 F.2d 319. Here, no state court is asserting
jurisdiction, but the state officer, charged by the statutes of the
state with the duty of supervising its own building and loan
associations and of liquidating them by an adequate procedure when
insolvent, asks to proceed with the liquidation.
See Amos v.
Trust Co. of Florida, 54 F.2d 286, 288.
Page 294 U. S. 185
A court of equity, which, in its discretion, may refuse to
protect private rights when the exercise of its jurisdiction would
be prejudicial to the public interest,
see Greathouse v.
Dern, 289 U. S. 352,
289 U. S.
359-360, or deny relief upon performance of a condition
which will safeguard the public interest and secure substantial
justice to the complainant,
see Harrisonville v. W.S. Dickey
Clay Mfg. Co., 289 U. S. 334,
289 U. S. 338,
would seem bound to stay its hand in the public interest where it
reasonably appears that the private right will not suffer. It is in
the public interest that federal courts of equity should exercise
their discretionary power with proper regard for the rightful
independence of state governments in carrying out their domestic
policy.
Fenner v. Boykin, 271 U.
S. 240,
271 U. S.
243-244;
Massachusetts State Grange v. Benton,
272 U. S. 525,
272 U. S. 527;
Matthews v. Rodgers, 284 U. S. 521,
284 U. S. 525.
Cf. Central Kentucky Natural Gas Co. v. Railroad Commission of
Kentucky, 290 U. S. 264,
290 U. S. 273.
It has long been accepted practice for the federal courts to
relinquish their jurisdiction in favor of the state courts where
its exercise would involve control of or interference with the
internal affairs of a domestic corporation of the state.
See
Rogers v. Guaranty Trust Company, supra, 288 U. S.
130-131.
Compare Burnrite Coal Briquette Co. v.
Riggs, supra, 274 U. S.
212-213;
Canada Malting Co., Ltd. v. Paterson
Steamships, Ltd., 285 U. S. 413,
285 U. S.
419-423;
Langnes v. Green, 282 U.
S. 531,
282 U. S. 541.
There are stronger reasons for adopting a like practice where the
exercise of jurisdiction involves an unnecessary interference by
injunction with the lawful action of state officers.
Matthews
v. Rodgers, supra, 284 U. S.
525.
Here, upon presentation of the application for appointment of
receivers, which would involve such an interference, the District
Judge might appropriately have required notice of the application
to be given to the state officers. It was his duty to do so if
satisfied that the delay
Page 294 U. S. 186
involved in adopting that course would not result in the
sacrifice of any vital interest of the insolvent corporation, its
creditors, or its stockholders. On the showing that their interests
would be adequately protected by liquidation under the direction of
the Secretary of Banking, the District Judge should have denied the
application for the appointment of receivers, or, if he had already
appointed them, should have discharged the receivers, and directed
the surrender of the property in their possession to the Secretary
in order that the liquidation might proceed under the state
statutes.
That course should be pursued now. For that purpose, the decree
will be reversed and the cause remanded. The District Court will
direct that all assets and property in the possession of the
receivers be, with all convenient speed, surrendered to the
Secretary of Banking, the receivers retaining only sufficient of
the assets of the defendant association to pay their reasonable
fees and any obligations lawfully incurred by them. Jurisdiction
will be retained by the district court only for that purpose and
for the purpose of promptly discharging the receivers and settling
their accounts, after which the suit will be dismissed.
See
Harkin v. Brundage, supra, 276 U. S.
57-58.
Reversed.
1 The Pennsylvania Banking Act of 1923, P.L. 809, as amended by
the Acts of 1927, P.L. 762, 1931, P.L.193, 563, 1932 P.L. 7,
provides for the regulation and supervision of financial
institutions, including building and loan associations. Section 21
authorizes the Secretary to take possession of the business and
property of a building and loan association if its condition is
"unsafe or unsound," or if the association has violated the law or
an order of the Secretary; he can take possession only after notice
and hearing and after securing the approval of the Attorney
General. Section 22 requires the Secretary to file a certificate in
his office and in that of the prothonotary of the court having
jurisdiction (by § 19 the Court of Common Pleas of Dauphin County
or of the county in which the corporation is located), stating that
he has taken possession of the business and property of the
association. The association may, under § 23, obtain court review
of the action by application within ten days for a show cause rule.
The Secretary, after giving notice to all persons holding assets of
the association (§ 25), and after taking an inventory of the assets
(§ 26), may either suspend or continue the business pending
determination of whether or not to liquidate the affairs of the
association (§ 27). By § 28, the Secretary is authorized to
surrender possession upon the resumption of business by the
association or the sale of its assets to a successor or independent
corporation. Although the authority of the Secretary is not derived
from the action of any court, § 29 gives him, "except as herein
otherwise provided," the status and powers of a receiver of a court
of equity. The court having jurisdiction is given, by § 30, power
to enforce orders of the Secretary. Under § 31, his possession
continues until liquidation, resumption of business by the
association, surrender under § 28, the substitution of liquidating
trustees elected by shareholders or appointed by the court as
provided in § 50, or payment of the creditors in full. The
Secretary is authorized to compromise claims (§ 34) and to
prosecute or defend suits (§ 35). During his possession, no lien
shall attach or execution issue against the property of the
corporation, and no pledgee shall, without permission of the
Secretary or order of the court, sell the collateral or pledge (§
36). Before liquidation, the Secretary must give notice to
creditors and depositors (§ 41) and have an inventory and
appraisement made by disinterested persons (§ 38). By § 45, the
Secretary must submit a final or partial account of claims allowed
or rejected, and any party in interest may file objections in the
court; if no account is submitted within one year, a court order
directing its submission may be obtained. Section 46 provides that
the account is binding and conclusive, except as to those parts to
which objection has been made in court, and directs distribution in
accordance therewith. If the account were partial, its confirmation
is not conclusive on claims specified in subsequent accounts (§
47). The court is to hear and determine matters in controversy (§
48). Expenses of administration are to be paid out of the
association's funds, and are subject to the approval of the court
(§ 49). Section 50 provides for the election of liquidating
trustees by the shareholders, or appointment by the court in
default of election, if a balance remains after the final account
has been filed and the creditors paid in full.