SIGNEE IN BANKRUPTcy.-A
BARXRUPT 8'rocmoLDER-CONTI1£lJING LIABILITy-INDEMNITY 01'
Asstipulation by a purchaser of such bonds to indemnify the assignee in bankruptcy of the original holder of a part of such bonds against all liability as a stockholder in said corporation, does not relieve the bankrupt or other members of the corporation from their personal obligation to the purchaser of such bonds.
The American File Company was incorporated by an aet of the legislature of Rhode Island in May, 1863, and was organized in the June following. The company bought a patent under which the manufacture of files had been before carried on in Baltimore, and the persons who sold them the patent took nearly one-half the stock of the new company. The capital appears to have been insufficient for the business, and for some years money was raised or credit was obtained upon the notes of the company, indorsed by the stockholders, all of whom were liable for the debts of the company under the statutes of Rhode Island, relating to manufacturing corporatbns, by reason of the omission to file certain statements necessary to relieve that liability. In 1870 the company duly resolved to issue bonds, secured by a mortgage of all their corporate property, real and personal, to be offered to the stockholders, pro rata, until April 1, 1870, and such as were not then taken were to be disposed of "in the order of applicants." The bonds and mortgage were made accordingly. The bonds were payable to bearer in five years from January 1, 1870, with interest at 10 per cent. per annum, for which coupons were attached to them. Allen A. Chapman was the principal stockholder in Baltimore, and he took and paid for, in the. indorsed notes of the company, the full proportion of bonds allotted to the stockholders in that city. The notes with which he paid for them belonged to his firm of Kirkland, Chase & Co. Several of the smaller stockholders refused to subscribe, and he, or his firm, retained the bonds. Kirkland Chase & Co. were merchants doing a large business in Baltimore, and for 30 years or more they had dealt with ihe plaintiffs, Robert Garrett & Sa11.8, bankers, of Baltimore, and among other things they used 1JO borrow money of the bankers upon collateral security. In the summer of 1872
the current debt was about $500,000. Among other loans was one of $50,000, made Ma.y 10, 1872, for which notes of third persons were deposited. These were afterwards exohanged for a cargo of sugar imported by the Shiloh, for which Kirkland, Chase & Co. deposited with Garrett & Sons the warehouse receipt. By the arrangement between the partie!! all securities were to be held for the general balance of account. \ Kirkland, Chase & Co. failed, July 11, 1872, and it was then made known, for the first time, to Garrett & Sons that the cargo of sugar had been sold on the thirtieth of May, while they still held the warehouse receipt. Presently, after the failure, Chapman handed to Garrett & Sons, instead of the cargo of sugar, the bonds of the file compp,ny, with an assignment, dated May 30, 1872. The firm of Kirkland Chase & Co. and 6f:1,ch of its members, became bankrupt in October, 1872, and the assignees disputed the title of Garrett & Sons to these bonds and several other securities as So fraudulent preference. A settlement was afterwards made by which the assignees relinquished all title to the several securities, and paid certain moneys to Garrett & Sons, and the latter relinquished the right to prove against the assets for the excess of their debt above the value of the securities, which turned out to be a very considerable sum. The ment, which was approved by the court of bankruptcy and carried out, was in writing, and contained this stipulation: "And said Robert Garrett & Sons likewise further agree that, whereas, said assignees have been offered the eum of 50 cents on a dollar for certain bonds of the American File Company, now held by Messrs. Robert Garrett & Sons, which were received as collaterals from Messrs. Kirkland, Chase & Co" and an indemnification against loes or damage of any kind as holders of certain stock of said American File company as assignees of A. A. Chapman and Kirkland, Chase & Co., said Robert Garrett & Sons hereby agree to indemnify said assignees against loss or damage of any kind as holders of the stock aforesaid; and, in consideration of said acts of said assignees, said Robert Garrett & Sons do
also hereby agree to indemnify the said assignees, and th& estate of Kirkland, Chase & Co., and the estate of A. A. Chapman, against 10SB or damage of any kind, for releasing their claim to said bonds of the American File Company, . now held by Messrs. Robert Garrett & Sons, and agree to hold said assignees and said estates harmless for said transfer and release." The affairs of said Kirkland, Chase & Co. had been nearly settled, and the several bankrupts had been discharged, before this case was begun. In June, 1876, Garrett & Sons brought an action upon the bonds in the supreme court of Rhode Island, and recovered judgment against the American File Company, the amount of principal and interest $132,611.33, with $51.10 costs. As the law then stood, creditors recovering judgment against a manufacturing corporation, whose stoc1<holders were liable for its debts, might levy their execution upon the persona and property of such stockholders, as if for their own proper debts. The Rhode Island stockholders of the file oompany thereupon filed a bill in equity in the supreme court of Rhode Island to enjoin Garrett & Sons from levying their execution upon them or their property, alleging that when the bonds of the oorporation were issued, in 1870, the arrangement was that the bonds were a final payment of the debts of the company, relieving the stockholders from liability, and requiring them to look for payment of the bonds only to the property which was mortgaged to secure them, or at all events to the property of the company, and not to the personal responsibility of the stockholders; that Garrett & Sons had notice of this equity whe.n they acquired their title to the bonds, and stood in the place of Chapman, or Kirkland, Chase & Co·· that the plaintiffs had besides agreed to indemnify the assignees of those shareholders, and that a court of equity would enforce that liability in a suit between the plaintiffs and defendants, to save the circuity of action which would ensue if the defendants should call on the assignees for contribution, and they again on the plaintiffs for indemnity. To-
OABBETT tl. BAYLES.
this bill Garrett & Sons filed an answer, and the plaintiffs
l'eplied. The cause was then removed to this court. In 1877 the legislature of Rhode Island passed Orn act taking away the right to levy upon stockholders an execution upon a judgment against such corporations, and substituting a suit in equity, or action of debt. Garrett & Sons a;terwards brought a bill in this court against the stockholders of the file company resident in Rhode Island, to whioh they filed an answer, setting up the same equities which they had relied on in their bill filed to restrain the execution. Evi· dence was taken to be used in both cases, and they were heard together. James Tillinghast and John K. Oowen, for Garrett & Bons. A. Payne and Ohas. Hart, for W. F. Sayles and others. LOWELL, J. For convenience, we shall call Garrett & Bons, plaintiffs, and Bayles and others, stockholders of the Amer. ican File Company, We need not consider the bill filed in the state court· by these defendants to restrain the plaintiffs' levy of exeoution, and removed to this comi, be(\ause our power to stay a pro.cess issuing out of the state court is doubtful, unless when suoh injunction' had been issued while the case was in the state .court; and because the plaintiffs, while insisting that the law, of 1877, abolishing the remedy by levy upon the stockholders. and substituting a bill in equity, oannot be enforced against them consistently with the constitution of the United Btates, or with that of Rhode Island, have acquiesced in fact and brought their bill in this court under that aot, and the plead. ings in that suit raise all the questions between the parties. The defendants, admitting that they are stockholders of the .corporation and liable generally for its debts, set up against these plaintiffs two equitable defences. The first is that the stockholders, in the year 1870, agreed to pay the debts of the company in substantial acoordance. wit» their respective ultimate liabilities, inte'r sese, by. taking bonds in that proportion, and to look for reimbursement to ihe property conveyed in mortgage to trustees to secure the
bonds, or to that property and any which the company might afterwards acquire. We see no evidence that the parties concerned, the stock. holders, made any such agreement as is here Being under a statute liability for the debts of the company, and choosing to remain so-for they could have put an end to this state of things by filing an annual statement of their affairs-they found it more convenient to raise money by negotiating bonds with five years to run, rather than notes which needed to be often renewed. They sGCured their negotiable bonds by a mortgage,'in order to increase their value, not to diminish it. It was an ordinary arrangement, which had no concealed equities. The negotiable honds were to be negotiable, and to have the same properties in the hands of the shareholders as in those of other "applicants" who should take them. No doubt one principal motive which induced the shareholders to take the bonds in the first instance was that the company must !>3 kept afloat ; but there was no agreement expressed, and none arisos from the nature of the transaction, that th& bonds should not be sold, or that they should hold good only against the pror"rty of the company. We suppose it to have been taken for granted that the bonds were amply secured, in which case no such question as is now before us could have arisen. At any rate, it appears, from the correspondence between the parties and from the votes, and all the evidence in the record, that the bonds were intended to be what they purport to be, the negotiable promises of the corporation, as much so as the notes ·for which they were substituted. The second defence is that the plaintiffs have agreed to stand in the place of stockholders by their stipulation to indemnify the assignees of Chapman as such stockholders. We agree that if the assignees, when this stipulation was made, were stockholders in the sense of being liable for the debts of the company, the defence is a good one to the -extent of their proportionate share of the debts, so that the plain. tiffs could only recover in equity the difference between the price of their bonds and such proportionate liability. This
GARRETT V. SAYLES.
equity does not depend up"n privity of contract, but upon fm squitable duty. Dering v. Earl of Winchelsea, 1 Lead. Cas. Eq. (4th Am. Ed.) and notes. We are of opinion, however, that under the statuteeof Rhode Island neither assignees in bankruptcy, nor the assete in their hands, are liable to contribute under the circumstances stated in the record, which are, simply, that they have· in their possession the certificates· :of stock, aud recite in the agreement with the plaintiffs that they are does not appear how far, if at all, they have acted as stock· holders, and it is certain that. they had nothing to do with contracting this debt. In Massachusetts, where the law is as nearly as possible identical with that of Rhode Island, the liability was held not to attach, though the assignees had attended and voted at meetings of the stockholders, and done other unequivocal acts of ownership. Gray v. Coffin, 9 Cush. 192. The general law of bankruptcy would give the same answer to the question. It is an anomaly, perhaps, but it is the undoubted rule, that assignees are not bound to accept onerJ ous proJ!erty. Its application to leaseholds is familiar. Mills v. Anreol, 1 Smith Lead. Cases, (7th Am. Ed.) l11g and notes; and as to an onerous litigation or contract, Smith v. Jordan, 6 Law Rep. 313; Streeter v. Sumner, 31 N. H. 542; Amory v. Lawrence, 3 Clifford, 523. The rule has been often applied to shares in a company liable to the onus of assessments, or calls, as they are called in England, and would apply a fortiori to an unlimi:ted liability. See Re Lond cf: Provo Teleg. Co. L. Eg. Eq. 653; South
R. Co. V. Burnside, 5 Ex. 129; Levi V. Ayres, 3 App. Cas. 342; Metropolita.n Bk. V. Offord, L. R. 10 Eq. 398.
The peculiar statutory liability imposed upon shareholders in New England is not one which can be proved ar a debt against a bankrupt's assets unless it is liquidated and ascertained by a decree in equity before the time for proving debts has gone by. Kelton V. Phillips, 3 Met. 62; Bangs V. Lincoln, 10 Gray, 600; James v. Atlantic Delaine Co. 11 N. B. R. 390. It follows that Chapman, or the several members
of his firm, according to the fact of ownership, would remain personally liable to contribute to the debts of the corporation uotwithstanding their discharge in bankruptcy, because only provable debts are discharged, and because they would remain shareholders. See Martin', Patent Co. v. Morton, L. R. 32, B. 806; IIastie, Case, L. R. 7, Eq. 8, 4 Ch. 274. It is plain, upon inspection of the contract between the plaintiffs and theassignees of Kirkland, Chase & Co., that the former did not undertake to become stockholders of the corporation, nor to indemnify Chapman or the members of the firm personally, but that out of abundant caution the assignees took an indemnity for themselves and the estate in their hands, and, sincethe assignees are not liable, there is no claim or right to which the defendants can be subrogated. Equity might require the plaintiffs to apply the mortgaged property, or to call upon the trustees of the mortgage to apply it to diminish the debt, so far as it would go, beforea final decree should be rendered against the defendants. The pleadings do not raise this question, and we understood 'at the argument that the property had been converted intO' money and would be propel'1y disposed of without the intervention of the court. We decide, therefore, that in the bill filed by Garrett & Sons, there must be an interlocutory decree fOl complainants.
Assignee, etc., v.
(Di8trid Ouurl., B. D. New York.
FINAL DECREE-MOTION TO OPEN JUDGMENT AFTER CLOSE OF TERM,-
After the term at which 8 final judgment or decree is entered, the court!! of the United States have no power to open the judgment or decree, and grant a rehearing, or let a defendant in to answer, unless, at the time at which the judgment or Jecree is entered, some order is made virtually keeping the judgment open for further relief or proceedings.
8.um:-OlllISSION TO ENTER ORDER THAT THE BILL BE TAKEN PRO CoN-
FEBSO.-The omission to enter a formal order that the bill be taken prp eon/el/IO against the defendants, will Dot affect the regularity of a final lecree or make it any less absoluUil.
J. If. Drake, fo:" motion. G. If. Yeaman, contra. CHOATE, J. This is a motion to open a final decree entered at the September term 1879, whereby the, defendants Wettstein, Meyer and Ochninger were decreed to pay to the co:mplainant, as assignee in bankruptcy of Wallach & Co., the sum of $3,109.24. These defendants wete judgment creditors of Wallach & Co.' before their bankruptcy, and after the execution of a general assignment for the benefit of creditors by the bankrupts, and before the filing of the original petition in bankruptcy, these defendants and several other judgment creditors took out their executions and placed them in the hands of the sheriff, who levied on goods covered by the general assignment. Afterwards, the sheriff requiring indemnity before he would sell the goods, the several judgment creditors, defendants, indemnified him, but some of the judgment cl'editors withdrew their bonds and took action, which' has been held In this suit to exempt them from liability to account to the plainant for the proceeds of ths goods b0ld by the sheriff. The suit was brought against the general assignee, the sheriff and the judgment creditors to set aside the voluntary assignment, and to compel the sheriff and the judgment· creditors to account for and pay over the value of the goods sold. The final decree was for the complainant, setting aside the assignment, and charging the sheriff and the judgment creditors, who did not withdraw their authority to the sheri:fl\ with the proceeds of the goods. These moving defendants were duly servedwithi process and appeared in the suit, but put in no answer. 'Their time to answer was twice extended by stipulation. It appears now, by the moving papers, that through some :misapprehension on the part of their attorney he ,was led to believe that no Bubstantial relief was sought against them in the suit. They were, however, regularly served with notice of the proceedings in the cause, had notice of the applications for the interlocutory and for the final decree, which was entered, as above stated, at the last September term. They now