Waterhouse Tr. Co. v. King , 33 Haw. 1 ( 1934 )

I cannot agree with the majority of the court in its conclusion that the demurrers should be overruled.

It is conceded that the remedy sought in this bill against the respondents, other than the trustee, is in the nature of a creditor's bill to reach and apply equitable assets. I believe that to allow such a remedy without a return of execution nullabona on a judgment or decree, or at least a showing that there are no legal assets out of which the demand of the complainant can be satisfied, would be to engraft upon the general rule governing a creditor's bill an exception that, so far as I know, is entirely without precedent. I take the view that in order to relieve the complainant of the necessity of exhausting its legal remedies against the mortgagor before seeking by a creditor's bill to reach equitable assets it is necessary to allege that there are no legal assets of the mortgagor available for the satisfaction of a deficiency decree which may be rendered against him. There is no such allegation in the bill. Instead, it affirmatively appears that subsequent to the execution of the mortgage certain property which had been included in it was released. What has become of this property is pure conjecture. For aught that appears to the contrary it may still be under the ownership of the mortgagor.

It is the opinion of the majority that in the instant case the exhaustion of legal remedies against the mortgagor is not a condition precedent to seeking satisfaction of a deficiency decree out of equitable assets; in other words, that resort may be had to such assets in the first instance although the mortgagor may have sufficient legal assets to satisfy the decree. This conclusion and the reasoning in support of it appear in the following portion of the opinion: "There is no doubt that there are many cases in which the statement is made that it is an essential prerequisite to the maintenance of a creditors' bill that the creditor first secure a judgment at law and have execution issued and returned nulla bona. These two prerequisites are repeatedly mentioned together in the statement of the rule. In the case at bar the bill is being sustained in both of its aspects, that is, as a bill to foreclose a mortgage and as a creditors' bill to reach equitable assets, because the complainant's claim is of a purely equitable nature cognizable only in a court of equity. A court of equity alone can foreclose a mortgage and as incidental relief may enter a decree in terms of money for the deficiency remaining unpaid after sale of the mortgaged property and application of the proceeds to the mortgage debt. In the case at bar, therefore, this particular question narrows itself to this: When, in a court of equity, a decree for money has been properly rendered, even though incidentally, is it necessary to have execution issued upon that decree (there is no doubt of the power of a court of equity to issue an execution in such a case) and to have it returned nulla bona as to legal assets before the purely equitable assets of the respondent can be applied to satisfaction of the complainant's claim? And hereunder, if there are two suits in equity and in the first one, purely for the foreclosure of the mortgage and the obtaining of a deficiency judgment, the complainant has secured a decree for the deficiency, is it necessary in order to sustain the second suit (in the nature of a creditors' bill to reach equitable assets) to allege and prove that execution has been issued upon the earlier decree and returned nulla bona as to legal assets?

"There are doubtless some authorities which hold that it is necessary. Their reasoning, however, is not satisfactory. In the great multitude of cases in which it is held that as a prerequisite to the maintenance of a creditors' suit it is necessary to secure a judgment at law and to have execution issued and returned without avail, the reason given is in order that thereby it may be shown to the court in equity that the remedy at law does not exist or is inadequate. See, for example, 15 C.J. 1397 and Miller v. Davidson, 3 Gil. (8 Ill.) 518, 523. If a judgment at law cannot, for some reason, be secured the remedy at law for that very reason is nonexistent. If a judgment at law can be secured but is not attempted to be enforced by execution it still does not appear that the remedy at law is inadequate. It must first be shown by the effort, in the issuance of an execution, that such a remedy does not exist at law. When, however, the petitioner is properly in a court of equity with his original demand, for example, because he is there praying for the enforcement of a trust or because he is there for the adjustment of a claim which is of a purely equitable nature as in the case of a foreclosure of a mortgage — it ordinarily, by that very fact, appears that he has no remedy at law. If he must first allege and prove that in a decree for the deficiency rendered by a court of equity in a prior suit execution was issued and returned unsatisfied in consequence of the failure to find legal assets, it must necessarily be for some reason other than that the remedy at law is inadequate, for it has been found in the supposed case to be utterly nonexistent. What can that other reason be? Is it that there is some peculiar sanctity which attaches to the equitable assets of the main defendant which does not attach to his legal assets? Is it that courts of equity strain to protect equitable assets while more readily subjecting legal assets to the payment of a just decree for money? We know of no such rule or preference."

As I understand this reasoning the purpose of requiring a judgment and execution and a return nulla bona is to demonstrate to the court of equity that the remedy at law is inadequate or does not exist, but when as in the case at bar the complainant is properly in equity on a foreclosure suit thatipso facto indicates that he cannot obtain a judgment at law and is without legal remedy; that such being the case execution need not issue upon a decree and be returned nulla bona as to legal assets nor in order to sustain a creditor's bill need the prerequisite of an execution and its return unsatisfied be alleged and proved; in other words, that because the complainant is in equity upon a matter cognizable only in a court of equity he is excused from first exhausting his debtor's legal assets but may proceed instantly against his equitable assets. I think the fault of this reasoning is in not recognizing that equity does protect equitable assets against the effort of creditors to subject them to the satisfaction of their claims until legal assets, if there are any, have been exhausted. The very statement of the general rule implies the intention of equity that the creditor must exhaust the legal assets of his debtor before proceeding against his equitable assets. Were this not so equity would not require a judgment or decree against the debtor and an execution and a return unsatisfied. If the effect of this rule is to clothe equitable assets with a garment of "sanctity," it is a result which equity itself has in its wisdom accomplished.

If we were confronted with an action at law the creditor, before he would be permitted to subject the equitable assets of his debtor to the satisfaction of his claim, would be required to comply with certain conditions precedent, namely, to obtain a judgment and have execution issued and returned unsatisfied. The purpose of requiring compliance with these conditions precedent is to compel the creditor, before involving third parties in the litigation, to proceed against the debtor and thus in the first instance exhaust his legal assets. It is the opinion of the majority that because the present complainant is in equity it need not do this but may immediately subject the equitable assets to the satisfaction of its claim. I know of no reason why the general rule should be recognized in the one case and ignored in the other.

There is sound precedent for the conclusion that simply because the complainant's claim is of a purely equitable nature that fact alone does not dispense with the necessity of exhausting the legal assets of the debtor.

Comstock v. Horton, 235 Mich. 282, was a suit in equity for the dissolution and winding up of a banking copartnership. In that suit the receiver who was appointed filed a petition to establish the liability of Comstock, one of the partners, and others on several notes and endorsements and also asked that certain conveyances made by Comstock be set aside on the ground that they were in fraud of creditors of the bank. The trial court granted the entire relief prayed for. Upon appeal the supreme court rendered a money decree against Comstock but refused to set aside the conveyances, saying (p. 290): "But we are satisfied the decree was erroneous in setting aside these conveyances in this proceeding. This court has consistently held that to authorize the filing of a bill in aid of execution there must be a judgment or decree fixing the amount, an execution issued thereon and a levy by virtue thereof, and to authorize the filing of a creditor's bill there must be a judgment or decree fixing the amount, an execution issued and returned unsatisfied in whole or in part."

This was a case in which a court of equity had jurisdiction to render a money decree and did in fact render such a decree. It also had jurisdiction, under proper allegations, to render a decree setting aside a fraudulent conveyance of lands and thus subject the lands to the payment of a money decree. Notwithstanding this duality of jurisdiction the court held that until a money decree had been obtained and execution issued thereon and returned unsatisfied in whole or in part equity was without jurisdiction to set aside the fraudulent conveyance. So in the instant case the court below, sitting in equity, had jurisdiction to enter a money decree against the mortgagor for whatever difference there might be between the amount realized on a sale of the mortgaged property and the amount due the complainant. It also had jurisdiction, under proper allegations, to render a decree against alleged holders of equitable assets. But under the rule laid down in the Michigan case, which I believe to be sound and without opposing precedent, it properly refused to exercise this jurisdiction in the absence of an allegation that no legal assets were available for satisfaction of a money decree for the possible deficiency.

In order to bring the question into a clearer light, let it be assumed that instead of the bill being in its present form it had been brought for the sole purpose of foreclosing the mortgage and obtaining a deficiency judgment against the mortgagor; and let it be further assumed that before the termination of the foreclosure suit the complainant had brought a creditor's bill against the demurring respondents, in which there was reference to the pending foreclosure suit and an allegation that in the opinion of the complainant a decree for a deficiency would be obtained against the mortgagor but no allegation that the mortgagor was without legal assets sufficient to satisfy such judgment, I wonder if it could be seriously doubted that the bill would be demurrable for lack of essential allegations. I think not. It seems to me obvious that such a bill would be fatally defective. I perceive no reason why the rule requiring certain allegations in a creditor's bill should be dispensed with merely because the bill for such relief is joined with a bill to foreclose a mortgage. There are limits, of course, to the maxim that a court of equity having acquired jurisdiction for one purpose will retain it for other purposes in order to settle the entire controversy. Equity does not ordinarily override established principles of law in order to accomplish this result.