Little v. Southern Cotton Oil Co. , 156 S.C. 480 ( 1930 )

There is sufficient evidence in the case, although much of it should have been excluded as hearsay, to have warranted the submission of the issue of fact to a jury, as to the delivery of the cotton seed by Braswell to the defendant company. The submission of that issue to the Judge, in a law case, as this was, and his finding thereon, have the same effect as a verdict of a jury and cannot be reviewed by this Court.

The question, however, which has given me great concern, is whether under the circumstances the plaintiffs should be allowed to enforce the judgment which they have obtained in the State Court, against the defendant corporation, after the Federal Court had assumed jurisdiction of the corporation by the appointment or receivers, after the assets of the estate had been assembled, converted into cash, and distributed among the creditors, and after the receivers had been discharged: the plaintiffs during the administration of the receivers not having filed a claim against the estate.

It appears that the action of the plaintiffs upon the cause of action stated in the complaint, the conversion of certain cotton seed upon which they had a lien, was commenced in1917, while the defendant was a going concern; the action for some reason or other lay dormant until the early part of 1926, nine years thereafter, at which time the case was docketed for trial and referred to the Master to take the testimony. The testimony was taken and reported to the Court in July, 1929. In September, 1929, the case was heard by his Honor, Judge Dennis, who filed a decree rendering judgment against the defendant in the sum of $1,000.00. From that decree the defendant has appealed.

In the meantime, that is, between the date of the commencement of the plaintiffs' action in 1917, and the docketing of the case for trial in February, 1926, that is to say, in March, 1924, the Virginia-Carolina Chemical Co., which owned the entire capital stock of the defendant herein, Southern Cotton Oil Company, became insolvent and was placed by the Courts in the hands of receivers, who were by separate proceedings appointed receivers also of the Southern Cotton Oil Company.

In the administration of the affairs of the Virginia-Carolina Chemical Company, the Federal Courts directed the receivers of that company to sell the stock which it held in the Southern Cotton Oil Company, which they did, the same being sold and transferred to two parties, Hecht and Groghegan, who complied with the terms of sale and received the stock. Thereupon the Federal Courts by order, duly confirmed the sale.

Apparently the purchasers of the stock of the Southern Cotton Oil Company did not deem it necessary to organize a new corporation, as manifestly such necessity did not exist as the corporation, as a legal entity had not been dissolved and they owned all of the stock.

In the administration of the estate of the Southern Cotton Oil Company, then in the hands of the receivers, on June 26, 1924, an order was passed in the United States Court for the Eastern District of South Carolina, appointing a special master to ascertain and report the claims against the Southern Cotton Oil Company, and providing:

"5. All creditors who elect to present and prove their claims in this jurisdiction, shall present them to the said Charles W. Waring as Special Master at his office No. 35 Broad Street, Charleston, S.C. by filing written statements or proofs of their several claims and demands against the said Corporation within Ninety (90) days from the date of this order.

"6. No such creditor of the said corporation who fails to file such written statement or proof of his claim as aforesaid, either in this jurisdiction within Ninety (90) days from the date of this order, or in the domiciliary jurisdiction, within the time fixed under the provisions of any order taken therein, shall be permitted to share in any dividend which may be made and declared by this Court out of the estate or assets of the said corporation within this jurisdiction, or shall be permitted to assert any claim whatsoever against the estate or assets of the said corporation in the possession of the said receiver within this jurisdiction.

The order provided for the call for creditors to be advertised, which appears to have been complied with on July 5, 12, 19, 1924.

The plaintiffs filed no claim in compliance with this order.

On May 16, 1925, the Federal Court passed an order directing that all of the assets of the Southern Cotton Oil Company, represented by the stock so sold, be restored and delivered to that company upon its compliance with certain named conditions, which appear to have been done — at least there is nothing appearing to the contrary — and discharging the receivers upon compliance, without further order.

If it can be demonstrated, as I think it can be, that the plaintiffs are not entitled to enforce their judgment against the defendant corporation, it would be an empty formality to sustain what appears upon its face to be a judgment enforceable by the issuance of an exception to be levied upon the property of the defendant.

I do not question, of course, the principle announced in the case of Riehle v. Margolies, 279 U.S. 218,49 S.Ct., 310, 73 L.Ed., 669; but the question now at issue was not presented or decided in that case. There the claimant prior to receivership had commenced his action in the State Court, and pending receivership prosecuted it to judgment; he maintained that in the distribution of the assets of theestate, in the hands of the receiver, his judgment in the State Court must be accepted as res adjudicata. The Court sustained his contention upon the ground that the Federal Court could not enjoin the State Court from proceeding to judgment in the action, which was one in personam; and that the plaintiff had a right to present his claim to the receiver as an adjudicated claim against the estate, the validity of which could no longer be open to inquiry. It is clear that the plaintiff in that case had done exactly what he should have done and was entitled to participate in the distribution which had not up to that time been made.

The distinction between that case and the one at bar is manifest; if the plaintiffs in the case at bar had prosecuted their claim to judgment pending the receivership, and had filed the judgment with the receivers, they would have been entitled, as Margolies was, to have their claim treated as an adjudicated claim and to share in the distribution of the assets of the estate without further proof. They, however, did not do so; they delayed prosecuting their action to judgmentfor nine years after it had been commenced, and for two years after the receivership had been completed, all of the assets distributed and the receivers discharged.

While unquestionably the plaintiffs had the right to prosecute their action in the State Court to judgment, that right was simply to have its validity judicially established for presentation to the receivers. The Federal Court had assumed jurisdiction of the insolvent corporation through its receivers, and whatever relief the plaintiffs were entitled to had to be sought in that proceeding whether upon a simple claim or upon a claim that had been judicially ascertained in the State Court which had jurisdiction of that matter.

As the Court said in the Riehle case:

"Of course, no one can obtain any part of the assets, or enforce a right to specific property in the possession of a receiver,except upon application to the Court which appointedhim. * * * There is no inherent reason why the adjudication of the liability of the debtor in personam may not be had in some Court other than that which has control of the res. It is only necessary that in the receivership proof of the claim be made in an orderly way, so that it may beestablished who the creditors are and the amounts due them."

It seems clear to me that the Federal Court, having appointed a receiver, was charged with the duty of assembling the assets of the estate, calling in the creditors, converting the assets into cash, and making distribution. The only interest which it had in reference to the pending State suit was that the State Court should proceed in an orderly way to determine the validity of the claim, which the plaintiffs had the right to have done but neglected.

If pending the receivership, the plaintiffs found that they could not reach a determination of their claim in the State Court, it was their duty, either to file their claim with the receiver, or to notify the Court of the pending State suit and of their insistence upon prosecuting it to judgment; they did neither.

It does not seem fair to allow the plaintiffs to remain idle for so many years, and then, after the estate had been fully administered, to fall upon the necks of the purchasers of the stock at a receiver's sale, ordered by the Court, who have acted in all good faith and are entitled to the Court's protection.

The entire capital stock of the Southern Cotton Oil Company was an asset of the Virginia-Carolina Chemical Company and was ordered sold as its property. The Court owes it to the purchasers whose purchase was made under its order and confirmed to protect their title. I can see no difference between the sale of that stock and the sale of any other property that was in the hands of the receivers; their sale ordered by the Court and confirmed by the Court should pass the title free of all claims against the corporation.

If the plaintiffs should be allowed to realize upon their judgment, it will be done out of the property of the purchasers of the stock at the receiver's sale, and not out of theassets of the estate, against which alone they were entitled to have recourse.

I feel satisfied that the defendant would be entitled to an injunction in the Federal Court against the plaintiffs enforcing execution under their judgment.

In Kline v. Burke Const. Co., 260 U.S. 226,43 S.Ct., 79, 81, 67 L.Ed., 226, 24 A.L.R., 1077, the Court said:

"It is settled that where a Federal Court has first acquired jurisdiction of the subject-matter of a cause, it may enjoin the parties from proceeding in a State Court of concurrent jurisdiction where the effect of the action would be to defeat or impair the jurisdiction of the Federal Court."

See Wells Fargo Co. v. Taylor, 254 U.S. 175,41 S. Ct., 93, 65 L.Ed., 205; Atchinson, T. S.F.R. Co. v.Wells, 265 U.S. 101, 44 S.Ct., 469, 68 L.Ed., 928.

In Wabash R. Co. v. Adelbert College, 208 U.S. 38,28 S.Ct., 182, 52 L.Ed., 379, it was held, quoting syllabus:

"The possession of property in the Circuit Court carries with it the exclusive jurisdiction to determine all judicial questions concerning it, and that jurisdiction continues after the property has passed out of its possession by a sale under its decree to the extent of ascertaining the rights of, and extent of liens, asserted by, parties to the suit and which are expressly reserved by the decree and subject to which the purchaser takes title; and any one asserting any of such reserved matters as against the property must pursue his remedy in the Circuit Court and the State Court is without jurisdiction."

In Julian v. Central Trust Co., 193 U.S. 93,24 S.Ct., 399, 48 L.Ed., 629, it was held, quoting syllabus:

"Where the Federal Court acts in aid of its own jurisdiction and to render its decree effectual it may, notwithstanding Sec. 720, Rev. Stat., restrain all proceedings in a State Court which have the effect of defeating or impairing its jurisdiction."

In the case of St. Louis S.F.R. Co. v. Spiller, 274 U.S. 304,47 S.Ct., 635, 71 L.Ed., 1060, it was held that in the administration of the property of an insolvent corporation it is the customary practice of a Court of Equity to make an order requiring all persons claiming a right to participate in the property to file their claims by a stated date, and barring claims not so filed from participation in the property being administered, and such orders are necessary, lawful and effective. To same effect, see Chicago, R.I. P.R. Co. v. Lincoln Co. (C.C.A.), 284 F., 955; Ex parteNayler, 11 Rich. Eq., 259, 78 Am. Dec., 457.

It is difficult to see how else the Court of Equity could proceed in order to wind up the affairs of the receivership estate and protect purchasers who may have acquired property of the corporation upon a sale made under order of the Court which was later confirmed.

It is true that in some instances a claimant who has not complied with such an order may, upon special grounds of equity and showing of diligence, be allowed to come in before distribution of the assets and discharge of the receiver and establish his claim. A striking illustration of this is found in the Spiller case, hereinafter referred to. In the case at bar it is difficult to see how the plaintiffs could have been more neglectful of their rights and duty; they are without the faintest shadow of invoking the consideration which a Court of Equity will sometimes extend "vigilantibus, nondormientibus."

In Employers' Corporation v. Astoria Co. (C.C.A.),6 F.2d 945, 946, it was held that ordinarily a creditor who has not filed his claim with a receiver within the time fixed by order of Court, will be allowed to do so thereafter "unless the result of allowing the claim is to destroy intermediate interests, arising in the faith of creditors' inaction."

The case of St. Louis, etc., R. Co. v. Spiller, 274 U.S. 304,47 S.Ct., 635, 71 L.Ed., 1060, is instructive in that it demonstrates the diligence which a claimant, under such circumstances as surrounded the plaintiffs in the case at bar, should exercise. There (quoting syllabus) "an unsecured creditor of a railroad prosecuted his claim diligently in an independent suit before and after the railroad passed into a receivership and was sold to a new company pursuant to a plan of reorganization, during which period his suit was resisted by the railroad, the receivers, and counsel for the new company, successively; and where, having recovered judgment after the sale, he appeared at the hearing on the order to confirm the sale and gave notice to the old company, the receivers, the reorganization committee and the new company of his claim, and that the judgment would be a charge on the property in the hands of the purchaser, notwithstanding which the new company continued defending his suit and the new securities were issued, held, that the creditor was not guilty of laches; that his failure to file his claim within the time limited in the foreclosure case and thus conform to the terms of the reorganization plan, did not bar him from participating in its benefits with the other unsecured creditors, if that were still equitably possible; and that such relief might be had as well upon an intervening petition as upon an original bill."

In the opinion, the Court said:

"While the Court of Appeals [14 F.2d 284] erred in granting the specific relief prayed in the petition for intervention, it does not follow that Spiller must be denied all remedy. He was guilty of a serious inadvertence in not filing his claim in the receivership suit within the time limited by the interlocutory order. But it is clear that he has not been guilty of laches. Southern Pacific Co. v. Bogert, 250 U.S. 483,488-490 [39 S.Ct., 533, 63 L.Ed., 1099]. And it does not appear that his inadvertence misled in any way the Court, the receivers, the reorganization committee or the new company. He had prosecuted his claim with vigor for years before the receivers were appointed. His diligence does not appear to have slackened either during the receivership or after the foreclosure sale. Throughout the whole period the claim appears to have been resisted with equal vigor. After the old company ceased to function, counsel for the receivers conducted the defense. After the receivers ceased to function, counsel for the new company conducted the defense. It is clear that neither the receivers nor the new company considered the failure to file the claim in the receivership a bar to the relief.

"Before Spiller recovered judgment in the trial Court the sale on foreclosure was had; but the hearing on the order to confirm the sale was yet to be held. At that hearing Spiller gave, before the confirmation of the sale, notice in open Court, and otherwise to the old company, to the receivers, to the reorganization committee and to the new company, that he had recovered judgment fourteen days before. He notified them that he claimed that the purchaser would take the property subject to all his rights; and that those included a charge upon the property in the hands of the purchaser for full payment of the judgment. With knowledge of Spiller's claims, the reorganization committee and the new company took over the property. Later, the new company assumed the further defense to the action in which the judgment had been recovered. The issue of the securities of the new company and the distribution of its stock among stockholders in the old occurred after these notices of Spiller's claim had been given. Under such circumstances neither the long delay nor the failure to file claims as required by the interlocutory and final decrees should operate to prevent the appropriate relief; and the District Court had jurisdiction to grant it."

I do not think that it is a matter of any consequence that the purchasers of the stock had not organized a new corporation, which they could have easily done. The point is that the plaintiffs had the right, and it was their duty, to come into the Federal Court and participate in the distribution. They have only themselves to blame for not doing this, and should not make the purchasers of the stock, who were entirely relying upon the records and orders of the Court, which had full jurisdiction of the estate, and who had no knowledge of the outstanding claim, suffer as a consequence of their neglect.

For these reasons I think that the decree should be reversed.