England v. Russell

71 F. 818, 1896 U.S. App. LEXIS 2502

• Court: U.S. Circuit Court for the District of Southern Ohio
• Decided: January 16, 1896
• Docket: NO. 4,842
• Status: Published

Opinion

CLARK, District Judge.

When the hill in this case was first presented to me for a restraining order, I was of opinion, upon the authority of Scott v. Neely. 140 U. S. 106, 11 Sup. Ct. 712; Cates v. Allen, 149 U. S. 451, 13 Sup. Ct. 883, 977; and Hollins v. Iron Co., 150 U. S. 371, 14 Sup. Ct. 127, — that the plaintiffs, being creditors at largo, were without standing in this court to make the questions made in this hill, and that the restraining order should be denied for want of jurisdiction in the court. The plaintiffs’ counsel maintained earnestly that by virtue of the Ohio statutory law, as construed by the court of highest authority in the state of Ohio, a trust existed by reason of the transaction set forth and impeached in the bill, and that this trust arose at the time of the conveyance impeached, and was therefore a trust and equity existing in creditors generally,— those without as well as those with judgment, — and that the trust thus created in their favor by statute was one which existed before the filing of the bill, and was not a right which arose with the filing of the bill, and that any beneficiary might come into a court of equity to enforce his interest in this trust. In other words, the position was, and now is, that this statute creates an equitable right, and enlarges equitable jurisdiction in that respect, which the courts of the United States may enforce, the requisite citizenship existing, and that it is not a statute affecting the remedy, or changing the form of procedure. As this position was maintained by eminent counsel of the highest character, I felt that possibly it would be assuming too much to overrule the contention on a mere application for a restraining order, and that it would be more consistent with safe procedure, and would better maintain the purpose of the law, to give both sides a hearing in any controversy, to grant the restraining order, and set the application at a time and place where it could be heard by one of the circuit judges, or Judge SAGE, who would have the advantage of their familiarity with this Ohio statutory law. The right was reserved to the defendants, however, to bring on the application sooner, if the circumstances of the case were such as to make this necessary, and this they have done; and, as it is stated that some time will elapse before either Judge TAFT or Judge SAGE could act on the matter, I feel that it is my duty now to dispose of the application, as delay cannot be allowed in regard to an issue on extraordinary process. The position taken by the plaintiffs has been maintained with great diligence, -and has been rendered very plausible indeed; but, after such consideration as I can now give this case, I am unable to concur in this view. It is true that there are strong intimations in the cases which tend to support the plaintiffs’ contention. Stating my own view of this very briefly, it is this: That the questions of the effect of the statutes relied on, and their interpretation by the court of highest authority in the state of Ohio, are questions which go to the merits of the controversy presented by this bill, and that they in no wise determine, nor could determine, for the courts of the United States, the standing which the plaintiff must have to entitle him to call in question the conveyances which are impeached as fraudulent. This is a question of jurisdiction, as affecting the right of the plaintiff to come into equity and allege that his debtor’s transaction is fraudulent. It is certain that the plaintiff cannot get along with the case, and that no court can grant the relief sought except by virtue of its power to declare the transaction fraudulent. It is also, I think, apparent that whether a conveyance is fraudulent or not, within the meaning of this statute, is the central fact in the case, on which the right and remedy depend; and I think that, upon the authority of the cases before cited, the plaintiff has no standing in the courts of the United States to invoke equitable interposition without a judgment at law.

Tills being my view, the application for an injunction is denied, and the restraining order heretofore granted is dissolved. Being of this opinion, I would, of my own motion, dismiss this bill for want of jurisdiction in this court, except that under section 7 of the act of March 3, 1891 (26 Stat. 826), establishing the circuit court of appeals, the plaintiffs may within 30 days take an appeal from this order, and the case in the circuit court of appeals is one that takes precedence!; and this will enable them to have the question speedily passed upon, and the question as effectually settled as if I should dismiss the bill, in which case the appeal would not take precedence, and could not be heard so soon.

I wish merely to add that if plaintiffs can in any way present this question to either Judge TAFT or Judge SAGE, for the purpose of taking his opinion on the point, I shall be glad for this to be done, and in that event request that either of those judges shall pass upon any question so presented. The case made in the bill is a strong one, and I should certainly not regret to see it investigated, if the court could rightfully do so.

No entry was made under this opinion, but it was arranged that an application should be made to Judge SAGE upon his return, and that in the meantime no part of the stock of the defendant firm should be sold or otherwise disposed of.

Upon that application, which was made in October, affidavits were filed on behalf of the complainants and on behalf of the defendants.

SAGE, District Judge

(after stating the facts as above). A careful consideration of the pleadings and affidavits, and of the arguments and briefs of counsel, has led me to the following conclusions:

1. The case does not fall within the provision of section 6343 of the Revised Statutes of Ohio. The averments of the bill do not sustain the contention that a trust, originally cognizable in equity, in the property conveyed, was created by the act of the debtors and their grantees. The bill avers that separate and distinct mortgages were made to Levi D. York, Henry Vincent, William B. Williams, and Tda O. Williams by the defendants Russell, Vincent & Williams, in contemplation of insolvency, and with intent thereby to prefer said York, Vincent, Williams and Ida 0. Williams, to the exclusion of the complainants and all other creditors. It is further averred that said York took said securities in trust for himself and said firm and its members, agreeing to account to them for any surplus remaining after the payment of its pretended claim, amounting to $29,900, set forth in said mortgage. In Ohio a failing debtor may lawfully, having in contemplation his insolvency, prefer a creditor, and secure his claim by mortgage. To bring such a case within section 6343, it must be shown that the mortgages were given, not only to secure the claims of the mortgagees, but also of other creditors. Such was not the fact in this case, nor does it appear from the bill, which shows only that a mortgage was made to each of the persons named to secure his or her claim. It is not averred that any one of these parties held for the benefit of any one else. The averment that York held in trust for himself, and for the firm and its members, is merely a statement of a legal conclusion. The mortgagor, under the law, is entitled to any residue after the payment of the mortgagees’ claim. The answer' and affidavits filed on behalf of the defendants deny any such claim, or that there was any agreement other than that stated in the mortgage itself.

2. The reliance upon section 6344 of the Revised Statutes of Ohio is not well founded. The complainants are creditors at large. Their claims have not been reduced to judgment. They have not, therefore, exhausted their legal remedy, which is, as was pointed out by Judge CLARK in his opinion, necessary to their standing in this court to present the questions made in the bill. Judge CLARK cites Scott v. Neely, 140 U. S. 106, 11 Sup. Ct. 712; Cates v. Allen, 149 U. S. 451, 13 Sup. Ct. 883, 977; Hollins v. Iron Co., 150 U. S. 371, 14 Sup. Ct. 127. These authorities support the proposition that simple contract creditors, whose claims have not been reduced to judgment, cannot have any standing in the circuit court of the United States, sitting as a court of equity, upon a bill to set aside and vacate a fraudulent conveyance, and that this rule is not affected by the fact that the statute of the state in which the property is situate authorizes such a proceeding in the courts of the state, because the line of demarkation between equitable and legal remedies in the federal courts cannot be obliterated by state legislation. It is, however, contended, inasmuch as section 6344 of the Revised Statutes of Ohio not only authorizes any creditor to bring suit to annul transfers, conveyances, or assignments made by a debtor, or procured by him to be made, with intent to hinder, delay, or defraud creditors, but further provides that the probate judge of the proper county, after any such transfer, conveyance, or assignment shall have been declared by a court of competent jurisdiction to have been made with the intent aforesaid, or in trust with the intent mentioned in section 6343, shall, on the application of any creditor, appoint a trustee, who shall recover possession of the property fraudulently transferred, conveyed, or assigned, and administer the same as in other cases of assignment to trustees for “the benefit of creditors by reason of the transaction set forth and impeached in the bill, that the complainants, as cestuis que trustent, are entitled to come into a court of equity to enforce the trust thus arising. It is further contended that this trust arose at the time of the conveyance impeached, and was therefore a trust and equity existing in favor of creditors generally, including those who were not judgment creditors. Hence it is urged that this statute creates an equitable right, and enlarges the equitable jurisdiction of the federal courts so as to authorize them to hear and determine this suit upon its merits. Judge CLARK, although he did not concur in this view, preferred that it should be considered by a judge of the district, because he would be familiar with the Ohio legislation. I am not able to concur in the view of counsel. My conclusion is that sectiofi 6344 reaches no further than to make a statutory rule for the disposition of the property fraudulently conveyed, substituting a ratable distribution among all the creditors of the debtor, as under Assignments in trust in cases of insolvency, for the preference which in equity was given to the judgment creditor who, having exhausted Ids legal remedies, came into a court of equity to reach the equitable estate of his debtor. In every case of a fraudulent conveyance or transfer, equity will, if necessary, regard the transferee as a trustee for the benefit of the creditors of the transferror. Clements v. Moore, 6 Wall. 299-312; Perry, Trusts, § 212; 1 Story, Eq. Jur. §§ 350-381. Hence, in every case of an attack upon a conveyance as fraudulent, it might as well be insisted that the hill was, in equitable effect, a hill establishing a trust, and therefore could he maintained upon the suit of any creditor. In such case it might be Maimed, as well as in this, that the trust arose out of the fraudulent transfer. The trust, under section 6344, is established and springs from the adjudication upon the suit of the creditor that the conveyance was fraudulent, and, until that adjudication has been made, no trust can be said to exist under that statute.

3. The attempt, by amendment to the bill, to reduce the complainants' claim to a certainty by adopting the amount admitted by the ans wer, which is less than is claimed in the bill, as the true amount of the claim, will not save the jurisdiction of the court. It is true that in Scott v. Neely it was said by Mr. Justice Field, delivering the opinion of the court, that, in all cases where a court of equity interfoies to aid the enforcement of a remedy at law, there must be an acknowledged debt, or one established by a judgment rendered. But he adds that there must, in addition, be an interest in the property, or a lien thereon, created by contract or by some distinct legal proceeding, and that the existence of such lien or interest before Hie suit in equity is instituted is essential to the jurisdiction. Chief Justice Fuller, in Cates v. Allen, 149 U. S. 458, 13 Sup. Ct. 883, 977, said that the mere fact that a party was a creditor was not enough. ‘Tie mast be a creditor with a specific right or equity in the property; and this is the foundation of the jurisdiction in chancery, because jurisdiction on account of the alleged fraud of the debtor does not attach, as against the immediate parties to the impugned transfer. except in aid of the legal right.” In that case it was sought to maintain the hill under certain provisions of the Code of Mississippi, the suit having been originally brought in a court of that state. But ilia supreme court said the fact: that the statute of the state aimed to create a lien by the filing of the bill did not affect the question, for, in order to invoke equitable interposition in the United ¡States courts, the lien must exist when the hill was filed, and form if s basis, and that to allow a lien resulting from the issue of process (<• constitute such ground would be to permit state legislation to withdraw all actions at law from the one court to the other, and unite legal and equitable claims in the same action, which the court said could not be allowed in the practice of the courts of the United States, where the distinction between law and equity is matter of substance, and not merely of form and procedure. Reference was made in Scott v. Neely to the jurisdiction in foreclosure to ascertain the amount due on the mortgage without the intervention of a jury. Mr. Justice Field said that the debt or obligation to secure which the mortgage was given was stated in the instrument itself, and the only proceeding with reference to the amount was one of calculation of interest, or of ascertaining the balance after the crediting of partial payments. That statement, however, left out of account that the entire mortgage debt claimed might be assailed as fraudulent, or upon averments of payments or want of consideration. The jurisdiction in equity, in such a case, rests most firmly upon the other ground, that, by the maturity of the obligation and the default of the mortgagor, the legal title becomes absolute in the mortgagee, and there is left in the mortgagor only his equitable interest. The mortgagee’s bill is to foreclose that equitable interest, which is cognizable only in a court of equity. The right in equity to ascertain the true amount of the mortgage debt is incidental to the main equity of foreclosure. The application for an injunction will be denied, and the bill dismissed.