In re Sabin

21 F. Cas. 120, 18 Nat. Bank. Reg. 151

Opinion

BROWN, District Judge.

This is a conflict between rival claimants to a fund still practically in the hands, or under the control of the assignee of Sabin, the petitioners being the trustees of Bancroft under a general assignment for the benefit of_ creditors, and the respondents, standing in the position of the assignee of such claim to the amount of twenty-five thousand dollars, by a special assign ment made before the general assignment to petitioners. This, in brief, is the relative position of these parties, and the question is whether the court will order the dividend paid over to the trustees of Bancroft under the general assignment, as holding the legal title thereto, or will detain it until the right of Cochran & Barbour to the same can be determined in the chancery suit, commenced by them against the assignee and the petitioners. This, of course, involves incidentally the jurisdiction of the district court, in equity, of a bill filed by citizens of New York, as complainants, against the assignee of Sabin and the petitioners, who are also citizens of New York, as defendants. .

Whenever a contest arises with regard to the ownership of a fund in court, the practice of the English court of chancery is to make what is termed a “stop order” to detain the fund in favor of assignees or creditors, or other persons entitled thereto, as against any party to the suit, and, in case the right to the same is in dispute, to make such order operative until a bill can be filed to settle the right to the same. The practice is thus stated by Mr. Daniell (3 Daniell, Ch. Prac. 1797): “Any person, although not a party to the cause or proceeding in which the fund in court is standing, who has become entitled to any such fund, or to any share thereof, or to any lien or charge thereon, may apply to that branch of the court to which the cause or proceeding is attached, for an order to prevent the fund in question being paid out or otherwise dealt with, without notice to the applicant.” Instances of such applications are not infrequent in the reports. Hobson v. Shearwood, 8 Beav. 486; Williams v. Symonds, 9 Beav. 523; Thorndike v. Hunt, 3 De Gex & 1. 563; Wells v. Gibbs, 22 Beav. 204; Bethune v. Kennedy, 3 Beav. 462.

The case of Feistel v. King’s College, 11 Beav. 254, bears a strong resemblance to the one under consideration. Feistel becoming entitled, by assignment, to a certain claim, filed a bill, obtained a fund in court and a decree for payment. Before payment to him under the decree, the assignees of one Lyon Samuel, a bankrupt, came into court and claimed that a part of the fund equitably belonged to the bankrupt, by an agreement made in 1844, and asked for an account to be taken. It was contended “that strangers to the cause had no right to intervene. That this was an attempt to alter the decree by petition, and that a stop order was not usually granted after the rights had been declared by decree.” But the chancellor observed: “I quite agree that the decree cannot be altered upon ^petition, but here there is no attempt whatever to find fault with the decree. The case is simply this: there is a decree for payment to A B, who has assessed, or holds it in trust for C D. C D says: ‘Do not part with the fund until I have an opportunity of taking proceedings to establish my right.’ I think that a court has authority to do this, and has frequently exercised it.” It was ordered that the fund be not paid out, and that applicant file a bill to enforce his demand within ten days. In Stuart v. Cockerell. L. R. 8 Eq. 607, the question arose between assignees in bankruptcy and an assignee of a dividend in court. The court entertained the application of the assignee of the dividend. See, also, In re Brown’s Trust, L. R. 5 Eq. 88; Lister v. Tidd, L. R. 4 Eq. 462. In Thorndike v. Hunt, 3 De Gex & J. 563, Head Justice Turner held that the application to the court should be by a bill, when parties claim adversely. I see no reason to doubt that Cochran and Barbour have pursued the proper practice, in this regard, and that a stop order should be made, provided the court has jurisdiction of the bill filed by them against the assignee and petitioners.

Aside from the question of citizenship, I' find no difficulty in supporting the jurisdiction of the district court in this case. By section 4972 the jurisdiction of the district courts as courts of bankruptcy extends — 3d. To the ascertainment and liquidation of liens, and other specific claims upon the assets of the bankrupt. 4th. “To the adjustment of the various priorities and conflicting interests of all parties.” 5th. “To the marshaling and disposition of the different funds and assets, so as to secure the rights of all parties, and due distribution of the assets among all the creditors.” 6th. “To all acts, matters and things to be done under, and in virtue of the bankruptcy, until the final distribution and settlement of the estate of the bankrupt, and the close of the proceedings in bankruptcy.”

More comprehensive language could scarcely be used to confer upon the district courts jurisdiction of all controversies of whatsoever name and nature, connected with the winding up and distribution of the estate of bankrupts. McLean v. Lafayette Bank [Case No. 8,885]. It is true the jurisdiction under this section is1 usually exercised in a summary manner; but I know of no objection to proceeding in any case by plenary suit, particularly where there are parties making adverse claims to any portion of the bankrupt’s estate.

It is admitted that if this were an original suit, this court would not have jurisdiction, by reason of the parties in interest being citizens of the same state. The bill can only be supported upon the theory that it is auxiliary to the proceedings in the bankrupt court, and that cognizance of the case is necessary to prevent a failure of justice. I find no case directly in point, though there are a large number holding the general principle that when the new suit naturally grows out of, and is connected with the former one, jurisdiction may be entertained regardless of citizenship. For instance, if a judgment at law be recovered in the circuit court, the defendant may file a bill to enjoin the judgment against the representative of the original plaintiff. though he be a citizen of the same state as the defendant. Dunn v. Clarke, 8 Pet. [33 U. S.] 1; Dunlap v. Stetson [Case No. 4,164]; St. Luke's Hospital v. Barclay [Id. 12,241]. So a creditor’s bill, a cross-bill, and a bill of review, are simply continuations of the original suit, and may be sustained between citizens of the same state. Hatch v. Dorr [Id. 6.206]; Whyte v. Gibbes, 20 How. [61 U. S.] 541; Railroad Co. v. M’Chamberlain, 6 Wall. [73 U. S.] 748. In Freeman v. Howe [24 How. (65 U. S.) 450], a state court attempted to replevy from the marshal property seized by him upon a writ of attachment. The proceeding was held to be unauthorized, and the supreme court remarked by way of dictum, that the plaintiff in replevin might have obtained relief in a federal court, even if both parties were citizens of the same state. Such jurisdiction was actually exercised by the circuit court of Massachusetts, in Gibbs v. Usher [Case No. 5,387], when a bill was filed to restrain the use of the process of the court by the marshal, in a manner contrary to law. In Minnesota Co. v. St. Paul Co. 2 Wall. [69 U. S.] 609, it is said that when a bill in equity is necessary to have a construction of the orders, decrees, and acts made or done by a federal court, the bill is properly filed in such federal court, as distinguished from any state court, and it may be entertained in such federal court, even though the parties who are interested in having the construction made, would not, from want of proper citizenship, be entitled to proceed by original bill of any kind in a court of the United States.

If the property be in the hands of the receiver of the circuit court “nothing can be plainer than any litigation for its possession must take place in that court, without regard to the citizenship of the parties.” The dictum in the case of Freeman v. Howe was subsequently quoted with approval in Buck v. Colbath, 3 Wall. [70 U. S.] 334. That a judgment of this court may be stayed, or impeached for fraud, by a bill in equity filed for that purpose, regardless of citizenship, was also declared in O’Brien Co. v. Brown [Case No. 10,399], and in St. Luke’s Hospital v. Barclay [supra]. In Givin v. Bradlove, 2 How. [43 U. S.] 29, the marshal failed to pay over to a judgment creditor the money collected upon an execution. It was held. Mr. Justice Daniel dissenting, that the marshal might be proceeded against by the creditor, ■ notwithstanding both parties were citizens of Mississippi. In Jones v. Andrews, 10 Wall. [17 U. S.] 327, a leading case, it was held, that a bill for an injunction to restrain proceedings in garnishment against the plaintiff’s property, which proceedings had been instituted in the circuit court, and also praying the benefit of set-offs against the garnishing creditor’s demand, was not an original suit but a defensive and supplemental suit, in which the jurisdiction of the court did not depend upon the citizenship of the party, but upon the cognizance of the original case. In First Nat. Bank of Alexandria v. Turnbull, 16 Wall. [83 U. S.] 190. the sheriff of a state court had levied an execution upon property claimed to belong to citizens of other states; an issue was made in the state court to determine the title of the property, and before trial the plaintiffs in such issue removed the cause to the circuit court of the United States. The supreme court held the action to be merely auxiliary to the original action, and therefore not properly removed. See, also, Davis v. Gray, Id. 203; Sutherland v. Lake Superior Ship Canal & R. Co. [Case No. 13,643]. In Kellogg v. Russell [Id. 7.666], the marshal, acting as messenger of the district court in bankruptcy, seized certain property supposed to belong to the bankrupt, and transferred it to the assignee. A suit was brought in the state court against the marshal for such seizure, by the party who claimed the property. It was held that the marshal and the assignee might bring suit in' the circuit court against the claimant and the bankrupt to set aside the transfer as fraudulent, notwithstanding the fact.that the property was in possession of the assignee at the time the suit was brought, and that an injunction could be issued to restrain the further prosecution of the suit in the state court.

The principle underlying these cases is thus admirably stated by Judge MacDonald, of the district court of Indiana, in Conwell v. Whitewater Valley Canal Co. [Case No. 3,148]: “In a cause over which a national court has acquired jurisdiction solely by reason of the citizenship of the parties, if the rights and interests of third persons should become complicated with the litigation, either as to the original judgment, or any property in the custody of the court, or any abuse or misapplication of its process, and if no state court has power to guard and determine those rights and interests without a conflict of authority with the national court, the latter court will, from the necessity of the case, and to prevent a failure of justice, give such third persons a hearing, irrespective of . their citizenship, so far as to protect their rights and interests relating to such judgment or property, and as to correct any abase or misapplication of its process, and no further.”

I cannot see that the case of Paine v. Caldwell [Case No. 10,674] has any bearing upon the one under consideration. In that case it was held that an assignee in bankruptcy, appointed by the district court of Maine, had no power to bring an action in that court against a citizen of Massachusetts, to recover a fraudulent preference obtained by him in the supreme court of Maine, which was paid within four months preceding the commencement of bankrupt proceedings. Service • of the subpoena was made on the attorneys who acted for the defendant in obtaining this judgment, and it was argued that the respondent, having resorted to and • availed himself of the courts of Maine to obtain this fraudulent judgment, continued subject to the authority of the courts of that state, including the district court in bankruptcy, and could not withdraw from the state with the fruits of his judgment, without remaining amenable to the courts in any ulterior proceedings arising from his original suit; but as the defendant had never become a party to the bankruptcy proceedings, the court denied its jurisdiction. There can be no doubt of the correctness of this opinion.

So in Christmas v. Russell, 14 Wall. [81 U. S.] 09, the bill was dismissed on the ground that it was an original proceeding, and therefore not cognizable in the federal court. See, also, Markson v. Heany [Case No. 9,098]. The case under consideration grows directly out of a dispute as to the ownership of a fund in the hands of the bankrupt court. The defendants, the original trustees of Mr. Bancroft, having proved their debts, remain subject to the jurisdiction of this court without regard to their place of residence. In re Kyler [Id. 7,956]; Phelps v. Sellick [Id. 11,079]; Watson v. Citizens’ Sav. Bank [Id. 17,279]. I am not bound to anticipate that the subpoena may not be served upon them; indeed it strikes me now as a proper case for substituted service on their attorneys. I regard the suit as auxiliary to the original proceedings in bankruptcy, and that the court has jurisdiction of the case.

The claim that the complainants in this bill have a complete and adequate remedy at law was touched upon at the argument of this motion, but I prefer to consider it when formally raised upon demurrer to the bill. As at present advised, I am unwilling to say that a suit at law in a court of another state is as complete a remedy as the detention of the fund here. Boyce v. Grundy, 3 Pet. [28 U. S.] 210; Watson v. Sutherland, 5 Wall. [72 U. S.] 74; Bunce v. Gallagher [Case No. 2,133]; U. S. v. Meyers [Id. 15,844]; Hunt v. Danforth [Id. 6,887].

The petition must be denied.