Lippincott v. Shaw Carriage Co.

34 F. 570, 1888 U.S. App. LEXIS 2337

• Court: U.S. Circuit Court for the District of Indiana
• Decided: March 10, 1888
• Status: Published

Opinion

Woods, J.,

(after stating the fads as above.) It is certainly a mistake to say that “the fund is the property of the Shaw Carriage Company.” The mortgages in question were valid between the parties, and, as between them, have never been set aside. The mortgagee of a chattel has the legal title, (Jones, Chat. Mortg. § 426; Fay v. Burditt, 81 Ind. 433;) and consequently, if the bill in this action had been brought, and the present stage of procedure reached, before steps.to foreclose had been taken in the state court, it could not have been said that the Shaw Carriage Company had any interest in the property, except a right of redemption, by paying the mortgage debt. But by the decree of the state court, consummated in a sale of the property, that equity has been extinguished; and upon no supposable contingency — not even if this court had found that the mortgage debts were fictitious, and the fund more than enough to pay all just demands — could an order be rightfully made for the return or payment of a dollar of the surplus to the Shaw Carriage Company. That surplus would justly belong to the defendant banks, and it would be so adjudged, not upon the theory of a distribution made to them as intervenors under complainants’ bill, but because the money was lawfully theirs by virtue of a transaction valid between the parties, and to that extent unassailable by creditors of the Shaw Carriage Company. Indeed, in the case of Dunphy v. Kleinsmith, 11 Wall. 610, speaking in respect to an action of creditors to set aside a mortgage alleged to have been fraudulently made to secure fictitious liabilities, the supreme court said: “ The decree against the defendant must be a decree for an account. He must be called to account for just what property has come into his hands,- and no more; and he will be entitled, under ordinary circumstances, to a rebate for the amount that was justly and honestly due him.” That is to say, as I understand this statement, the case being one in which a lawful preference might have been given for the “amount justly due,” the preference given, under ordinary circumstances,. will be upheld to that extent, notwithstanding an overstatement in the mortgage or assignment of the amount of indebtedness intended to be secured. Much more, — and certainly, as it seems to me, both upon principle and upon reason, — it must bo said in eases like this, where there is no taint of fraudulent intent in the conduct of the respondents, that they will be permitted to retain, as justly their own, such proportion of the fund as they would have been entitled to receive upon a ratable distribution between creditors. This view involves no wrong in theory or result to other creditors. The strict right of each of them, when the debtor became insolvent, and ceased to do business, was to receive his proportionate share of the assets; and, holding the defendants as trustees of the fund derived from the assets, they can claim in a court of equity no further interference than necessary for the full enforcement of that right and the corresponding rights of other intervening creditors. 1 Story, Eq. Jur. § 371; Stewart v. Platt, 101 U. S. 731; Findley v. Cooley, 1 Blackf. 262; Burtch v. Elliott, 3 Ind. 99; Springer v. Drosch, 32 Ind. 486; O'Niel v. Chandler, 42 Ind. 471; Van Wy v. Clark, 50 Ind. 259; Garner v. Graves, 54 Ind. 188; Edwards v. Haverstick, 53 Ind. 348; Stout v. Stout, 77 Ind. 537. Beginning with the original hearing, counsel for the complainants have insisted and several times have moved that as a condition of being allowed to share in the fund the defendant banks be required to abandon their hostile attitude of defense, and to put on record a formal request to be admitted “under the invitation of the bill” to share the benefit of the suit on an equality with other intervenors. The inadmissibility of this proposition, now that its bearing upon present questions is apparent, is, as it seems to me, quite evident. As against the carriage company and all parties to the decree of the superior court, the defendant banks have a perfect and exclusive right- to the entire fund, and in respect to other creditors are bound to surrender to them only their proportionate share of the fund. As stated in the case of Stout v. Stout, supra:

“The theory of the action [which was to set aside aseries of fraudulent conveyances] is not to annul the deeds, and revest the title in the original fraudulent grantor, but to convert the Anal grantee into a trustee holding for the benefit of the injured creditors. Except as to creditors, the conveyance is valid, and it will not be interfered with further than necessary to secure their rights.”

In a proper case, of course, as has been suggested, a receiver will be appointed, and, if necessary, the entire property or assets brought into the custody of the court will be converted into money; but this involves no different principle from that stated. The costs of the receivership, including compensation to the receiver’s counsel or solicitors, might doubtless be taxed against the fund in such cases, (Hubbard v. Camperdown Mills, 1 S. E. Rep. 6;) but if on final distribution any of the fund remains after payment of creditors in full or in part, according to their respective equities, the remainder will go to the defendant from whom the fund nr property was taken, as of right, and not upon the fictitious theory that he takes as an intervenor or plaintiff in the action, when in fact ho has been a défendant throughout the litigation. The attitude and conduct of the defendants in the case, therefore, in tho opinion of the court, afford no reason for denying them the ordinary privilege • conceded to litigants of contesting any adverse ruling of the court, and of carrying the question to the supreme court for final decision. But, if the position of counsel be true, the defendant banks cannot receive or retain any part of the fund in their possession, without thereby surrendering the right to dispute further the first and most important ruling in the case, — that is, that their mortgages were invalid. Outside of bankruptcy cases, the court knows of no authority for such practice, or for such a rule of right and equity. Counsel, it may be observed, have not adhered with entire consistency to the proposition that the defendant banks, if they share at all in the fund, must do it upon the terms offered to intervenors; because they have also insisted that as between themselves these defendants must not only continue bound by their mortgages and by the decree of foreclosure thereof, but must separately account in this action, each for the portion of the fund in its possession, without right to share in that portion thereof in the possession of the other, or to have the debt of the carriage company to the other counted as a part of the aggregate indebtedness; while, as they urge, the commercial creditors shall be allowed to prove their demands in full against each; and reference is made to Bank v. Oar Co., 20 Fed. Rep. 69, as authority for permitting the proof of claims in full against distinct funds. Of this case it is enough to say that the claims there considered were liens by contract upon the different funds, and the decision simply gave full effect to contract rights. It is, of course, true that these banks can be put in no new attitude towards each other, but their relation to the complainants and other creditors who are not bound by the decree of the state court is different, and must be determined by the principles of equity already stated; and therefore, whether the distribution shall be deemed to be of one fund or two, the sum of all demands against the carriage company, including those of the defendant banks, should be taken into consideration; and, if this be done, the share or percentage of the fund which each creditor entitled to participate can receive will be the same in the aggregate, whether treated as derived from one fund or two. But if the distribution is to be made upon the theory of two funds separately considered, and the demand of one defendant bank is not to enter into the computation by which distribution of the fund in possession of the other shall be determined, and vice versa, then not only will the commercial creditors and Fletcher & Sharpe receive much larger shares of the fund, but their shares, as between themselves, will be relatively greatly different; and the amounts taken from the defendants, besides being larger in the aggregate, will be increased in an unequal ratio, —these inequalities and irregularities arising in part from the fact that Fletcher & Sharpe can share in one fund and not in the other, and in perhaps larger part from the fact that the difference between the respective demands of the defendant banks against the carriage company does not correspond with the difference between the respective amounts for which they must account. Besides, a computation upon this basis leads, as will be found upon experiment, to an arithmetical tangle from which there seems to be no escape entirely consistent with either equitable or mathematical principles; while, if each creditor be allowed a percentage of the fund or funds in which he is entitled to share, equal to the percentage of his demand in the sum of all demands against the carriage company, the computation will be free from difficulty, and in harmony with the principles stated, both of law and equity. In this way Fletcher & Sharpe will take nolhing from the First National Bank, but will receive their percentage of the fund in the possession of the Indiana Banking Company; and the commercial creditors will take alike from both funds; while neither bank will take anything from the other, but each will retain what, but for the decree of the superior court and because of the validity of the mortgages between the parties, would go out of its fund to the other and to the creditors bound by that decree,. On this theory, it was conceded in argument, as I understood, that if defendants had paid to any creditor his proportionate share of the fund, or of the value of the mortgaged assets, they would be entitled to bave the amount of that creditor’s demand considered, as if assigned to them, in determining what other creditors should receive; and by the same principle I am unable to see why the defendants shall not be allowed a like benefit from the estoppel obtained in the state court against the creditors made parties to that procedure. To so hold does not diminish the just remedies of creditors not estopped; while to hold otherwise would, without merit or consideration moving from them or from any other for their intended benefit, enhance their interests, to the detriment of the defendants who obtained the decree. If complainants had procured a lien by levy of tlieir execution upon the mortgaged chattels before they wore sold under the foreclosure decree, and they had brought their bill here to annul the mortgages, this court would of course have recognized their priority or right to full satisfaction, both as against the defendants and against inter-venors. But that is not the situation, nor is the case one in which by the mere bringing of the bill and the service of process the complainants sought to procure, or, perhaps, could have procured, an equitable lien os-priority over other creditors; and consequently the cases wherein such priorities have been recognized are not controlling of the questions presented here. In any event, the lien of a- creditors’ bill is commensurate only with the remedy or relief proper to be granted under the bill; and that much, in effect, the complainants arc awarded in tills case, in that the defendant banks are held to account for all moneys and property received by them under their mortgages, and the fund and property, so far as brought under the power or into the custody of the court, (as the real estate in possession of the receiver of the First Naüonal Bank lias been,) is held for the full payment of the sums decreed to be paid into court for the complainants and intervenors. The question is not whether the defendants might, of their own motion, have proved and brought into the computation the claims of creditors who were not parties to the foreclosure decree nor to this suit, and to whom they had paid nothing. Doubtless, in order to obtain a complete adjustment of rights and liabilities, and to protect themselves against further suits, they might have had a reference, with an order that claimants should present their demands within a time stated, or be barred of any right in the fund; but the question presented respects only the rights and demands of parties to the record whose claims have been established, beyond dispute by the complainants and, in respect to the amount due thereon, beyond dispute by any party to the case. Consistently with this situation and the respective rights of the parties, the distribution can be made only on the basis already stated: that is, the fund must be apportioned according to the several amounts of the different demands proven. And when this is done, who shall take the sums corresponding to the demands of A., B., and C., the estopped creditors, so called? The complainants and other intervenors cannot, because as against them the rights of A., B., and C. are perfect and exclusive; but, as against the defendants, A., B., and C. cannot take, because they are estopped by the decree of foreclosure. The necessary conclusion, not inconsistent, as already shown, with the rights of any party, is that these sums must remain in the hands of the defendants. If possibly there be error in this conclusion, I think it more probably is in the holding that in this action any creditor is estopped from sharing by reason of the decree in the state court, and, if the court has erred in this respect, an appeal will give the creditors so excluded their just rights, without harm to other parties, plaintiff or defendant; but, alter a distribution upon the theory contended for, such an appeal, successfully prosecuted, would result in an incomplete remedy to the appellants, or in taking from the defendants more than would be just, or at least in a situation difficult to adjust equitably between the parties.

The motion of complainants for an allowance of a solicitor’s fee, to be taxed as costs, or taken from the fund before distribution, it is evident from what has already been said, should be denied. The power to make such allowances, at best, is dangerously arbitrary, and, as has often been suggested by the courts, ought not to be extended to doubtful cases. In this case, such an allowance, if asked, might properly be made against intervenors who have accepted “the invitation of the bill;” but no example of á like charge against defendants in the attitude of these has been cited, or, as I think, ought to be established. To illustrate the inequity of the consequences to which the proposition would lead, let us suppose that the court had ordered in this case that the commercial creditors and Fletcher & Sharpe should be piaid in full, taking $35,000 of the fund, and leaving in possession of the defendants $28,000; or suppose, instead of the mortgaged property having been converted into a fund, that the defendant banks had purchased the property at the de-cretal sale, and were still holding it, and that by reason of enhanced values it had been found, in this case, to be worth a sum exceeding the amount of all demands against the carriage company, and that accordingly the court had required the defendants to bring into court money enough to satisfy the demands of all creditors not bound by the decree of foreclosure, — could it be insisted (and yet such is the logic of counsel) on either supposition that, theoretically, not only the entire fund or property must be deemed to have been brought into court, — which in a sense is true, — but that tbe defendants must be deemed to take, as dis-tributees under complainant's bill, the remainder left in their possession, and therefore should be required to contribute to the compensation of complainants’ solicitors ratably, and not only in proportion to the amount of their demands against the common debtor, but also upon the surplus over and above all demands derived from the enhanced value of the property?

In respect to the costs of the first reference to the master, which the defendants ask to have taxed against the complainants, it is true, as stated in the former opinion, that the charges of actual fraud, in respect to which mainly the evidence on that reference was taken, were not sustained, but nevertheless much of this evidence was more or less pertinent to tbe inquiry made on the last reference into the amount of the demands of the defendant bank against the Shaw Carriage Company, and it would doubtless be quite difficult to make a fair or exact apportionment of these costs: therefore, as tbe nearest practicable approximation, it is ordered that all costs in the case be taxed against the defendant banks, and the amount thereof deducted from the fund in their hands, and that the remainder be distributed as indicated. Decree accordingly.