MR. CHIEF JUSTICE TAFT delivered the opinion of the Court.
This case presents a controversy between state court receivers and the receiver of a federal court over the possession of the property and assets of the Daniel Boone Woolen Mills Corporation. It is here by certiorari to the judgment of the Circuit Court of Appeals for the Seventh Circuit affirming a decree of the district court for the Northern District of Illinois. The receivers in the state court were appointed on the prayer of what was called a stockholder's bill. The receiver in the federal court was appointed on the prayer of what was called a creditor's bill. The receiver in the federal court was appointed
The Daniel Boone Woolen Mills was a corporation of the State of Illinois engaged in the manufacture of woolen cloth in Illinois with its principal place of business there but with additional plants in other states. It had 187,000 shares of stock owned by 1,500 individual stockholders resident in many states. It had been so badly managed during the year 1924, and its indebtedness had been so much increased that a surplus of $500,000 had been changed into a deficit of more than $2,000,000. Nevertheless, at the end of 1924, it was alleged by all parties that its assets exceeded its liabilities by $1,000,000, although the event has proved the fact to be otherwise and administration under receivership shows the debts much to exceed its assets. The mismanagement had led its president and its treasurer, both named Gumbinski, to resign, and they were replaced by Joseph Byfield as president, and Frank Solomon as vice-president. These two officials had not been able to secure the financial support necessary to meet the expenditures and conduct the business. On February 14th, 1925, therefore, Harry Hurwitz, a stockholder of the company, filed a bill in the Superior Court of Cook County, Illinois, in his own behalf and in that of all other stockholders of the corporation, "and all other firms or corporations who might be interested in the litigation, and who might seek to intervene or contribute to the expense thereof."
On the 19th of February, five days later, a bill was filed in the United States district court for the Northern District of Illinois by the United States Worsted Sales Company, a corporation of the State of New York, claiming to be a simple non-judgment creditor of the Woolen Mills in the sum of $6,000. The plaintiff brought the bill on its own behalf and on behalf of all the creditors of the Woolen Mills who would join in the prosecution. Its averments in respect to ownership and the disastrous operation of the company were much the same as those of the bill by Hurwitz in the state court. It specifically averred that the Woolen Mills was not insolvent but that it had been impossible to secure money with which to carry it on, that there was grave danger of the recovery of judgments and the levy of executions, and of a race for undue preferences, and that in the preservation of the property it was
Application for receivers in the state court in the Hurwitz suit had been made upon the filing of the bill, and notice given to the defendant Woolen Mills that the motion would be presented on February 16, 1925, the bill having been filed February 14th. Upon application of one Cowan, the attorney for the Woolen Mills corporation, the hearing on the motion for a receivership on the 16th was postponed until February 21st, and meantime the bill in the federal court for a receiver was filed on February 19. On the same day the Woolen Mills Corporation entered its appearance in the district court, filed its answer admitting the averments of the bill and consented to the appointment of a receiver. The appointment of Brundage as receiver was made on the following day.
On the 25th of February, the Superior Court of Cook County entered an order allowing one Max Goldenberg, a stockholder, to file in the Hurwitz suit his intervening petition, which did not in effect change the nature of the relief asked, but elaborated a description of details of the conspiracy of the Gumbinskis to loot the Woolen Mills Company, and of a conspiracy of the Woolen Mills management to evade the jurisdiction of the state court by delay in the appointment of receivers there and by the collusive answer and consent of the Woolen Mills to the
The question mainly argued in the district court and in the Circuit Court of Appeals and here was whether the state court, solely by the filing of a stockholder's bill for the appointment of a receiver, obtained constructive possession of the property and assets of the Woolen Mills Corporation. Upon this motion, evidence was taken disclosing at length the circumstances of the postponement in the state court, the filing of the bill in the federal court and the appointment of the receivers there. Of these we shall hereafter consider the effect. The district court held that the controversy in the federal court was different from that in the state court as shown by a comparison of the two bills; that the bill in the federal court was a creditor's bill, whereas that in the state court was
The principle which should govern in a conflict of jurisdiction like this has been a number of times stated by this Court. As between two courts of concurrent and coordinate jurisdiction, the court which first obtains jurisdiction and constructive possession of property by filing the bill is entitled to retain it without interference and can not be deprived of its right to do so because it may not have obtained prior physical possession by its receiver of the property in dispute; but where the jurisdiction is not the same or concurrent, and the subject matter in litigation in the one is not within the cognizance of the other, or there is no constructive possession of the property in dispute by the filing of a bill, it is the date of the actual possession of the receiver that determines the priority of jurisdiction. Moran v. Sturges, 154 U.S. 256, 283, 284; Palmer v. Texas, 212 U.S. 118; Wabash Railroad v. Adelbert College, 208 U.S. 38, 54; Farmers' Loan and Trust Company v. Lake Street Railroad Company, 177 U.S. 51, 61; and Adams v. Mercantile Trust Company, 66 Fed. 617. The difficulty in the application of the rule is in determining whether the conflicting jurisdictions are actually concurrent and the same. A doubtful question, too, is whether the bill is of such a
In Palmer v. Texas, the suit in the state court was an action by the State to forfeit the charter of the corporation and wind up its affairs. The suit in the United States court was an action by a stockholder to liquidate the corporation. Both were substantially alike in purpose. The state court had proceeded so far as to appoint receivers of the property and had merely delayed their taking possession until the case might be examined on appeal in the court above. The state court was held to be in constructive possession all the time, and was given priority of jurisdiction over the property as against the receivers of a federal court who had taken actual possession under a subsequent bill.
In Farmers' Loan and Trust Company v. Lake Street Railroad Company, the suit in the federal court was an action to foreclose a mortgage, and the one in the state court sought to enjoin the foreclosure. In that case the controversies were held to be substantially the same, and the filing of the bill in foreclosure in the federal court was held to be a constructive possession of the property.
In Moran v. Sturges, on the other hand, the controversy was between the jurisdiction of a state court in winding up a corporation and the distribution of its assets, which included navigable vessels, and the jurisdiction of the federal court, which had taken actual possession of the vessels, to enforce the collection of maritime liens on them. It was held that as the state court had no capacity to take jurisdiction of the maritime liens and enforce them, there was not concurrent jurisdiction, and therefore the court which first obtained actual possession of the vessels by its receiver was entitled to retain it without interference.
In Empire Trust Company v. Brooks, 232 Fed. 641, a suit was pending in the state court for the dissolution of a
We conclude that if the decision of this motion turned on the question of priority of jurisdiction on the face of the two bills, it could not be said that the courts were exercising concurrent jurisdiction. The creditor's bill conferred on the court the power to enjoin the judgments and executions of creditors and the establishment of undue preferences among the creditors, whereas in the stockholder's bill no such remedy was asked and could hardly be afforded without amendment and further allegation and prayer. Of course, as it has now turned out, because the corporation has proven to be insolvent, it would not have been difficult or be difficult now in the state court bill, by an amendment, to give the stockholder's bill the effect of a creditor's bill, with the receivers in possession. Indeed it would seem to be its duty to do so.
These considerations based upon the face of the pleadings in both actions would have justified the conclusions reached in the district court and in the Circuit Court of Appeals were it not that the evidence submitted by the receivers of the state court upon the motion here under consideration discloses a fraud upon the state court by which the appointment of receivers therein was delayed in order that the federal receiver could be appointed.
Mr. Cowan was one of a firm of lawyers that acted for the defendant the Woolen Mills Corporation, and was himself a member of the executive committee of the board of directors of that company. Mr. Byfield admits that he talked with Mr. Cowan sometime before and had expressed his opposition to anything but a federal receivership. The application for a receiver in the state court on the stockholder's bill was set for February 16, 1925. When the motion was called on that day, what followed is recited in the record as agreed upon by the parties. We have inserted it in the margin.
The delay in hearing the motion for a receiver in the state court was procured by Mr. Cowan, the attorney for
Mr. Cowan telephoned to Mr. Grand to come to his office with the expectation that because of his diverse citizenship he could file a stockholder's bill in the federal court. Grand suggested that a law firm of which Stern and Johnson were members should be selected. One of that firm, either Mr. Stern or Mr. Johnson, expressed the opinion that instead of a stockholder's bill a creditor's bill should be filed, because on such a bill they were more
We do not wish what we have said to be taken as a general approval of the appointment of a receiver under the prayer of a bill brought by a simple contract creditor simply because it is consented to at the time by a defendant corporation. The true rule in equity is that under usual circumstances a creditor's bill may not be brought except by a judgment creditor after a return of "nulla bona" on execution. When a receiver has been thus irregularly appointed on such a bill without objection, and the administration has proceeded to such a point that it would be detrimental to all concerned to discharge the receiver, the receivership has been permitted to continue because not seasonably objected to (Pusey & Jones Company v. Hanssen, 261 U.S. 491, 497, 500; Re Metropolitan Ry. Receivership, 208 U.S. 90, 109, 111; United States v. Butterworth Corporation, 269 U.S. 504, 513).
In refusing the motion of the state court receivers for surrender of the property and assets of the Woolen Mills, the district court said:
"It must be borne in mind that the State Court did not act until nine days after the appointment in this Court,
Again, the same court said, speaking of the state court:
"The Court had taken no action which brought defendant's property within its custody; and it was not until March 13, 1925, that it was claimed in this Court that there was any agreement in the State Court beyond the terms of the order of February 16, 1925. In the meantime, the Federal Court here and in other districts proceeded with the administration of the affairs of the defendant corporation. As Judge Lurton said, it would lead to absurd results and inflict unwarranted injury upon innocent parties, if the alleged oral agreement of the attorney in the State Court, of which there was no record, can be invoked to invalidate the proceedings here."
We differ radically from the trial court as to the purpose and effect of the conduct of Cowan in securing the postponement of the hearing for a receiver in the state court. Ordinarily we should acquiesce in a conclusion of fact by the court that heard the witnesses in such a case, but here the evidence of what was said in the state court is on a stenographic report agreed upon by the parties, and the other circumstances make the necessary inferences therefrom clear.
Nor can we take the view that when the motion of the state court receivers applied for surrender there were then in the federal court case innocent parties upon whom surrender to the state court of the property would work any hardship, for no creditor had come into the case except the complainant, which by its actual relation to the
"That the conduct of debtor's first counsel (not the counsel appearing in this court) was far from commendable, is unfortunately, most apparent. It is, happily, not a frequent occurrence that an attorney for a debtor seeks the creditor and urges him to bring suit against his client, or turns over his client's list of creditors to an attorney soliciting business, to say nothing of the violated pledge to the judge and opposing counsel. Moreover, good faith required this counsel to have advised the Federal District Court of the pendency of the State court proceedings.
"The case is one where in their determination to control the receivership, counsel proceeded with such speed and zeal that the code of professional ethics was entirely ignored and forgotten. Counsel should avoid these hurried ex parte applications for friendly receivers. In fact, there should be no `friendly receiverships.' Whenever possible, notice should be given to any and all interested parties. When the debtor corporation appears, however, and consents to such appointment, the court must rely on counsel to inform it as to all the facts. If essential facts are deliberately withheld, counsel may well forfeit his right to practice further, or be otherwise disciplined.
"Notwithstanding the prejudice which this conduct has created, we have approached the question with the understanding that the client's rights rather than attorney's conduct must be the basis for the determination of this litigation."
But we do not agree with either of the courts below that the vindication of the cause of comity and good faith as between the two courts should be limited to punitive
In this country, in which in every state we have courts of concurrent jurisdiction under the federal and the state authority, it is of the highest importance that conflict of jurisdiction should be avoided. It can only be avoided by forbearance and comity, and by enforcing upon the parties and counsel engaged the utmost good faith and the fullest disclosure in one jurisdiction with reference to what are the exact facts relevant to litigation in a corresponding case in the other. This is especially true with respect to receiverships. The desire of those who represent an embarrassed corporation to seek a refuge from active and urgent creditors under the protecting arm of an officer of the court, leads to strenuous efforts to frame a case which may under equity practice justify a receiver. More than this, circumstances which should have no influence lead the parties in interest to prefer one court to another in the selection of the person to be appointed as receiver, with the hope on behalf of those in charge of the embarrassed corporation that the appointment may fall to one whose conduct will be in sympathy with, rather than antagonistic to, the previous management of the corporation, in the hands of which the embarrassment has arisen. As the Court of Appeals says. there should be no "friendly" receiverships, because the receiver is an officer of the court and should be as free from "friendliness" to a party as should the court itself. Nor should there be any competition or rivalry on the part of the two courts themselves in regard to assuming jurisdiction. The temptation of the exercise of power and patronage in the selection of receivers and the management of great businesses under the court should not be a feather's weight in prompting court action. Each court should examine with nicety the question of the right of the parties to have
It is quite true, as already said, that if there had been no chicanery in the delay of the proceeding in the state court, the difference between the two proceedings would have justified the retention of the jurisdiction by the federal court. But the two proceedings, while not the same, were closely related, and the proceeding in the state court must by the subsequent insolvency have resulted in reframing in the state court the pleadings so as to make it a creditor's bill. Hence they were closely enough related to call upon the federal court to refuse thereafter to continue jurisdiction through its receiver, and to surrender custody of the res to the receivers of the state court. Such action we deem to have been that which the comity
But now the condition has changed, and the rights of innocent creditors who have since become parties are involved, the court and the receiver have proceeded to administer the property, have found it necessary to issue receiver's certificates, and have paid them, have sold some of the property and have made some distribution to the creditors. It would be in some ways easier to allow the settlement to go on as it is, but this would not comport with the obligation of a federal court to observe and emphasize the highest good faith and comity towards state courts in matters where the two have concurrent jurisdiction. We therefore shall direct the district court to reverse its action in denying the motion to surrender through its receivers the property of the estate still in its custody to the state court receivers. But the surrender should be only on condition that the state court receivers produce an order from the state court confirming all that has been done in the sale of the property, the disposition of the assets and the distribution thereof as if it had been by its own decree and shall so shape the pleadings and its orders that the case may proceed in the state court as a creditor's bill and a liquidation of all the debts, to enable it to proceed to the complete distribution of all remaining assets in liquidation, as it would have had to do, in view of the insolvency, in a continued administration under the stockholder's bill. The federal court should, before surrender, fix and pay the compensation due to its officers for the work done by them and, in doing so, should take care to fix the compensation within limits which are plainly reasonable. After this and other preliminaries are attended to, all the assets then in the hands of the receiver of the federal court shall be turned over for further and complete distribution in the suit in the Superior Court of Cook County. If such an order of the state court, as is
The decrees of the Circuit Court of Appeals and of the district court are reversed and the case is remanded to the district court for further proceedings in conformity with this opinion.
Mr. Cowan: The situation, if the court please, is this, without going into the merits of the bill, whether or not the bill sets up such grounds as would warrant this court in entering a receivership; there are certain important matters now coming before the Board of Directors of this company, which involves some very large amount of finances, and which will be seriously interfered with, if this court undertakes to hear the application, for a receivership. I think those negotiations will be concluded, within a week, and the rights of the complainant, under this bill, will not be affected in any way at all, by allowing this matter to go over for a matter of a week or ten days. I would prefer not to argue the motion this morning, but if counsel insists upon it, of course it will be necessary for me to do it.
Mr. Gesas: I think the first thing the record should disclose is whether or not these gentlemen are appearing here for the company; there is no appearance on file.
The Court: Yes, that is right.
Mr. Gesas: I appear here for the complainant.
Mr. Cowan: I appear for the company, and will file my appearance in due time.
Mr. Gesas: In your individual capacity?
Mr. Cowan: The firm of Barrett and Barrett, with which I am associated.
Mr. Gesas: Now, if the court please, in this matter, without going into the full matters, there has been a considerable fight, as your Honor happens to see, from this photographic newspaper, in which it is a fight between the former directors against the present directors and the present directors against the former directors —
The Court: And their compliments were passed back and forth?
Mr. Gesas: Yes, if the court please, and there has been a loss of over three million dollars in one year in the operation of this business, which practically has been neglected on account of no action taken by these directors, and if any continuance is granted here at all it must be — well, I think the court has a right to hear this matter; that the issues, if any at all are involved, should be tried by this court, not the newspapers, so that the good-will which the stockholders have in this business, and the value of that good-will, if there is any left after this terrible fight, between the old directors and the new directors, should be placed in status quo, and if there is any continuance granted, I think it ought to be done with the understanding that the status will not be changed, and that the issues be not tried in the newspapers, but by this court.
The Court: Yes, but of course, I can not control the newspapers, you understand.
Mr. Gesas: Your Honor can control the status quo.
The Court: Yes, with that understanding, but the suggestion that individuals should not seek publicity, of course, —
Mr. Gesas: The situation is this —
Mr. Cowan: Just a minute. Mr. Gesas complains about trying the case in the newspapers; one of the parties, who is charged with fraud in this bill, published half a page of an advertisement, and it was paid for, I assume, by —
Mr. Gesas: Here it is.
Mr. Cowan: (Continuing) — that is something over which we have no control, and which we didn't mail; there has been a two million dollar libel suit against the present President of the company, so that I don't think we could be charged with trying our case in the newspapers.
Mr. Gesas: I am not making any direct charge, at this moment, as to either the present directors or the former directors, as to their activities, except to say that both are guilty of seeking this publicity.
Mr. Cowan: Now, the question of publicity —
Mr. Gesas: Just a minute. May I suggest, if the court please, there is a considerable emergency in this way; from what I understand a form letter was sent out by the present President, in which he advises the stockholders of the terrible condition he finds the company in, at the present time, with the payroll and other expenses which run about one hundred thousand dollars a week; that any great delay in this matter is going to be very harmful to the rights of the parties; of course, we are willing to grant a reasonable continuance, and if this matter goes over to about Friday or Saturday of this week, I should imagine that ought to be a reasonable time, and not have a continuance for one week or ten days. We are here to ascertain our status —
Mr. Cowan: I have no objection to its going over to Friday or Saturday, but personally I think if you let it go until Monday —
The Court: There is no court Monday; that is what the Clerk tells me. You see Washington's Birthday is on the twenty-second, and we observe it on the twenty-third, the day following.
Mr. Cowan: Saturday morning, all right.
Mr. Gesas: Saturday morning and everything remains in status quo?
The Court: Yes. Saturday morning, without further notice.
Mr. Gesas: And any notices, or affidavits that you are going to present —
The Court: Yes, have them served on the other side, naturally, either side.
Mr. Cowan: All right, Saturday morning.
The Court: Yes.
Which were all the proceedings had in the above entitled cause, on this date.
Signed and sworn to by the Court Reporter, Cleary.