BAXTER v. UNITED FOREST PRODUCTS CO.

PER CURIAM.

This appeal arises from a district court's auxiliary order sequestering monies of the defendants in a federal diversity case without compliance with state law governing attachment. We find no authority for the action of the district court and vacate its order.

The facts show that in 1962 the defendants formed the Baxter Lumber Company and became its major stockholders. The company, which had plants in Iowa, Texas and Tennessee, engaged primarily in the assembling of ammunition boxes. The plaintiff, United Forest Products Company, Inc., supplied pre-cut component parts of wooden boxes to the Baxter Company. Early in 1967 the parties commenced negotiations for the purchase of Baxter Lumber Company by United Forest. On April 24 of that year a final agreement was entered into whereby United Forest agreed to purchase the company for $2,180,000. Payment was to be made in four installments, ranging from $500,000 to $600,000 each. The contract also contained a forfeiture provision which provided that upon default of payment the plaintiff would lose all previous payments and return the stock and management of the company to the defendants. Under the contract plaintiff was required to put $500,000 working capital into the business the first year. This investment was also to be forfeited upon default.

Shortly before the first installment was due in August of 1967, United Forest brought suit in federal district court alleging fraud and misrepresentation by defendants in the sale of the lumber company. United Forest, stating that the forfeiture provisions made rescission impractical, affirmed the contract, but sought actual damages of $1,180,000 and exemplary damages of $1,000,000. Plaintiff then requested leave of court to deposit the first installment into the registry of the court alleging that some of the defendants were nonresidents, and that unless the monies were sequestered none of the defendants would ever be able to respond to plaintiff for damages.

After an evidentiary hearing, the court determined that there existed evidence demonstrating misrepresentations of a substantial nature and, relying upon Fed.R.Civ.P. 67,1 ordered all monies due and payable under the contract to be deposited into the registry of the court. At the same time the court ordered plaintiff relieved from an attachment bond, but nevertheless required it to deposit an additional sum of $44,800 "which additional sum shall be held as security for such right of action, if any, as the individual Defendants might have under Iowa law for wrongful attachment * * *." (Emphasis ours.)

In November of 1967, defendants moved for disbursement of the funds. Plaintiff then requested leave of court to deposit the second installment, due December 31, 1968. After another hearing, the court held that the portion of the installment payments owed to three of the defendants would not be disbursed until decision of the case on the merits. The court also noted that since the plaintiff had made no direct allegations of fraud against the three other shareholders, they could not be charged with exemplary damages. He therefore ordered their shares of the first two installments to be disbursed, stating orally, however, that their shares of the last two installments would be held. At the time of appeal the total amount of money paid into court was $691,200.2

Initially we must decide whether the district court's order is appropriate for appellate review. The district court properly refused to certify "that there is no just reason for delay" under Fed.R.Civ.P. 54(b). This rule applies only to multiple claims, wherein there has been an adjudication of less than all claims and a party desires "finality" for purposes of appeal. Procedure for interlocutory appeal under 28 U.S.C. § 1292(b), was not followed and is not applicable. Nor does the off-shoot, "irreparable injury" rule of the Forgay-Conrad3 case render the matter appealable. This rule relates only to the appealability of a partial adjudication of a single claim and is not applicable here.

If the court's order is reviewable at all, our jurisdiction can only be premised upon the so-called "collateral order" doctrine which disposes of a right auxiliary to the merits of a claim filed. The United States Supreme Court in Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541, 546-547, 69 S.Ct. 1229, 93 L.Ed. 1528 (1949) stated that the appealability of a collateral order depends upon (1) whether the rights decided are collateral to the merits of the claim (cf. Western Steel Erection Co. v. C. H. Leavell & Co., 384 F.2d 764 (8 Cir. 1967)), (2) whether the order is "too important to be denied review," (3) whether the order is "too independent of the cause itself" to defer appellate review until the whole case is decided, and (4) whether the order involves an adjudication of an important question of law or is only an exercise of the court's discretion. The above factors are to be weighed with Mr. Justice Frankfurter's statement in DiBella v. United States, 369 U.S. 121, 126, 82 S.Ct. 654, 7 L.Ed.2d 614 (1962), that under proper application the "collateral order" doctrine is applied "when the practical effect of the order will be irreparable by any subsequent appeal."

In focus is the specific question whether the court was correct in refusing to require plaintiff to post security under and otherwise adhere to the Iowa law of attachment pursuant to Fed.R.Civ.P. 64.4 If review of the court's authority to sequester funds were required to await appeal of the merits on protracted litigation,5 compliance with the Iowa law of attachment would come too late to assure protection of the defendants' property rights involved. In order to attach monies before judgment the Iowa Code requires (1) that in a non-contract action the amount attached must be approved by a court of competent jurisdiction,6 (2) that plaintiff demonstrate statutory grounds for such attachment,7 and (3) that a bond be required in an amount double the value of the property to be attached.8 The policy reasons behind these statutory provisions are self-evident. Under Iowa law the amount of the attachment bond was not left to the discretion of the trial judge. The legislature required a bond double the value of the property attached not only as protection to the property owner but undoubtedly as an added deterrent to those who seek to attach property upon a mere statement of a contingent claim. See discussion in n. 10, infra. Of particular significance is the prerequisite of judicial approval as to the amount to be attached in a tort action, as involved here. Under Iowa law a party cannot arbitrarily govern the amount attached by inflating the prayer for damages in the complaint. The value of the property attached must have some realistic relationship to the damages theoretically sustained.

The issue here is not one related to the proper exercise of the court's discretion as to the amount of security to be posted. The question which makes this matter reviewable is whether the law permits a trial court to circumvent the Iowa law of attachment altogether. A similar issue of review was involved in the Cohen case where the district court had refused to apply New Jersey law requiring security for costs in a stockholders derivative action. Cf., e. g., Swift & Co. Packers v. Componia Columbiana Del Caribe, 339 U.S. 684, 70 S.Ct. 861, 94 L.Ed. 1206 (1950) (reviewed order vacating attachment); Phelps v. Burnham, 327 F.2d 812 (2 Cir. 1964) (reviewed order requiring the posting of security); McDonnell v. Birrell, 321 F.2d 946 (2 Cir. 1963) (reviewed order requiring party to make payments, to determine whether order conformed with requirements of state law).

We find the district court's order is reviewable under the Cohen rule. We now consider the merits.

Plaintiff seeks to avoid Rule 64 by reasoning that sequestering the funds did not involve "attachment" because the funds were never owned by the defendants. This argument is inconsistent with its asserted action. If the money does not belong to defendants, plaintiff has defaulted in its payment and is subject to the forfeiture terms of the contract. However, plaintiff has specifically elected to affirm the contract and has deposited the installment payments into court in order to avoid the forfeiture provision of the contract. Plaintiff cannot pursue inconsistent forms of relief to the prejudice of the defendants. See Myzel v. Fields, 386 F.2d 718, 740 n. 15 (8 Cir. 1967). Upon plaintiff's election to affirm the contract, the money paid under the contract legally belongs to the defendants. The fact that the money has been paid into the registry of the court does not deprive the defendants of ownership of the funds, since the court merely holds the money as trustee for the rightful owner. See In re Moneys Deposited, etc., 243 F.2d 443, 445 (3 Cir. 1957). Plaintiff has no recognizable interest remaining in those funds. Mere allegations of tortious injury cannot give plaintiff any specific interest in defendants' property. Plaintiff at this juncture is not entitled to any kind of lien, equitable or otherwise, on said monies which could place its interest above that of defendants' general creditors. At this point, plaintiff does not even enjoy the status of a general creditor. The district court itself tacitly recognized that the fund belonged to the defendants by disbursing a small portion of it to some of the defendants and by requiring plaintiff to post a $44,800 bond in case the defendants wished to sue for wrongful attachment.

Fed.R.Civ.P. 64 governs seizure of a person's property in a federal diversity action. The Advisory Committee comment on Rule 64 relates to the necessary application of state law in discussing the origin of the rule:

The "existing law" refers to the Conformity Act of 1872 which provided that in all cases at common-law, the procedure as to "attachment or other process should conform to the state practice." See Big Vein Coal Co. v. Read, 229 U.S. 31, 36, 33 S.Ct. 694, 57 L.Ed. 1053 (1913). Thus, with respect to such provisional remedies the federal courts are required to apply state law. See, e. g., Bernstein v. Van Heyghen Freres Societe Anonyme, 163 F.2d 246 (2 Cir. 1947); General Elec. Credit Corp. v. Waukesha Bldg. Corp., 259 F.Supp. 958 (W.D.Ark.1966); Hisel v. Chrysler Corp., 90 F.Supp. 655 (W.D. Mo.1950); 7 Moore, Fed.Practice ¶ 64.-01.-09 at 1501-1507 (2 ed. 1966). Rule 64, however, does make state law subject to any existing statute of the United States which might be applicable.

The question then is whether there exists any applicable federal statute which authorized the district court's action. The trial court relied upon the "literal" language of Rule 67. The history of Rule 67, however, demonstrates that it is not intended as an "equitable" alternative to the applicability of state law under Rule 64. Rule 67 was intended to apply only to a fund that is in dispute. See discussion in United States v. Balfour, Gutherie & Co., 192 F.Supp. 60 (S.D.N.Y.1961). When a disputed res or "sum of money" is deposited into the registry, the court holds the money in trust; it is "held for the benefit of whomsoever in the end it should be found to belong," Branch v. United States, 100 U.S. 673, 674, 25 L.Ed. 759 (1879). However, here the seized money is not in contest. Plaintiff's election to sue in tort and keep the bargain confirms this. The plaintiff seeks relief from material misrepresentation which has caused it damage since its bargain retained allegedly is less valuable than was represented. The damage, if any, arises out of the alleged excess consideration paid on the contract; the damage is not the consideration itself, since the bargain has been affirmed and rescission has not been elected. Plaintiff simply wants its bargain and its money too. At the same time it seeks to deprive defendants of their right to claim forfeiture or to sue for a breach of contract. Cf. General Pencil Co. v. George N. Kahn Co., 246 F.Supp. 60 (S.D.N.Y.1965); Dinkins v. General Aniline & Film Corp., 214 F.Supp. 281 (S.D.N.Y.1963). Rule 67 was not intended for such a one-sided before-judgment consequence.9

The sole question remaining is whether the court has an "inherent power" to allow the plaintiff to deposit the monies into court. Argument is made from cases relying upon the All Writs statute, 28 U.S.C.A. § 1651(a), which reads:

However, these cases and statute are not helpful here. This statute was not intended to be used to subvert the specific requirements governing attachment under state law. Section 1651 relates only to writs "agreeable to * * * principles of law." This brings us directly back to Rule 64. In De Beers Consol. Mines v. United States, 325 U.S. 212, 65 S.Ct. 1130, 89 L.Ed. 1566 (1945), which involved an analogous situation, the government sought a preliminary injunction under § 262 of the Judicial Code which preceded § 1651(a). The injunction sought restraint from withdrawal by defendant foreign corporations of any properties located in the United States of America and from "selling, transferring or disposing" of any of its properties until the determination of the merits of the suit. The complaint sought equitable relief under the Sherman Act and the government claimed the injunction necessary to enforce the court's ultimate decree. The district court entered the injunction. The Supreme Court vacated the same. The government admitted Rule 64 inapplicable because under New York law attachment could only issue in an action at law. However, the concluding remarks of Mr. Justice Roberts demonstrate, we feel, the error of the district court in the instant case:

The effect of plaintiff's action here is to obtain such a "so-called injunction" for an action at law. The situation is no different than if defendants were paid the monies directly and then were enjoined from "disposing" of them until the determination of the merits. Provisional remedies of attachment before judgment were not recognized at common law. They are statutory remedies in derogation of the common law and strict compliance with the statutory requirements is therefore necessary.10 However, even more cogent is the fact that before a person's property can be sequestered, basic principles of due process require adherence to recognized legal standards.

One reason plaintiff urged sequestering defendants' funds during the pendency of the claim was its concern for defendants' bankruptcy. Plaintiff's action in retaining the business sold and depriving defendants of the consideration during pendency of the litigation would almost guarantee this ominous result. The law does not recognize such leverage in the hands of litigants.

Judgment reversed with directions to vacate the court's order in conformity with this opinion.