198 U.S. 561
GREAT WESTERN MINING & MANUFACTURING COMPANY, by L. C. Black, its Receiver, Petitioner,
CHARLES A. HARRIS et al., Executors of D. B. Harris, Deceased.
Argued April 14, 17, 1905.
Decided May 29, 1905.
This case was begun by bill in equity, filed in the circuit court of the United States for the district of Vermont, in the name of the Great Western Mining & Manufacturing Company, a Kentucky corporation, by L. C. Black, its receiver, against B. D. Harris, a citizen of the state of Vermont. It is averred that the corporation was duly organized under the laws of the state of Kentucky. In substance the bill sets forth: That the Great Western Mining & Manufacturing Company was organized by the Kentucky legislature on January 19, 1856, for the purpose of owning and operating mining property, and selling coal. On or about February 10, 1859, it became the owner of coal properties to the value of about $40,000, situated in Lawrence county, Kentucky. The capital stock of said company was $200,000, divided into 2,000 shares [198 U.S. 561, 562] of $100 each. That previous to November 10, 1887, the capital stock of the company was owned as follows:
B.D. Harris, the defendant herein, 600 shares, par value $60,000 00 G. D. Harris, 600 shares, par value 60,000 00 John Carlisle, 440 shares, par value 44,000 00 George W. Carlisle, 300 shares, par value 30,000 00 James C. Holden, 4 shares, par value 400 00 Loren Hinsdale, 4 shares, par value 400 00 George S. Richardson, 52 shares, par value 5,200 00
On November 10, 1887, the stockholders increased the capital stock in the sum of $50,000, the same being distributed among the stockholders as follows:
To B. D. Harris, 150 shares, par value $15,000 00 To G. D. Harris, 150 shares, par value 15,000 00 To John Carlisle, 110 shares, par value 11,000 00 To George W. Carlisle, 75 shares, par value 7,500 00 To George S. Richardson, 13 shares, par value 1,300 00 To James C. Holden, 1 share, par value 100 00 To Loring Hinsdale, 1 share, par value 100 00
[The record she is that this increase was in fact made on January 11, 1888, in pursuance of a meeting authorized to be called at that date in the meeting of November 10, 1887, and certificates issued January 14, 1888.]
On April 22, 1889, a further increase of capital stock was had by adding 1,000 shares of $100 each, which was distributed as follows:
To B. D. Harris, 300 shares, par value $30,000 00 To G. D. Harris, 300 shares, par value 30,000 00 To John Carlisle, 220 shares, par value 22,000 00 To George W. Carlisle, 150 shares, par value 15,000 00 To George S. Richardson, 26 shares, par value 2,600 00 To James C. Holden, 2 shares, par value 200 00 To Loring Hinsdale, 2 shares, par value 200 00 [198 U.S. 561, 563] The complainant avers that at the time the increases of capital stock were made and carried out, the stockholders had formed a plan of issuing bonds and selling the same, and that the issues and distribution of said stock were made for the purpose of defrauding said company, and obtaining, without consideration, the aforesaid shares of capital stock, and for the purpose of selling the same to the company in connection with the said loan, and defrauding the company out of a part thereof. That said issues of capital stock were made by the shareholders and board of directors, of whom the defendant was one, ostensibly in consideration of alleged betterments of said mining property, which betterments, it was pretended, were made and paid for out of the net earnings of the company, which, it was represented, had increased the value of the property belonging to the stockholders. Complainant alleges that no such betterments had been made, and if made they were paid for out of money borrowed upon the credit of the company, for which an indebtedness then existed and still exists. That in fact there had been no net earnings which had been put into betterments by the company, and that the issue of said stock was without consideration, illegal and void, and a breach of duty upon the part of the stockholders and the directors of the corporation to its creditors. That said stock so issued still remains outstanding in the names of the parties to whom it was issued, or their assignees. That on May 13, 1889, the directors of the company, of whom the defendant Harris was one, and who were also stockholders in the company, for the purpose of defrauding said company, and abstracting the assets of the company for their own use and benefit, the corporation then being insolvent, without means to pay its floating indebtedness, which then amounted to $100,000, or more, agreed that they would obtain a loan of $300,000 for said company, said loan to be evidenced by bonds to the number of 300, in the denomination of $1,000 each, to be secured by mortgage upon the property of the company. That the issues of stock had been made upon the consideration that certain betterments [198 U.S. 561, 564] had been added to the property, and had been paid for out of the profits of the operation thereof, which profits would otherwise belong to the stockholders, when in truth and fact the said company was largely insolvent, and had a mortgage debt of about $60,000 upon it, and a floating debt of $100,000 or more. In fact, said company had not made any net profits whatever, and said betterments had not been made at all; or, if made, had been paid for out of the earnings of the company, and no consideration than that herein stated was ever paid by the stockholders for the stock issued to them. That it was for the purpose of carrying out the scheme of abstracting from the company money arising from the sale of the bonds, and for that purpose only, that said stock was issued to the defendant Harris and others. That said bonds were sold at a price of 85 cents on the dollar, including a bonus of 50 per cent of the par value of said bonds in the stock of the company; that is, a purchaser of a $1,000 bond was entitled to have with said bond $500 of the capital stock of the company. That in pursuance of the combination aforesaid the said directors and stockholders furnishing said bonus stock were paid for the same from the proceeds of the sale of the bonds. The stock was furnished as follows, in pursuance of the said arrangement:
By B. D. Harris, 450 shares, par value $45,000 00 G. D. Harris, 450 shares, par value 45,000 00 John Carlisle, 336 shares, par value 33,600 00 George W. Carlisle, 225 shares, par value 22,500 00 George S. Richardson, 39 shares, par value 3,900 00
That out of the proceeds of the sale of the bonds the sum of $75,000 was distributed among the parties, as follows:
To B. D. Harris the defendant herein $22,500 00 To G. D. Harris 22,500 00 To John Carlisle 16,800 00 To George S. Richardson 1,950 00 To George W. Carlisle 11,250 00 [198 U.S. 561, 565] That, as a matter of fact, when the stock was contributed the company was insolvent, and could not carry on its business without making the said loan; that said stock was worthless, and was sold to the company at 50 cents on the dollar for the purpose above mentioned, and thereafter said stock was transferred to the purchasers of the bonds. Then follow allegations as to the mismanagement of the company, and the wrongful payment of dividends, and the averment that on or about September 12, 1892, one of the creditors of the company was compelled to make an application to the United States circuit court of Kentucky, wherein a request was made for the appointment of a receiver of the property and franchises of the company for the purpose of realizing its assets, and distributing them among its creditors; that in said proceedings all of the property of the Great Western Mining & Manufacturing Company was sold, and was found to be of the value of $75,666.66, which left a large floating indebtedness of about $90,000, besides a large balance due upon the bonded indebtedness, aggregating about $270,000; that in said proceedings in the United States court for the district of Kentucky, L. P. Black was appointed receiver of the assets of the company, for the purpose of realizing upon the same for the benefit of its creditors, and it is averred that, by special order of the United States court, said receiver had been directed to prosecute this suit, either in his own name or that of the company, as may be proper. The prayer of the bill is for an accounting respecting the matters and things set up in the bill, and that the defendant be required to pay to the complainant the sums which may be found to be due by reason of the matters and things set forth, and for general relief. An answer and replication were filed, and the issues made up were heard upon the pleadings and testimony. The circuit court found the estate of B. D. Harris, he having died pending the suit, liable in the sum of $15,000, being the amount Harris received from the company in exchange for the 300 shares of stock issued to him in April, 1889, and held that the estate was [198 U.S. 561, 566] not liable on account of the amounts received by him for stock previously issued to him, and was not liable to account for the amounts taken by other officers, directors, or stockholders of the company. The case in the circuit court is reported in 111 Fed. 38. Upon cross appeals the circuit court of appeals for the second circuit reversed the judgment of the court below upon the ground that the circuit court had no jurisdiction of the action, as the same could not be brought by the receiver in the name of the corporation, and if it could be maintained by the corporation, or in its behalf, no case was made for a recovery, because of the consent of the stockholders to the transactions complained of. 128 Fed. 321. The order appointing the receiver in the circuit court is found in the record, and is as follows:
The application for the order to bring this action sets forth:
Upon this application the court made the following order:
Mr. Harlan Cleveland for petitioner.
[198 U.S. 561, 570] Messrs. Brainard Tolles and Julien T. Davies for respondents.
Mr. Justice Day delivered the opinion of the court:
The theory of the complainant's case seems to be that the transfers of the stock of the defendant and other directors and stockholders, paid for out of the proceeds of the bonds, in view of the allegations of the bill as to the condition of the company, and the purposes in view by the defendant and associates, amounted to a breach of duty upon the part of the defendant and other directors, and a conversion to their own use of the property of the company, for which they should be held to account in an action brought by the company, through its receiver, under the order of the circuit court of Kentucky. The particulars of the suit in which the receiver was appointed are not very fully set forth, but enough appears to show that he [198 U.S. 561, 574] was appointed in a suit to adjudicate and enforce liens, and subject the property to the payment of the claims of creditors. In the brief of the learned counsel for complainant, it is styled a 'general creditors' and foreclosure suit.' It does not appear that, by order of the court or otherwise, there has been any conveyance of the property and assets of the company to the receiver, nor has the corporation been dissolved, and the receiver made its successor, entitled to its property and assets. The minute books of the company, in evidence, do not show any authority by the corporation for the filing of this bill in the name of the Great Western Mining & Manufacturing Company or otherwise, although meetings were held after the appointment of the receiver. Nor is our attention called to any statute vesting the title of the corporation in the receiver. So far, then, as the receiver is concerned, his right to prosecute the action must depend upon his powers as such officer of the court and the order of the court, set forth in the statement of facts, authorizing him to bring suit against the stockholders and directors for the purpose of realizing the assets, either in his own name or that of the corporation, as may be proper. This condition of the record brings up for consideration at the threshold of this case the question of the extent of the power of the receiver to maintain this action under the order of the court, either in his own name or that of the company. As to the power of the court to authorize the receiver to use, we think the case is ruled by Booth v. Clark, 17 How. 338, 15 L. ed. 170, in which case the authority of the court to authorize a receiver appointed in one jurisdiction to sue in a foreign jurisdiction was the subject of very full consideration. In that case it was held that a receiver is an officer of the court which appoints him, and, in the absence of some conveyance or statute vesting the property of the debtor in him, he cannot sue in courts of a foreign jurisdiction upon the order of the court which appointed him, to recover the property of the debtor. While that case was decided in 1854, its authority has been frequently recognized in this court, and as late as Hale v. Allinson, [198 U.S. 561, 575] 188 U.S. 56 , 47 L. ed. 380, 23 Sup. Ct. Rep. 244, it was said by Mr. Justice Peckham, who delivered the opinion of the court:
In that case the following language, as to a receiver's powers, from Booth v. Clark, 17 How. 338, 15 L. ed. 171, is quoted with approval:
Mr. Justice Wayne, who delivered the opinion of the court in Booth v. Clark, stated, among others, the following reasons for refusing to recognize the powers of a receiver in foreign jurisdictions:
It will thus be seen that the decision in Booth v. Clark rests upon the principle that the receiver's right to sue in a foreign jurisdiction is not recognized upon principles of comity, and the court of his appointment can clothe him with no power to exercise his official duties beyond its jurisdiction. The ground of this conclusion is that every jurisdiction, in which it is sought, by means of a receiver, to subject property to the control of the court, has the right and power to determine for itself who the receiver shall be, and to make such distribution of the funds realized within its own jurisdiction as will protect the rights of local parties interested therein, and not permit a foreign court to prejudice the rights of local creditors by removing assets from the local jurisdiction without an order of the court, or its approval as to the officer who shall act in the holding and distribution of the property recovered. In Quincy M. & P. R. Co. v. Humphreys, 145 U.S. 82 , 36 L. ed. 632, 12 Sup. Ct. Rep. 787, the powers of a receiver were under consideration, and the following language was quoted with approval (p. 98, L. ed. p. 637, Sup. Ct. Rep. p. 792): 'The ordinary chancery receiver, such as we have in this case, is clothed with no estate in the property, but is a mere custodian of it for the court, and by special authority may become an officer of the court to effect a sale of the property, if that be deemed necessary for the benefit of the parties concerned.' There are exceptional cases, such as Relfe v. Rundle (Life Asso. of America v. Rundle), 103 U.S. 222 , 26 L. ed. 337, in which the entire property of the insolvent company was vested in the superintendent of insurance of the state, where his authority did not come from the decree of the court, and his right to sue was maintained. In Hawkins v. Glenn, 131 U.S. 319 , 33 L. ed. 184, 9 Sup. Ct. Rep. 739, it appeared that Glenn had derived title by assignment and deed, and he was permitted to sue. In the case now before us it does not appear that the receiver had any other title to the assets and property of the company than that derived from [198 U.S. 561, 577] his official relation thereto as receiver under the order of the court. In such a case we think the doctrine of Booth v. Clark is fully applicable. It is doubtless because of the doctrine herein declared that the practice has become general in the courts of the United States, where the property of a corporation is situated in more than one jurisdiction, to appoint ancillary receivers of the property in such separate jurisdictions. It is true that the ancillary receiverships are generally conducted in harmony with the court of original jurisdiction, but such receivers are appointed with a view of vesting control of property rights in the court in whose jurisdiction they are located. If the powers of a chancery receiver in the Federal courts should be extended so as to authorize suits beyond the jurisdiction of the court appointing him, to recover property in foreign jurisdictions, such enlargement of authority should come from legislative, and not judicial, action.
Nor do we think the jurisdiction is established because the action is authorized to be instituted by the receiver in the name of the corporation. Such actions subjecting local assets to a foreign jurisdiction and to a foreign receivership would come within the reasoning of Booth v. Clark. If a recovery be had, although in the name of the corporation, the property would be turned over to the receiver, to be by him administered under the order of the court appointing him.
It is urged that jurisdiction in this case is sustained by the case of Great Western Teleg. Co. v. Purdy, 162 U.S. 329 , 40 L. ed. 986, 16 Sup. Ct. Rep. 810, in which it was held that the assets and affairs of an insolvent corporation being in the hands of a receiver, the court might direct the calls or assessments upon delinquent shareholders who had not paid for their shares, thereby using the authority the directors might have exercised before the appointment of the receiver. In that case, a receiver appointed by the circuit court of Cook county, in Illinois, under the direction of that court brought an action in the name of the Great Western Telegraph Company, an Illinois corporation, by its receiver, against Purdy, a citizen of Iowa, to recover a sum alleged to [198 U.S. 561, 578] be due from him upon an assessment upon his stock subscription, and it was held that the Illinois court might make the assessment and calls necessary to collect the stock which would be binding in another court. The jurisdiction of the Iowa court was not called in question in the state court of Iowa, where the original action was brought, nor was the question of jurisdiction raised in this court, or passed upon in deciding the case. While not detracting from the authority of that case as to the matter decided, we see nothing in it to indicate that, had the question herein presented been made, it would have been decided otherwise than herein indicated.
There are numerous and conflicting decisions in the state courts as to the rights of a receiver to sue in a foreign jurisdiction upon principles of comity, which it is not necessary to review here. In this court, since the case of Booth v. Clark, 17 How. 338, 15 L. ed. 170, we deem the practice to be settled, and to limit a receiver who derives his authority from his appointment as such, to action, either in his own name or that of an insolvent corporation, such as may be authorized within the jurisdiction wherein he was appointed.
We think the Circuit Court of Appeals was right in holding that the Circuit Court had no jurisdiction of this action.
This view of the case renders it unnecessary to consider the other questions made in the record.
Mr. Justice Brewer concurs in the decree.