text:
    Hannah V. Gallagher et al. v. Asphalt Company of America.
    [Decided May 16th, 1904.
    Filed October 17th, 1904.]
    1. The United States circuit court in New Jersey had, in a suit by a foreign creditor of a New Jersey corporation, appointed a receiver, who had taken charge of all the assets of the corporation that were capable of being seized and had undertaken the collection of amounts due from stockholders on account of unpaid subscriptions, and in such suit the federal court had also issued an injunction against the insolvent corporation in the terms prescribed by the New Jersey statute, P. L. of 1829 p. 59 § 6; Corporation act of 1896 §§ 65, 66. Qutere. Whether this suit in the federal court was the New Jersey statutory equitable action or some dissevered part of such statutory action.
    2. The equitable action under the above-cited statute was then commenced in the court of chancery of New Jersey, and a final decree was made therein that an injunction issue disabling the corporation from exercising its franchises, but the application for a receiver upon the final decree was denied. 65 N. J. Bq. {20 Dick.) 258. The motion for a receiver being now renewed, and it not appearing that there were assets beyond the scope of the federal receivership — Held, that the motion should be denied.
    3. Nature of the New Jersey statutory action in. equity against an insolvent corporation, and the extent to which the federal court has taken jurisdiction of it on the ground of diversity of citizenship, considered.
    On application for receiver.

      Mr. Charles E. Hendrickson, Jr., and Mr. Newlin (of Pennsylvania), for the complainants.

      Mr. Rynier J. Wortendyke, Mr. A. H. Winiersteen (of Pennsidvania) and Mr. Tolies (of Yew York), for the defendant.
   Stevenson, V. C.

(orally).

I laid this case over last week for decision to-day, because I desired to examine the opinions of the learned judges of the circuit court of appeals which relate to the jurisdictional questions in this case and which have been delivered or published since I delivered my original oral opinion upon which an injunction was granted in this cause. I have not had any opportunity to refer to the papers, the affidavits and other papers that were read last week. So far as the branch of the case was concerned, which required for its treatment reference to those affidavits, I was prepared last week to announce the conclusion which I formed and still entertain. But during the week I have tried, with some care, to examine the opinions of the federal court, which I have referred to, in order to aid me in determining the very important question what jurisdiction has this court now in this cause to appoint a receiver. If I had reached a conclusion that the settled federal law excludes the court from exercising such jurisdiction, it then would be unnecessary for me to entertain the question addressed to the discretion of the court whether in this particular case, at this time, a receiver ought properly to be appointed. I wish very much that I had the time to prepare a written opinion upon this first branch of the case, because it is something to be handled with the utmost delicacy and care. It is absolutely impossible for me to undertake that work in the present state of my engagements, and I shall therefore try to indicate to counsel the view that I have come to entertain on this very important subject. It is quite important for counsel to know what view the court takes, because this application, if unsuccessful now, may be renewed at a later day.

This bill was filed under our Insolvent Corporation act, as we have got to calling it, by a complainant claiming to occupy the position of a creditor. The bill invokes the statutory jurisdiction of this court over insolvent corporations. In determining any question of jurisdiction, such as is before the court now, it is, in my opinion, of the utmost importance that a correct view should be entertained of the exact nature of this statutory action. And I may say here that the view which I entertain of the nature of this statutory action is in many respects radically different from that which is indicated in the opinions of the learned federal judges to which I have referred.

In my former opinion in this cause I pointed out the origin of this proceeding. It had its origin in an act of the legislature of the State of Yew York, passed in 1825. The statutory remedy was prosecuted under that act by the attorney-general of the state, although a creditor was permitted to bring the suit himself. If you go to the very origin of our act you find that the legislative intent is to provide a means by which, on behalf of the public, the corporate existence or the corporate operations of a creature of the legislature may be terminated and by which, to use a briefer expression, corporate franchises are declared forfeited to the state. That is the fundamental conception of this whole statutory proceeding. It is not a proceeding by a creditor to collect a debt. It is not a proceeding by a stockholder to enforce his rights as a member of the corporation. The legislature of the State of Yew Jersey passed the first act, the act which now exists in the form of sections 65 and 66 of our present Corporation act, following this Yew York model as a part of an act to prevent fraud by incorporated companies. It was not an act regulating a creditors’ suit. It was a radically different statute from the one that I referred to last week, enacted b}r the legislature of Delaware, by which, when a corporation becomes insolvent, it is liable to have its assets seized, sequestrated and administrated for the benefit of creditors. The fundamental idea of the act was to prevent a corporation from going on in business when the interests of the stockholders and the safety of the public, including, of course, the stockholders and creditors, required that its franchise should be forfeited to the state. That is indicated in the title of the act, and every provision of the statute bears out that construction. It is true that the legislature saw fit to permit this statutory remedy for the protection of the public and the prevention of fraud to be instituted by any stockholder or any creditor. But it does not follow from that that what was done was to establish a stockholders’ suit or a creditors’ suit. The fact that it was not a creditors’ suit is sufficiently indicated1 by the alternative — either a stockholder or a creditor may institute the suit. If, when a creditor institutes it it is a creditors’ suit, it would seem to follow that when a stockholder institutes it then it is a stockholders’ suit.

Now, the slightest reflection upon the nature of a creditors’ sirit against a corporation and a stockholders’ suit against a corporation will show how radically different those two things are. When we have either a creditor or a stockholder, qualified to appear as the actor, to set in motion the machinery of the court for the accomplishment of justice, for securing this important remedy on behalf of the public for the prevention of fraud, certainly there is a .very strong indication that what the statute is aimed to secure is the redress or the prevention of a public wrong rather than the enforcement of a private right— a private right either of a stockholder qua stockholder, or of a creditor qua creditor.

' About forty or fifty years ago, Chancellor Williamson, in the leading case of Rawnsley v. Trenton Life Insurance Co., 9 N. J. Eq. (1 Stock.) 95, said with that clearness which characterized almost everything that he ever did say, it is .not the particular grievance of the party complainant which is redressed in this proceeding; it is the public grievance. I am giving substantially his language; 1 have recently had occasion to quote it in an opinion. It is not, he says in substance, the private interest of the party complainant; it is the public interest which is cared for, including the general interest of the stockholders and creditors.

The view that I entertain of the character of this proceeding is that it is more in the nature of a public action brought not in the name of the attorney-general but brought by direction of the state in the name of any person who, as stockholder or creditor, is so interested in the assets of the corporation as to have an interest in instituting the statutory suit. We find the same principle illustrated throughout our jurisprudence. A criminal law is enforced, or a quasi criminal law, by qui lam actions, actions for penalties, where private prosecutors are allowed to intervene. The state relies upon the private individual to institute the action, the primary object of which is the protection of the state. I take it that in this case the substitution in New Jersey of the attorney-general as the necessary actor in this case by any stockholder or any creditor was made simply because the legislative policy could be, would be inevitably, carried out more fully in greater numbers of instances by leaving the power to institute the proceeding with a stockholder or a creditor — any stockholder, or any creditor; because that being so, as soon as the condition came into existence, which it is the intention of the act to prevent or to remedy, some stockholders or some creditor would have sufficient interest in the assets which would be distributed as the result of the final decree to set the machinery of the court in motion to accomplish directly the object, and only essential object, of the suit, namely, the placing of the corporation under disabilities with reference to the exercise of its franchises. That this is not a creditors’ suit, but that it is such a quasi public proceeding, I think is well illustrated by the fact that the suit can be prosecuted to a final decree and the corporation can be placed under disabilities, and then an order can be made dissolving the corporation, precisely as has been done in this case, without' administering any assets and without there being any assets capable of administration by this court. I might say in this connection, that Chancellor Walworth indicated this view of the'New York statute within five or six years after it was first passed. I cited the case in my former opinion in this case. He said, in substance, that this was an instance where the creditor — I think at that time the stockholder was not permitted to bring suit in New York — the creditor was allowed to bring an action to secure a forfeiture of the corporate franchises.

Now, that being the view which I have entertained, and which I still entertain, and I think it is the view entertained generally in the State of New Jersey, I have difficulty’ in construing and applying the views'expressed by these learned federal judges/ because it is very plain that 'they look at the whole thing in a different way, and they regard this proceeding as a mere creditors’ suit, and they regard the decree for an injunction and a receiver as merely enforcing the private right of the creditor.

There are a good many questions which might have been discussed and might have been settled by these learned federal judges, but they are neither discussed nor settled. The view which I have indicated perhaps supports the theory that this is' not a civil action within the meaning of,the Judiciary act. It perhaps supports' the view that the controversy in the cause is not wholly between the particular complainant or petitioner,:who happens to be a non-resident, and the New Jersey corporation. If Chancellor Williamson was right when he said that the grievance redressed in this cause was not the particular grievance of the stockholder or creditor -who happened to set the machinery of the court in motion for the benefit of the public — if he was right, why, then, there are certainly strong grounds for holding that the controversy is not wholly between citizens of different-states. ■

l'n this connection it is worth while to note that, according to the well-settled doctrine of this court, while this suit is an action inter partes down to the time for the decree for an injunction, it then ceases to be an action inter partes, the complainant no longer controls the cause, and the stockholders and creditors have to be brought in. I never heard of a decree fixing the status of the corporation as one under disabilities, with reference to the exercise of its franchises being vacated without notice to all the stockholders and all the creditors of the corporation. That is the sort of a status you have as the result of a decree in this suit in rem. Very many of our chancellors have remarked — I think, certainly, the idea is expressed in a number of reported cases — that in fact all of the stockholders and all of the creditors constitute a single party complainant in this proceeding. This statement is based on the idea that the actor who originates the proceeding is not acting in a private capacity, merely coming into court with his own private grievance as a creditor and seeking a means of collecting his debt. Nor is he acting on his own behalf and as the representative of creditors with a common grievance which such creditors, as a class, have against the defaulting debtor corporation. Nor is he acting, in case he is a stockholder, on behalf of the stockholders as a class for the redress of any injury to the rights of such stockholders. When a corporation is hopelessly insolvent, its stockholders are interested in a variety of ways in having its activities perpetually enjoined and its assets equitably administered. In the same case creditors have a very great interest, in some respects the same but in others widely different from that of the stockholders. The public at large, as has so often been pointed out, has a further distinct interest in preventing an insolvent corporation from contracting obligations and continuing its business operations in which it may deceive new parties and thereby perpetrate fraud.

.All these parties complainant, with their various and different injuries to prevent or injuries to redress, imite in securing the accomplishment of their respective purposes by having our statutory action prosecuted to a decree which disables the insolvent corporation from exercising its franchises. The extent to which the various classes to which I have referred derive any benefit from the prosecution of the statutory action to a final decree, or beyond that point, of course, depends upon the circumstances of each particular case. But the object of the suit, it seems to me, cannot be determined by considering whether the public, by the attorney-general, or a creditor alone, or on behalf of himself and all other creditors, or a stockholder alone or on behalf of all the stockholders, as a matter of fact, happens to institute the action in a particular case.

Although the statute does not provide that the bill or petition shall state that it is filed on behalf not only of the petitioning stockholder or creditor but for the benefit of all the stockholders and creditors who come into the suit — although such statement is unnecessary in the bill or petition — it is almost universally inserted. While there may be some difference of opinion as to the right of a stockholder or creditor to force his way into a pending suit and be made a party complainant, I strongly incline to the view that, subject to the regulation by the court, such intervention will be allowed, and the particular stockholder or .creditor who has started the suit cannot arbitraria exclude these otlier parties equally interested from coming into a suit which, when the decree goes, confessedly will be beyond his control. At any rate, it is the uniform practice to admit stockholders and creditors who apply to be made parties complainant, and while I have not lately looked into the matter I do not recall any case where it has been directly held that the original complainant or petitioner can arbitrarily prevent such intervention.

That our statutory action against an insolvent corporation, the only essential object of which is to place the corporation under disabilities, is not in fact the personal action of the particular stockholder or creditor who is authorized to bring the action, and who may be induced to bring it from a variety of selfish motives, is illustrated by the nature of the final decree which the actor, the creditor, we may say, obtains in his suit. He obtains no decree which necessarily benefits him personally. Eór does he obtain, any decree which he owns or controls as a representative of or trustee for others. The decree, from the moment it is entered, is beyond his exclusive control and stands for the benefit of all the creditors and stockholders equally. This decree, while fixing the status of the complainant as a creditor for the purpose of qualifying him to sue, does not make it res adjudicata that he is entitled to $1 of the assets. He is obliged, after the final decree for an injunction has been obtained upon his motion and through his instrumentality, to prove his claim against the assets precisely as all the other creditors must prove their claims, and his entire claim may be rejected. He may thus utterly fail to secure the object which he had in view in bringing the suit, but the statutory object of the suit — its only legal object — is fully accomplished. There certainly seems to be grounds for arguing that the “matter in dispute” in this suit in rem is the res, i. e., the status of the defendant corporation with respect to the exercise of its franchises, and that this “matter in dispute” remains the 'same whether' the complainant alleges himself to 'be a creditor and is inspired by the hope of a dividend, of alleges himself to'bc a stockholder whose sole object in prosecuting the suit is to stop the operations of the corporation and thereby ward ofE a liability or an increase of liability on a stock subscription, or whatever, among numerous other possible motives, may actuate the complaining stockholder or creditor in instituting the litigation.

1 did not mean, however, to deal at length with these various questions, because the federal courts in these two cases which have been cited pass over them.

W'hat, then, have the federal courts decided as bearing upon the jurisdiction of this court and of their own court under this act? They do not say that a stockholder may maintain this suit in the federal court. There is no discussion of that question. Whether a Pennsylvania stockholder could initiate this proceeding in the United States federal court, I do not know. If the federal courts had decided that matter it would very greatly aid me in determining what the present status of this jurisdictional question is. And in both the cases which have been cited (United States Shipbuilding Co. v. Conklin, 126 Fed. Rep. 132, and Land Title and Trust Co. v. Asphalt Company of America, 127 Fed. Rep. 1), in the opinion of Judge Acheson and in the opinion of Judge G-rajq the utmost pains are taken to exclude from consideration the question whether a general creditor, without a judgment or without'a lien, is qualified to maintain this action, where there is diversity of citizenship, in the United States circuit court. I must confess that if that question had been decided by the federal courts it would throw great light upon the doctrine which the federal courts mean to enunciate, or will yet enunciate, in regard to this whole question of jurisdiction. They do not find it necessary for the purposes of maintaining the jurisdiction, in either of these cases, to decide whether the stockholder, being a citizen of another state, can have a standing in the United States circuit court to initiate this suit. ÜSTor do they decide whether the foreign creditor, who has the standing only of a general creditor, an unsecured creditor, can institute it.

Without discussing the question whether these deliverances of these learned judges arc necessarily a part of the ratio de cidendi of the cases, or are by way of dictum, taking the statements as indicating the law of the federal courts, I can only reach this conclusion: that (and I may say here that the conclusion is based not only upon the deliverances of the federal courts but upon the careful manner in which they abstain from deciding some of these other questions) the doctrine seems to be established by these cases that where the complainant is a creditor of the insolvent corporation, holding a lien upon all or any of the assets of the corporation, he then is qualified under the limitations of the constitution of the United States, of the statutes of the United States and of the rules of practice of the federal equity courts, to come into the circuit court of the United States and prosecute so much of this action as these learned judges find to be a creditors’ suit.

Now, whether the decision goes any further than that, I freely confess I do not know. I cannot discover upon reading these opinions whether it is held that this injunction that was granted, restraining the corporation from the exercise of its franchises, is the statutory injunction which suspends permanently the power of the corporation to exercise its franchises, or whether it is only an injunction in aid of the effort of the complainant to get payment of his debt -by sequestration of the assets of the corporation. I incline to think that the latter is the true view which the federal courts take. These federal courts regard the whole proceeding here as a statutory action for redressing the grievances of creditors, especially for the redress of the grievance of the particular creditor who files the bill. That seems to be the view. And, if that be true, then .the injunction is ancillary to the obtaining of that relief. It certainly is noteworthy that the next step in this New Jersey suit, which I have described, in the language of Chancellor Walworth, as an action practically for the forfeiture of the franchises of 'a corporation, the next step is an order 'dissolving the corporation. ’ And yet, for some reason, the parties interested refrained from making application-to the federal court for an order of dissolution, and two or three weeks ago came here into this court and took such an order, which, of course, has to be filed with the secretary of state. Whether the federal court would have made such an order, or, if so, it would have been such an order as under the statute should he filed, or could he filed, in the office of the secretary of State of Yew Jersey, I do no't stop to inquire. But all of the parties to this litigation seem to have conceded that this court had jurisdiction of that part of the action which is directed toward fixing permanently the status of the corporation. That seemed to he generally conceded.

And now we come right to the sharp point, whatever they may think in the federal court; no statutory receiver can he appointed in this court excepting at the time when the statutory injunction is ordered or at some time thereafter. In other words, the ordering of the statutory injunction, which places the corporation under disabilities with reference to the exercise of its franchises, is the jurisdictional fact, the condition precedent which must occur before any statutory receiver can be appointed. That, I think, has been the settled rule of the court from the very origin of our statute.

Yow, if the federal courts have entertained this suit simply so far as it is a proceeding to sequestrate assets for the benefit of creditors, and ancillary to that have granted an injunction, which, of course, they had a perfect right to do, such injunction is not the statutory injunction, and the receiver appointed in the federal court would not therefore get title under our statute. The result would be that this court had full jurisdiction to grant the statutory injunction, which I have held to be the only necessary object of the suit, disabling the corporation, putting it permanently under disabilities, preventing it from exercising its franchises. I say this court then had jurisdiction to do that. Yo other court has done that thing, or undertaken to do that thing.

Of course, I am not either commending or criticising the view of our statutory action which permits its severance into two distinct actions which can he prosecuted in two different courts at the same time. I am merely endeavoring to ascertain the principle controlling the jurisdiction of the federal court and of this court, which seems to have been enunciated in these recent federal decisions, either by way of dictum or otherwise.

And now we are back precisely where I thought we were when I originally decided the cause. We are back at the question, the court having discretionary ¡rower to appoint a statutory receiver, should such power be exercised? The court is not obliged to appoint the statutory receiver. The whole proceeding may end in placing the corporation under disabilities by the injunction; enjoining it from exercising its franchises; or the proceeding may go- a step farther and there may be an order dissolving the corporation, and there may never be a receivership in this court, and there may never be any reason why there should be. I indicated to counsel when the application was made heretofore, when I had not any aid from the decisions of the federal courts in determining any of these questions of jurisdiction, that they must come here and show some good reason why a receiver should be appointed before any would be appointed. This corporation might have been stripped of its assets by a general creditors’ suit, such as we have exhibited in the case of Wetherbee v. Baker, 35 N. J. Eq. (8 Stew.) 501. The corporation might have been adjudged an involuntary bankrupt and have had all of its assets vested in a trustee. That would not interfere with the prosecution of this suit down to the decree for the disabling injunction and beyond that to the order dissolving the corporation.

The question is, cui bono? That is the question for the applicant here, for the applicant to answer.

Well, this is the situation as I understand it, although I cannot recollect the facts or state them as clearly as I could last week. This is the situation as I recall the affidavits. The federal receiver, no matter what the theory of the jurisdiction of that court may be, and no matter what the nature of the injunction granted by the circuit court in fact may be, the federal receiver has undertaken the work of sequestrating all the assets of the insolvent corporation. The federal court of appeals holds that the circuit court of the United States has full jurisdiction- of the corporate assets, and it has, of course, jurisdiction over tiro corporation, l’n tliis case the corporation came in voluntarily and subjected itself to the jurisdiction of the federal court, consented to the injunction, consented to the final decree and consented to the order appointing the receiver. And this receiver has not only taken into his custody all the assets which are capable of being seized, but he has actually undertaken the work of collecting for the benefit of the creditors of the eorpora+ion the amounts due from stockholders on account of unpaid subscriptions. He is engaged in that work at the present time. He has brought a suit against some of the stockholders, and he has made an adjudication that he will not bring any suit against certain other former stockholders, because he thinks such suits would only be a waste of the assets in his hands, because the prospect of recovery is hopeless. That I understand to be the situation disclosed.

How, this particular creditor wants to have those particular stockholders attacked by the receiver. This particular creditor wants to have the efforts made to recover a very large amount of money which apparently would be recovered if there is any liability. Well, the question is, why should this court appoint a receiver and permit such receiver to shoulder his way into this business of enforcing the liability of these stockholders and bring a suit which the federal receiver has declined to bring? It is the duty of the federal receiver to bring the suit if the circumstances justify it. But if he will not bring it nobody has suggested that the federal court is not open to an application on the part of this particular creditor, the complainant here, to permit her to file a bill and use the receiver’s name in enforcing this liability which the federal receiver thinks, under the advice of his counsel, cannot be enforced. Ho such application has been made. The court has not declined to receive and act favorably upon such application upon the usual terms, which involve the giving of security to the receiver, indemnifying him against all liability for costs. The complainant, the creditor here, points out a somewhat unusual order; I am not going to criticise it, for I do not know the circumstances under which it was made; but the complainant points out a somewhat unusual order, which seems to prevent the receiver from bringing suits, or rather, I will not say that, winch seems to discourage suits by erecting a somewhat peculiar fence around the receiver and around the stockholders whom the complainant wishes, to. have sued. But, as was pointed out in the argument, and I think very satisfactorily, this order was only an offer, was only an order to be published under which creditors might come forward and act if they saw fit to do so. There is nothing in the order to prevent a creditor from walking into the United States circuit court and asking that court for permission to bring this suit at his own expense, he first indemnifying the receiver; and there is nothing to indicate that the court will not grant such an order. But I really consider this matter under protest, because it is not for this court to pass upon the action or non-action of the United States .circuit court. The remedy of this complainant is with that court. This court cannot hear these suggestions that were attempted to be made that this particular creditor cannot get justice in the United States circuit court for reasons which were not disclosed., Of course,' this complainant can get justice there, and that court is open. If this complainant wants to have a receiver appointed in this court, I think she will have to show that there is some asset of this corporation which a receiver of this court can collect,, or may collect, which the federal receiver has failed to collect, has not reduced to possession, has declined to undertake to collect, and that he, the applying creditor hero, has exhausted the ordinary remedies, such as I have described, which are open to him in the federal court to bring about an effort to collect this particular asset. I am not indicating that this court will sit in judgment on the way in which the federal court discharges through its receiver its duties to the creditors of this corporation. Nothing of the kind. But if an asset appears to be entirely beyond the scope of the federal receivership, if it is something that stands apart which the federal receiver is not undertaking to realize and which the applying creditor here cannot reach through that receiver upon application to the federal court, why, then, we have the case of an asset that is entirely removed from the scope of the suit of the federal court, and it may he that then it would be proper for this court to appoint a receiver. Such a receiver would not come in conflict in the slightest degree with the federal court receiver. He would simply be proceeding with the collection of an asset which the federal court, for one reason or another, had not undertaken to take into possession or deal with in any way or shape whatever.

These are the main reasons which lead me to the conclusion that while, probably, the federal law recognizes still that this court, in this cause, has exclusive jurisdiction of so much of the statutory proceeding as relates to the status of the corporation, to its permanent ability or disability with reference to the exercise of its franchises, with reference to a dissolution of it, and while, therefore, the only statutory injunction has been issued by this court and not by the federal court, and therefore the only statutory receiver can be appointed by this court; while that may be the truth, entirely consistent with the doctrines which the learned federal judges have enunciated, I think it is very plain that no case is made out for the appointment of a receiver at the present time. And I may say further that in my judgment the appointment of a receiver at the present time for the purpose of doing the thing which the complainant desires to have done would be against all the rules of comity, which are well settled and which always ought to be maintained. In my view it is of the utmost importance in these days when the federal courts and the state courts, in administering bankrupt laws and insolvent laws, and peculiar laws like this that we have now 'before us, are liable to come in contact, that the utmost care, the most scrupulous care, should be observed in the proceedings of both courts to prevent all unnecessary conflict. And in my judgment the complainant’s application in this cause amounts to.simply this: that she prefers to come to this court and willfully refuses to go to the federal court. She wants this court to consider that she cannot get justice, or full justice, in the learned and distinguished court — federal court — established here, and she therefore wants this court practically to sit in judgment upon what the other court has done, or, as she charges, neglected to do, and appoint a receiver who will immediately undertake the work which is now under the charge of the federal receiver. I think'it would be a gross violation of comity to appoint a receiver who would engage in any work of that kind.

The order, therefore, at the present time will be that no receiver is necessary and none will be appointed.

Mr. Hendrickson — You have not said anything in regard to the question of the- necessity of other parties. You held the matter over a week, stating that you would want to consider also the question of whether all the necessary parties were before the court.

The Court — 1 have not found it necessary to pass upon that question, because, having reached the conclusion that your application should not be granted, I did not see any necessity for dealing with the question of parties. If I had reached the other conclusion that your application ought to be granted, why, then, under the well-settled practice of the court all the creditors and stockholders would be brought in before the appointment of a receiver would be made.

Mr. Hendrickson — That would only apply as to the permanent receiver and would not apply to the appointment of a temporary receiver ?

The Court — The man who is appointed receiver upon the return day of the order to show cause, or upon the appearance of the corporation upon the filing of the bill, is the statutory receiver. He is appointed after the summary final hearing prescribed by the statute has been held, and this summary final hearing, under our practice and under a general principle of law and justice, can only be held after the corporation has been brought into court by notice, or has voluntarily appeared. The receiver so appointed takes title to the assets, and the further proceeding on notice to all stockholders and creditors effects, or may effect, merely a substitution of another person as receiver. There is no distinction between the titles of these two receivers, and the use of the term “temporary receiver,” as applied to the first appointee, is liable to mislead. The term “temporary receiver,” perhaps, might better be confined to the mere custodian receiver who is often appointed upon the filing of the bill under the general equity power of the court, in order to preserve the assets from waste until the hearing can be had which will determine whether the corporation is to be disabled or not and its assets vested in a receiver.

In this case, if the conclusion had been that an order should be made appointing a receiver, the stockholders and creditors would have been brought into court on notice before any appointment would be made, because under the circumstances of this case delay in the appointment of a receiver could do no harm.


source: Caselaw Access Project

author: Bergen, V. C.

license: Public Domain

text:
    Carl W. Volney v. Lewis Nixon.
    [Filed May 31st, 1904.]
    1. The complainant owned certain patents and most of the'stock of a corporation. The defendant, having agreed to furnish capital to enable the corporation to manufacture powder, did so, and took, in his own name, certain machinery and leasehold interests in land. Later, the parties severally transferred the patents, machinery and lands to a new company. — Held, that the parties were not partners.
    2. The facts proven do not establish that the complainant was led to transfer his patents by false representations made by the defendant.
    On bill for relief.

      Mr. Frank P. McDermott and Mr. Lindley M. Garrison, for the complainant.

      Mr. Foster M. Voorhees, for the defendant.
   Bergen, V. C.

In the jrear 1896 the complainant organized a corporation, under the laws of the State of New Jersey, known as the “Volney Smokeless Powder Company,” with an authorized capital of $100,000, of which he claimed to own ninety per cent. The property of this company consisted of seven small buildings, at Keyport, in this state, costing about $1,600, built on leasehold property, and certain letters-patent covering an invention of the complainant for the manufacture of smokeless powder, he claiming to ,be an expert in the production of explosives. The evidence shows that he had considerable technical knowledge of the subject, but apparently lacked the power of successful production, as it does not appear in the case that he ever produced a pound of powder for the market, although the patent under which he was experimenting or operating had been issued to him in 1887. Whether the patented formula owned by the company had any merit, it is not necessary to consider here, because previous to the happening of the events out of which this controversy grew the complainant had abandoned all efforts to bring it to the notice of purchasers of explosives, and was then engaged in a mining enterprise in Canada.

Early in the year of 1897 a New York broker, by the name of Wood, one of the incorporators of the Volney company, brought the company and its prospects to the attention of the defendant, and succeeded in interesting him to the extent of agreeing to meet the complainant, .who was summoned by Mr. Wood to come to New York City for that purpose.

The complainant and defendant met in New York City, where the matter was laid before the defendant so successfully that he agreed to advance the means required to develop the value of the complainant’s patent, the conclusions reached being embodied in a written agreement prepared by the complainant and duly executed by both parties. This' agreement bears date May 7th, 1897, and, after reciting that the complainant was the owner of sixty per cent, of the capital stock of the Volney company, stipulated that if the defendant could secure a contract for two hundred thousand pounds of smokeless powder, conditioned upon a successful trial of a sample lot made under the Yolney patents, then the defendant should furnish $5,000 for the purpose of manufacturing such sample lot, and in consideration of the investment of such sum the complainant should transfer to the defendant, at par, stock of the Yolney company to the amount of $12,500. In order to supply the money necessary to erect a plant for the manufacture of powder, it was also agreed that $45,000 of the stock of the company would be sold to the defendant at par, and that the complainant would assign to a new company, to be organized with a capital of $1,000,000, all his title and interests in the patents to be obtained in 1897, applications therefor having been filed, the stock of the Yolney company to be taken by the new company, on payment of ten shares of new stock for one of the Yolney company. Without waiting to secure the contract mentioned in the agreement between them, the defendant, in September, 1897, began advancing money, and after he had paid out all, or nearly all, of the $5,000, and on the 18th day of April, 1898, the stock of the Yolney company was issued to him to the extent of $12,500.

The defendant continued to advance money, some of which, amounting to about $18,000, passed through the hands of the complainant, and the residue of a total of $25,000 was paid out directly by the defendant for machinery, materials and wages. About May 10th, 1898, the defendant, through his personal influence, obtained from the United States government an order for one hundred thousand pounds of powder, to be manufactured according to a formula furnished by the United States ordnance department, which was not the formula described in the Yolney patents. IS! o powder was furnished under this order, the plant of the Yolney company not being sufficient to produce it in the time required, and the order was subsequently canceled.

During the latter part of the year 1897 the complainant had issued to him two letters-patent for inventions for the manufacture of smokeless powder, which were never assigned to the Yolney company: on the other hand, all the machinery purchased was bought with the money in the name and remained the property of the defendant.

A lease of forty-four acres of land at South. Ambóy, with an option to purchase, was taken in the name of the defendant; on it, one or two small buildings, adapted to the manufacture of powder, were erected. The leasehold of the property at Keyport was probably in the name of the complainant, the evidence being somewhat conflicting on this point, but it does appear that at one time the defendant paid $500 for arrears of rent due on this lease. Whatever may have been the reason, it does appear that in February the complainant, having charge of the mechanical part of the company’s affairs, had not produced any marketable powder; that the defendant had paid out about $25,000, to represent which he had the stock of the Volney company, of no substantial value, and the title to- certain powder-making machinery and material at Keyport, a lease of a tract of land with an option to purchase, located at South Ambojf, and some machinery in transit, and that the company had ceased any serious attempts to carry on business when the defendant met, at Atlantic City, a promoter by the name of Gibbs, who was then about to organize a powder manufacturing company, and the defendant proposed to sell him the business he had been trying to build up and also the patents of the complainant. Negotiations ensued, the result of which were the transfer by the complainant of his patents and by the defendant of his machinery, material and leasehold interests to the Gibbs company, incorporated under the name of the “International Smokeless Powder and Dynamite Company.” It is over this transfer that the present controversy has arisen. The complainant alleges that the original contract was abandoned; that in all the business between the signing of the original contract and the date of the transfer the complainant and defendant were partners; that he was grossly deceived by the defendant as to the consideration received for the transfer of the partnership property, and that the defendant should account to the complainant for all the stock received by him from the. International company.

The complainant does not testify to any agreement of partnership, but insists that it should be inferred from the conduct of the defendant and gathered from the correspondence between them, and particularly from statements found in numerous letters written by the defendant, such, as “we shall both make money,” and others of like character, but all such expressions are properly descriptive of their joint interest in the Yolney company, as defined by the original contract, and while there is a looseness of expression in these letters and a lack of strict business methods in the conduct of the parties, I am entirely satisfied that there was no express or implied contract of partnership between these parties; that all that was done by either had in view only the success of the Yolney company, and that the business, if it prospered, was to benefit the parties in proportion to their holdings in the Yolney company, as provided for in their contract, and that the only claim the complainant could establish to the profits of the enterprise would be through the stock he held in that company. This is in accord with their written contract, and no other business agreement having relation to this enterprise has been proven. Every sentence written by the defendant, as to their joint interests, may be consistently referred to their respective rights in the Yolney company; the fact that in the end both parties treated the property and patents as individual holdings and sold and transferred them by separate acts and not as joint assets, so far from tending to establish a contract of partnership, goes to prove an amicable distribution between them of what would have been .the property of the Yolney company or of its proposed successor. They were the owners of the stock of the Yolney company, and each disposed of what he had agreed to contribute — the complainant, his patents; the defendant, what remained of the property his money had paid for. There was no partnership and the trust relation arising between partners did not exist.

These parties were stockholders in a corporation whose interests they were jointly endeavoring to advance, hoping for a profitable return through its success. It is nowhere shown that there was any agreement to share the profits or losses, excepting through the instrumentality of the Yolney company or of a company into which it might be merged.

In support of Ms claim, tiré complainant testified that the defendant, at different times previous to April 5th, 1899, told him that he was trying to interest other parties in the formation of a new company (the company mentioned in the first agreement), with a capital of $1,000,000; that he was not having much success, and feared that they would get but little out of it; that he would have to give away most of his stock to accomplish his purpose, and that he (the complainant) offered to give the defendant one-half of the proceeds, or, as he says, he “conceded to the defendant one-half;” that the negotiations culminated at an interview held at defendant’s office, April 5th, 1899, when the defendant stated to the complainant that the Marsden company had gone into the formation of the International Smokeless Powder and Dynamite Company, and that if they went into that company they would only get $350,000 of the stock of that company, and no cash; that he objected to this because he had incurred obligations and expended money to the extent of $2,000, and as the concern would get, as he said, “all I had,” they ought to clear up the accounts; that the defendant told him he would pay the $2,000 out of his own pocket, and as to the stock, $50,000 of it was to go to Mr. Meigs, who had aided in the sale, and the $300,000 remaining was to be equally divided between them. He also testified that he was led to believe the capital of the International company was to be $1,000,000, and not $10,000,000, as he afterwards discovered; that the defendant also said that Mr. Gibbs, representing the new company, would not negotiate any further with him unless he (the defendant) was enabled to act, by transfers from the complainant, of his patents and property; that, relying upon these statements, he drew the assignments of his patents to the company the next day, and sent them to the defendant; that he first objected to assign his future inventions in connection with powder-making, but upon the representation of the defendant that he was to be general manager of the new company, with the means of obtaining information regarding the business, the company claimed to be entitled to any improvements ■ he might discover or invent, and would not proceed without'it; that he finally agreed to assign not only present, but all future, patents and inventions of his relating to powder-making, and did make such assignments by two deeds for that purpose — the first, under date of April 8th, of the patents allowed in 1895 and 1897; the second, under date of April 10th, 1899, which covered future inventions. The assignments were followed by a general assignment of the same patents and future inventions by a formal deed, under date of December 18th, 1899, the latter being the only one recorded in the patent office.

Briefly stated, the charge which the complainant makes is that the defendant, by fraudulently misrepresenting to the complainant the true consideration to be received, induced him to part Avith Avhatever he transferred to the neAV company, and that as the defendant was acting as his partner or agent in the premises he Avas bound, not only to disclose the full consideration, but divide equally AvhateArer he obtained from the company, for all property and rights passing from either, to the neAV company.

The misrepresentations, if any, which induced the complainant to consent, and upon which he relies for relief, were repeated in full on the 5th day of April, 1899, and it therefore becomes important to determine what statements were made on that day, and whether they were untrue, for fraud must be proven, to the reasonable satisfaction of the court, in order to justify the decree the complainant seeks.

The defendant denies that he perpetrated any fraud, and testifies that early in his negotiations with Gibbs he did offer to accept $350,000, in stock of the new company, and withclraAv from all connection with the proposed corporation, and that perhaps he told the complainant of the proposition, but afterwards informed him that it neA^er was accepted; that' as a matter of fact the promoters of the new company, wishing the benefit of his name and influence, desired'him to take an active interest in the company and serve as its president, promising him, if he would do so, to take care of him, without stating to what extent, and that the company was only willing to give the complainant $100,000 of stock fcr his patents; that on the 5th day ol April, 1899, ha offered the complainant, on behalf of the new company, $100,000 of its stock for his patents; that the complainant was not satisfied with the offer, claiming that he needed $2,000 in cash to clear up certain obligations he had incurred; and further, that he had learned that the capital of the company was to be $10,000,000, instead of $1,000,000, thereby reducing the value of the offer; that thereupon defendant agreed to give complainant $50,000 of whatever stock he might receive, and make an effort to induce the company to pay him $2,000 in money; that, as to the amount of capital of the proposed companj7, it had been fixed at $10,000,000 by its organizers, and he could not control or change it; that the offer was finally accepted by the complainant, without any reference to what the defendant was to get, and that he shortly after assigned the patents directly to the company; that the stock and cash agreed to he given him was duly issued and paid, $100,000 of the stock going directly from the company to the complainant and $50,000 from the defendant. The defendant further testified that he promised to use his influence to have the complainant employed as the general manager of the new company; that he was successful in such effort, and the complainant was employed as general manager, at a salary of $300 per month, for the first year, and $600 per month thereafter; that after the agreement had been arrived at the complainant insisted that it should be in wilting, whereupon the defendant called a stenographer, and in the presence of the complainant dictated a letter containing the terms of the agreement; that this letter was typewritten and mailed to the complainant on the same day.. This letter, after reciting that it was written for the purpose of confirming what had been said at the interviews, continues as follows:

“That in the organization of the now powder company the consideration to you for the assignment of all patents which you control will be one hundred thousand dollars ($100,000), par value, of the shares of the International Smokeless Powder Company. In addition to this, it is understood between ourselves that I shall turn over to you fifty thousand dollars ($50,000), par value, of the stock obtained by me from this company and two thousand dollars ($2,000) in cash. Assignments will be assigned, transferred and set oyer concurrently with the transfer of the stock.”

The foregoing letter, which complainant admits receiving, confirms, in every particular, the statement of the defendant as to what transpired on the clay when the complainant says representations were made which were fraudulent and untrue, and which he alleges were totally different from the contents of the letter. The defendant is corroborated in his statements of what occurred, and particularly so as to the dictating of the letter in the presence of the complainant, by two witnesses, who were present during the conversation and while the letter was being dictated, and their testimony shows that the letter correctly states what occurred at the interview.

With reference to the charge that he was deceived as to the capitalization of the new company, he admits that when he received his stock, in April, 1899, he knew the amount of the capital stock of the company; with that knowledge he accepted the stock, and afterwards, in December, 1899, executed a formal transfer of his patents and future inventions to the new company, without protest, and served as its general manager for nearly two years thereafter. The complainant, on reading the statements contained in the letter, knew precisely what he was to get. It was not a consideration for any joint propert}', but for his patents, and is so absolutely at variance with his statement of what took place that he would certainly have refused to act upon it or accept its benefits if it failed to truly express the agreement. On the contrary, he assigns his patents, accepts not only $100,000 worth of stock and $3,000 in cash, but also the contribution of the defendant, precisely according to the terms of the letter; he-enters into the service of the company, serves it in a lucrative position for nearly two years, and only after he has lost that position does he make this claim.

The claim for relief in this cause rests upon questions of fact, and the complainant has not maintained his side of the issue with that fair preponderance of evidence required to justify á finding in his behalf.

It was shown that the defendant received from the company his cash investment and also a large block of stock, but he was a person well known in the financial world, and his connection with the company to be formed might, in the judgment of its promoters, be of sufficient advantage to offer him liberal inducements to remain with them and to act as its president, and the issue of a large quantity of stock to him for redistribution is not, in these days of corporate promoting, unusual nor extraordinary. The contract between the defendant and the company, as shown by its minutes, states that he was to have seventy-nine thousand (79,000) shares of this company, of which twenty thousand (20,000) shares were to be returned to the company for redistribution, and the stock ledger shows that only twenty thousand (20,000) shares were issued to him. Be that as it may, in the view I take of this case, it is of no consequence what he received from the company; the complainant transferred nothing to the company but his patents, and the letter of April 5th shows what he agreed to accept for them, and if it correctly states the agreement, he is estopped from complaining at this late day. The letter corresponds with what the defendant says was the bargain; two witnesses, who were present, sustain his contention and disprove the claim of the complainant. No partnership existed; each party sold as much as he had' the title to; there was no joint "sale of any interest in the Volney company, but rather a sale by each of what he considered separate property, a proceeding recognized as proper by the parties interested." I am satisfied that the complainant was not misled or deceived; the Volney company was a wreck, and he had used a large sum of the defendant’s money experimenting in his endeavor to produce merchantable powder according to his patents, and seems to have failed, notwithstanding his professions to the defendant. He was an idealist, and not a mechanic. He still retains his interest in the Volney company; no property to which it had title was transferred; not even the patents of 1887, which the complainant liad conveyed to that company, have been assigned to the new company. The defendant was needed by the International company; his name and influence were thought to be valuable, and liberal inducements were offered him. The complainant had two patents which the company thought might be of use and made their offer, which the complainant accepted, and with which he was satisfied, so long as he remained in its employ, and if the letter of April 5th expresses the agreement, as I assume it does, he has received all he bargained for.

There is not the slightest proof that the patents of the complainant had any value, or that the complainant was a practical powder-maker, although he had induced the defendant to think he was, a belief which the defendant seems to have cherished, even after he had invested $25,000 without the production of any merchantable powder. On the day the agreement was made the complainant had for sale his patents, and the defendant the machinery, which had cost him $25,000 and his name and influence in business circles. Each sold what he had, in separate transactions, and the defendant is so strongly corroborated, by the testimony of two witnesses, and the conduct of the complainant after the receipt of the letter, that I must reject the charge of fraud, and am satisfied that when the complainant was told, as stated in the letter, “the consideration to you for the assignment of the patents which you control,” he knew that all he was selling was his patents, which he controlled, not those owned by the Yolney company, and that he was not being paid for nor parting with any other interest, nor was any interest in the Yolney company sold, as that could only be disposed of by an act of the corporation, and the property of that company is still vested in it. This bill of complaint is based upon alleged fraudulent statements and acts of the defendant, which the proofs fail to establish. Without this is sustained, the complainant is not entitled to the aid of this court.

I will advise a decree dismissing the bill of complaint, with costs.


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    Frank Fuller v. The Township of Belleville et al.
    [Filed June 9th, 1904.]
    1. The mere omission of a municipality to assess land dedicated by the owner for a street, for benefits for improvements of a neighboring- street, is not evidence of such an acceptance by the municipal authorities- as to make it a public street.
    2. Equity will restrain a municipality from carrying out a drainage scheme which will collect a large quantity of surface water and discharge the same on lands of an individual in such quantities as to practically render the lands valueless.
    On bill for injunction.

      Mr. James Trimble, for the complainant.

      Mr. Egbert J. Tamblyn, for the defendants.
   Bergen, V. C.

The complainant is the owner of a tract of land in the township of Belleville, in the county of Essex, lying east of Linden avenue and north of Joralemon street, which he has caused to be laid out in lots upon a map, showing a proposed street fifty feet in width, designated thereon as Essex street, the southerly line of which commences three hundred feet northerly from the north line of Joralemon'street, and runs from Linden avenue easterly to Washington street, nearly all of the lots adjoining Essex street having frontage on that street. One lot on the southeast corner of Linden avenue and Essex street has been sold-by the complainant, and in the deed of conveyance is described as adjoining Essex street. No other lots appear to have been sold from the tract, nor does it appear that the dedication of Essex street has been accepted or ratified' by the public authorities beyond an omission to assess benefits against that part of it adjoining Washington street, when the latter street was improved. This omission cannot be held to be, as defendants insist, evidence of that formal ratification or acceptance, required of a municipal corporation to subject the municipality to the burden of its repair and maintenance, or to confer upon the public authorities the right to use it as' a conduit for the discharge of an unlimited quantity of surface water colL lected from the neighboring streets and carried there by artificial means for that purpose. The dedication, so far as the public authorities are concerned, confers no rights and imposes no burdens without a formal act of acceptance, or such a continued public user as would estop the owners of the lands adjoining from withdrawing the dedication. Pope v. Union, 18 N. J. Eq. (3 C. E. Gr.) 282; New York and Long Branch Railroad Co. v. South Amboy, 57 N. J. Law (28 Vr.) 259.

It appears in the bill of complaint, and the -affidavits verifying the same, that about twenty years ago the township of Belleville began to open and grade a number of streets to the south and west of the complainant’s property and on higher ground, and has since continued the making of such improvements; that the streets running north and south so opened are Washington street, to the east of the complainant’s land, and Linden avenue- and Ilornblower avenue to the west, the latter streets being on much higher ground than the complainant’s property; that another street so opened and running east and west, intersecting the three last streets named, is Joralemon street. It further appears that previous to the opening of these streets there was a well-defined depression in the earth, following generally the course of Essex street, which received such of the surface water falling on the higher lands as would, by the 'natural configuration of the land, drain into it, and when so received flowed along the depression through what is now Essex street to a point about eight hundred feet westerly of Washington street, where it emptied into a stream, which at that point had its rise in a living spring. After these improvements were made most' of 'the surface water 'collected in I-Iornblower avenue and, as it is alleged, other streets, was carried easterly through Joralemon street, it appearing from the answer and affidavits annexed that the water collected by a gutter along the north side of Joralemon street entered into Linden avenue, and, following that street, found its way into the depression in Essex street and was carried away through that channel; but the bill of complaint shows, and it is not denied in the answer, that the surface water, as discharged into Joralemon street, is collected over an area requiring about thirty-five thousand feet of gutters, and that the quantity of water thus carried into Joralemon street, and which now flows along the course of that street to Washington avenue, is in times of heavy rains very great, resulting in the tearing up of Joralemon street. So that I think it safe to assume that by far the greater quantity of water collected and brought into Joralemon street has for the past fifteen years been carried through Joralemon street and discharged into Washington street, and that, as charged in tire bill of complaint, the purpose of the township committee in diverting the water and carrying it to Essex street, as I shall presently describe, is to prevent this great quantity of water from flowing down Joralemon street, as it now flows, and to thus preserve that street from the great washing it is now subjected to. If the volume of water now flowing on Joralemon street is of sufficient quantity and flows in such force as to tear up the stone gutters on Joralemon street, as it does, it cannot be consistently argued that such an' unusual condition of affairs existed prior to the artificial con-, structions and that all of that water formerly found its outlet through Essex street, for its force and volume would have created in that unimproved street a deep chasm, a condition which it is not pretended now exists. The allegation of the complainant is that the defendants, the township committee, have adopted a scheme of drainage under which the surface water collected in all of the streets and now discharged upon Joralemon street is to be arrested at the corner of Joralemon street and Linden avenue by a catch basin and from thence carried in an underground drain along the easterly side of Linden avenue until it reaches Essex street, at which point the drain is to turn into Essex street, terminating a short distance from Linden avenue, where all of this vast quantity of water is to be discharged into the old depression, and that in order to make this feasible it is intended to deepen the old water course. The result, as the complainant says, of the carrying out of this scheme will be to cast all of this surface water not only on his land within the limits of-Essex street but also upon certain of his lots, to their great damage, and in times of heavy rains would flow over said lands and thus render them practically valueless. The answer of the defendant does not seriously dispute most of the allegations of the complainant; it does deny the charge that the greater part of the surface water collected on Joralemon street follows the line of that street to Washington avenue, but the proposition to build an artificial waterway to carry the water from Joralemon street to Essex street would seem to indicate that the water flowing down Joralemon street was too great in quantity to be taken care of on the surface of that street.

As this case now appears, it is the intention of the defendants to gather together large quantities of surface water which have been forced out of their natural channels by the necessary improvement of the locality into Joralemon street, along which it now flows, and to carry it by artificial means to, and empty it upon, the complainant’s property, a proceeding which I conceive to be contrary to his rights. I am satisfied that the discharging of this water into Essex street will overflow and injure lands of the complainant not within the lines of Essex street, and that even if they have the right, because of complainant’s dedication of 'Essex street, to consider it as a public highway, with the power to grade or improve, that right will not permit the carrying out of a scheme for the collection and diversion of surface water in such a manner as to certainly cast it upon lands of an adjacent owner. Field v. West Orange, 36 N. J. Eq. (9 Stew.) 118; Scule v. Passaic, 47 N. J. Eq. (2 Dick.) 28. I also find that, as this ease now stands, no such acceptance of Essex street by the public authorities has been shown as will justify them in using the lands within the street limits as a receptacle for surface water which would not naturally converge at that point, and which is collected and carried to the place of discharge by artificial means; if the public authorities desire to avail themselves of the dedication they must manifest it by some formal act and assume the burdens and responsibilities usually following the appropriation of private property for public use as a street. To say to a landowner, you have dedicated your property to a public use, we do not accept it, but we propose, by a system of drainage, to collect and throw upon your land all the surface water which it is inconvenient or expensive to dispose of otherwise, is certainly inequitable. Upon final hearing, and after a fuller disclosure of the facts have been had, a different state of affairs may appear, but for the present I am of opinion that defendants should be restrained, and I will therefore advise an order for injunction. The restraint will be limited to enjoining the defendants from carrying out so much of the proposed drainage scheme set forth in the bill of complaint, and admitted in the answer, as will arrest and cast upon Essex street or upon the lands of the complainant any of the surface water which would flow down Joralemon street unless prevented by the construction of the basins and drains as described in the bill of complaint and which tire defendants admit they intend to build.


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    Charles R. De Bevoise v. The H. & W. Co. et al.
    [Filed June 9th, 1904.]
    1. To justify a bill in equity for an accounting, the issues must be so numerous, so distinct, and the evidence to sustain them so variant, technical and voluminous, that a jury is incompetent to deal intelligently with them and come to a just conclusion.

      2. A bill to redeem 'a pledge cannot be maintained without some -additional ground of equitable jurisdiction.
    3. Discovery in equity is given only as incidental to other relief sought, as to which complainant has no adequate remedy at law.
    On rule to show cause why injunction should not issue, argued on bill of complaint and answering affidavits.

      Mr. Edward G. Adams, for the complainant.

      Mr. Albridge O. Smith, for the defendants.
   Bergen, V. C.

It appears from the bill of complaint that the complainant served until November 17th, 1903, as the president of the defendant company, and as one of its directors until the 10th day of December, 1903, -the stockholders, at their annual meeting, held on that day, refusing to re-elect him as a director; that the. compensation to be paid the complainant for his services as president was fixed by a resolution of the board of directors, adopted December 13th, 1903, as follows: “A salary of $2,000 per annum, to be paid in monthly installments, and in addition to get twenty-five per cent, of the net profits, after ten per cent, for dividends on outstanding stock be set aside.” That in ascertaining the net profits for the year ending December 10th, 1903, it is alleged an injustice was done the complainant in the following particulars — first, in taking the inventory of the stock of goods, “manufactured and unmanufactured,” because they were inventoried at a price below their real value to an amount in excess of $1,700; second, that while the complainant had agreed that twenty per cent, of the book value of the machinery, tools and fixtures should be deducted from their cost, as they stood on the books, to represent depreciation, the board of directors, in ascertaining the net profits, calculated such twenty per centum upon the sum of $10,300 instead of upon the sum of $9,468.55, that being the amount, according to the complainant’s claim, to which the book value of the machinery acconnt had been reduced by previous credits of like character, the excess being $166.29, of which the complainant would be entitled to twenty-five per cent.; ihird, that the directors, in ascertaining the net profits, first deducted from the gross profits $5,000, as a reserved fund to offset a like amount standing on the books of the company to represent the value of patents, trade marks, &c., and as a part of its capital stock account. It further appears in the bill of complaint that the complainant, while president'and one of the directors of the company, and on the 25th day of June, 1903, borrowed from the company $1,000 and “deposited” with the treasurer of the company twelve shares of the capital stock of the defendant company as “collateral security,” the loan to be repaid on or before January 1st, 1904; that no such pajunent was ever made, and as an excuse for the default the complainant charges that upon an accounting it will be found that the company is indebted to him in the sum of $782.82, after charging him with the amount of the loan; that he had demanded payment of the $782.82 and also the return of his stock certificate; that the defendants not only refused to comply with this demand, but threaten to sell the stock in satisfaction of the loan. The prayer of the bill is for a discovery of the contents of the books of the defendants relating to their profit and loss account for the year ending December, 1903, and of certain entries in the minutes of the proceedings of. the corporation; and also that an accounting may be had to determine the amount due to the complainant for services as president, and that for this purpose the annual inventory, takeji November 30th, 1903, may be corrected under the direction of this court, and that the deduction for depreciation of machinery may be calculated upon the sum of $9,468.55, instead of the amount used by the directors; and also that the said sum of $5,000 be deducted from the earnings only after twenty-five per cent, of the net profits have been set apart for the complainant; and further, that the defendants be enjoined from selling the stock pledged for the loan and be decreed to deliver the same to the complainant and pay him $782.82.

This is the complainants case fully stated, and I fail to see the slightest ground for equitable interference. He bases his claim for equitable relief upon two grounds — the necessity for an accounting and discovery. 1 have considered the question of the complainant’s right to require the defendants to account in this court, and am fully convinced that the legal remedy is so plain, ample and effective that the right to exercise a -discretion and retain this bill for tire purpose of an accounting cannot be supported. If it could, then every case where a pledge has been deposited as collateral for the payment of a debt would be the subject of equitable jurisdiction. In this case the creation of the debt, the borrowing, the date of the loan, the amount and non-payment, according to the terms of the agreement, are all confessed. The complainant seeks to excuse the non-payment because he claims the1 defendant is indebted to him in a larger amount growing out of a separate transaction, and that having such counter-claim he is entitled to have it set off against his debt and the defendant decreed to pay the surplus due on his claim. Waiving the question whether in any event he can release the lien against the pledge, wdthout at least tendering in his bill of complaint his readiness to pay whatever may be found due on an accounting, no such offer appearing in the bill of complaint, I will dispose of the claims of the complainant as he presents them. First, he says the inventory of the goods and stock is unfair to the extent of $1,700. It is manifest that no inventory could now be taken, if desired, of the stock of goods, “manufactured and unmanufactured,” as it existed nearly a year ago; most, if not all of it, must have been disposed of in the regular course of business, and recourse could only be had to the books of the company showing the original inventory, and these books are within reach of a court of law; ■ nor is the complainant in any doubt about the amount of the undervaluation, as he fixes it at $1,700, and by reference to the answering affidavits, to which I will refer hereafter, it is plain that the only real dispute is as to the percentage to be taken from the sum of the appraisement of the goods in stock, and that the ascertainment of the undervaluation is simply a matter of calculation, when the legal principle governing the compláinant’s contract is established or the custom of the 'trade in like cases be proven. It is not a question of complicated accounting, but of fact and law. If the defendants were justified in reducing the appraised valuation by deducting the percentum, which they did, before ascertaining the amount due the complainant, then he would have no ground of complaint; if, under the contract, it was unlawful to first make such deduction, then he is entitled to have the amount so deducted restored.

The next item complained of is the deduction for the depreciation of the machinery. Whether this deduction was properly made depends upon a single item appearing upon the books of the complainant, and that is the cost of the machinery as shown by the hooks; a glance’at the account will' disclose the’fact. The third claim is that $5,000 was deducted for the extinguishment of a patent account. Certainly no equity is required to determine this 'claim; once the legal question is settled, all doubt vanishes. The amount in dispute is $1,250; there is no uncertainty about that, for if, under complainant’s contract, as a matter of law, the $5,000 should not be deducted before the ascertainment of his share of the profits, then he is entitled to a credit of $1,250, otherwise the defendants are sustained in their claim of the right to deduct that sum at the expense of the complainant. The complainant, so far from needing an accounting, states in his bill of complaint the precise balance due him, viz., $782.82, and undoubtedly he arrived at this sum by deducting $936.24, .the amount remaining due on the loan, from twenty-five per cent, of $6,866.29, the sum of the three disputed items, the result -agreeing so nearly with the sum claimed as to warrant that conclusion. According to the settled law in this state, to justify an equitable accounting the acco-unts must be so complicated and intricate that a court of law cannot deal with them properly, having regard to the rights of litigants; if it can, the superior right of that court to hear and determine such matters is recognized. Bellingham v. Palmer, 54 N. J. Eq. (9 Dick.) 136, and in Cranford v. Watters, 61 N. J. Eq. (16 Dick.) 284, Vice-Chancellor Pitney, after a most .exhaustive consideration of this question, formulated what seems to me a true and satisfactory test to be applied to the question whether the account is such as to give equity jurisdiction in the following words: “Are the issues so numerous and so distinct, and the evidence to sustain them so variant, technical and voluminous, that a jury is incompetent to intelligently deal with them and come to a just conclusion?” Tested by this rule, the complainant has not presented such a state of facts as to confer equñy jurisdiction. The issues are not numerous, the evidence required to sustain them is not variant, technical or voluminous, and a jury could come to a just conclusion. Another ground for discharging this rule is the fact that, except the question as to the deduction of the $5,000 before ascertaining the amount due to the complainant, and as to which the complainant has an undoubted legal remedy, the affidavits presented by the defendants entirely overcome the case made by the bill. The inventory of November, 1903, of which the complainant complains, it is shown, was made in the usual manner, and only the customary deductions for depreciation made; that after it was completed, and on the 9th day of December, 1903, there was a meeting of the hoard of directors, at which complainant was present and acting as a member, and that he did not object to nor protest against the inventory or the methods employed in its preparation, nor to the deduction made, although at the same meeting he did object to and voté against another proposition affecting the amount of his compensation.

It further appears from the affidavits that the complainant is entirely mistaken in regard to the book value of the machinery'-, and that $10,300 was its book value, as it stood on the books of account of the defendant company, November 30th, 1903. It is not charged that the defendant is insolvent, and the presumption, therefore, is that any judgment the complainant might obtain at law can be enforced. There is one other claim made by the complainant, and that is of a right to the aid of this court in the redemption of his pledge. Under certain conditions that right most certainly exists, but the required circumstances are not present, and besides, if the complainant wishes to avail -himself of this right he must offer to pay whatever may be due on his debt to secure which the pledge was deposited. This he neglects to do. To maintain a bill in equity to redeem a pledge, some special ground must be shown, as that an accounting or discovery is wanted, as ordinarily his remedy is at law. 2 Story Eq. Jur. 1032. The necessity for an accounting must be real; there must be a series of transactions on both sides, and not merely one item on one side, and a number of offsets on the other. Jones on Pledges § 557. What this complainant seeks is to have set off against his admitted debt three items, the respective amounts of which he knows and states, and the balance due him he gives with exactness; nor are the amounts, excepting as to the charge for depreciation on the machinery account, contested by the defendants; the real dispute is over the application of the law to written contracts and agreements. To maintain an equitable offset, some equitable ground for protection must be shown; a counter demand alone is not enough. Hewitt v. Kuhl, 25 N. J. Eq. (10 C. E. Gr.) 24. If the complainant is right in his contention as to the state of the accounts between these parties, the refusal to deliver upon demand the certificates, of stock amounts to a conversion, for which the defendants are liable at law. If their refusal to deliver is not justified, and if the pledgee should sell the stock improperly, he would be subject to the payment of all damages the pledgor might suffer.

Having determined that the case as presented by the complainant does not -entitle him to the relief asked, it follows that his praj>er for discovery, and as to which he waives answer under oath, furnishes no ground., for equitable jurisdiction, the single purpose of the discovery being in aid of the relief sought, as to which his legal remedjr is perfect. Miller v. Ford, 1 N. J. Eq. (Sax.) 365; Metler v. Metler, 18 N. J. Eq. (3 C. E. Gr.) 270; S. C. affirmed, 19 N. J. Eq. (4 C. E. Gr.) 457. The claim the complainant makes is for the payment of money; he does not charge accident, mistake, fraud or other essential ground for equitable jurisdiction. The legal remedy being ample, the accounting sought for falling within the class properly subject to the jurisdiction of a court of law, and no right of discovery appearing, it follows that a preliminary injunction ought not to be allowed.

This leads to the discharge of the rule to show cause, and I will advise accordingly.


text:
    William T. Gilroy et al. v. Somerville Woolen Mills et al.
    [Filed July 18, 1904.]
    After a corporation makes a general assignment for the benefit of its creditors, it may be adjudged insolvent, a receiver appointed, the assignee removed and all further proceedings with regard to such insolvency conducted under the jurisdiction of the court of chancery.
    On rule to show cause why a receiver should not be appointed.

      Mr. Edward P. Johnson, for the complainants.

      Mr. James L. Griggs, for the defendants.
   Bergen, V. C.

The bill of complaint, after setting forth the incorporation of the'defendant company under the laws of this state, the amount of its capital stock and the fact that the complainants are stockholders, charges that, on April 21st, 1904, the defendant corporation, by the act of its directors, and without consultation with or notice to its stockholders, executed and delivered to the defendant James L. Griggs a deed of assignment for the equal benefit of its creditors under and by virtue of “An act 'concerning general assignments (Revision of 1899).” That immediately thereafter the assignee took possession of the property and assets of the company, and has since then, -to a limited degree, carried on the manufacture of goods of the same character as had been previously manufactured by the corporation; that the assignee, at the time of the assignment, and for ten years previous thereto, had been a member of the board of directors and the counsel of the corporation; that the business carried on by the corporation had not been profitable for a number of years past, and that no dividends had been paid on any of its capital stock since tlie year 1900, and that at the present time the liabilities of the corporation far exceed the value of its assets.

The complainants further charge that certain dividends, declared and paid by the board of directors previous to the year 1900, were not distributed from profits made by the company, but that the capital of the corporation was drawn upon to make such payments; that the assignee, being one of the persons under whose management the corporation has become insolvent, resulting in a. total loss of a cash capital investment of $400,000 within a very fe^ years, is not a proper person to be continued in such management arid control, nor is it to be expected that he would, if as an assignee he had the lawful right so to do, compel restitution from himself and his co-directors of the amount unlawfully paid out in dividends. They further insist that the assignee, in continuing the business, is conducting the same at a loss.

The answer does not attempt to set forth in detail the amount of the indebtedness of the corporation, but admits that the same, as set forth in the complainants’ bill, is “substantially correct.” The affidavits attached to the answer show that on April 16th, 1904, the corporation discontinued its business, and at a meeting of the directors of the corporation, at which all of the directors were present, a resolution was adopted which recited, among other things, that the credit of the company had become so impaired that they could neither purchase raw material nor sell manufactured products on the usual terms, nor borrow sufficient money to meet their needs as working capital, and that it was impossible to provide for all- of their past-due and maturing indebtedness, and in the hope that all claims against the company might be fully discharged if an assignment for the equal benefit of the creditors, of the company should be made, did thereupon authorize the president and secretary to execute such deed of general assignment.

On the argument the insolvency of the company was not seriously disputed. The answer filed in general terms denied insolvencj', but it is entirely clear to me that the affairs of the corporation are in such condition that the-appointment of a receiver is not only justified but that- the best interest of the creditors and stockholders require such a course to be taken, and that the condition of insolvency contemplated by the statute exists.

The defendants, in resisting this application, rely upon the law of this state (P. L. of 1899 p. 146 § 24), which authorizes any corporation organized under the laws of this state to make a general assignment for the benefit of its creditors and confers upon the orphans court of the county where such corporation may be located jurisdiction of the proceedings. The same section, however, provides that if any such corporation shall at any time after such assignment be adjudged insolvent and a receiver thereof be appointed by the court of chancery of this state, such assignee may be removed and all further proceedings with regard to such insolvency conducted under the jurisdiction of the court of chancery. Previous to the enactment of this law all proceedings relating to the closing out of insolvent corporations were committed exclusively to this court, and the exercise of a concurrent jurisdiction by the orphans court ought not to be extended beyond the point intended by'the legislature, as manifested by the words of the act. It certainly contemplated that in cases of insolvency, and for good reason shown, this court would exercise its jurisdictional power and appoint a receiver, and it was very careful in the section under consideration to make the right of a corporation to execute a general assignment subject to the right of this court to exercise its statutory functions in the matter of insolvent corporations. Cases may arise where such a general assignment would be wise and judicious, and every 'application for the appointment of a receiver and the removal of an assignee must be determined by the particular facts and circumstances surrounding each case.

Whether the General Assignment act, as it now stands, can ever be successfully invoked by a corporation, where it appears that the corporation is insolvent, it is not necessary that I should now determine. A general assignment may be made, and frequently .is made, when the assignor is not insolvent, but where a corporation.is insolvent its affairs ought to be administered and the corporation dissolved in the court of chancery, where every right and remedy prescribed by the General Corporation act, and from which every corporation derives its existence, can be most efficiently protected and afforded, and the wise rule that the management of the trust, growing out of insolvency, will not ordinarily be committed to the persons responsible for the misfortunes of the corporation will be enforced.

This salutary rule would always be abrogated if the management of a corporation, having brought it to the verge of insolvency, could perpetuate their control by the simple method of assigning the property of the corporation to one of their own number.

It seems to me that if in any case where an assignment has been made this court should interfere and appoint a receiver, it should do so here. Since the year 1900 it is admitted that no dividends have been earned; in other words, the business has been run at a loss, and apqDarently the whole capital stock of $400,000 dissipated under the present management. On the eve of bankruptcy, with creditors pressing on all sides, and confessing their inability to further continue the business, these directors meet and, without calling together the stockholders, they direct the officers of the corporation to make a general assignment to one of their own number in direct violation of the spirit of the sixty-third section of the General Corporation act, which requires the directors, within ten days after insolvency, to call a meeting of the stockholders and lay before them for inspection and examination all the books of accounts and to exhibit a true statement of its property and of all debts owing by it.

The Corporation act makes the directors of a corporation jointly and severally liable to the corporation and to its creditors for any. dividends paid, except from the surplus or net profits. As this assignee was one of the directors charged with paying dividends in violation of the statute, he should not be retained in a position requiring him to enforce any such violation.

In my opinion the usual injunction order should be allowed in-this case, and a receiver or receivers appointed, and the assignee removed, and directed to transfer and convey the trust estate to the receiver, and I'will so advise.