text:
    Charles A. Hitchcock v. American Pipe and Construction Company.
    [Decided November 9th, 1918.]
    1. A bill filed in a federal district court alleging that a corporation was in such financial condition as that it could not meet its maturing-obligations as they matured and that if creditors were permitted to resort to legal process, the business would be immediately discontinued and the assets of the defendant sacrificed, showed a condition of insolvency within the meaning of section 65 of an act concerning corporations which would justify an adjudication of insolvency and the appointment of a receiver by this court.
    2. Proofs showing that the business of a company has been conducted in such a manner as that it has been obliged to resort to a moratorium to protect its assets, that the management of its affairs has been for nine months under the management of a receiver in a foreign court; that its stock declined from ninety in 1912 to five in 1917; that no dividends had been declared since 1914, and that its working capital was almost exhausted, disclosed that the business had been conducted at great loss and greatly prejudicial to the interests of its stockholders so that its business could not be conducted with safety to the public and advantage to the stockholders within the meaning of section 65 of the Corporation act, as amended, P. L. 191& p. 5S5.

    3. To bring a ease within the language of section 65, as amended, there need not appear that there has been either fraud or mismanagement.

      4. The effect of a decree of the United States district court being to take from the corporation all of its assets and to remove from the stockholders the power to manage its affairs through its directors without in anywise affecting the corporate liabilities, there was a complete suspension of business.
    5. When directors and officers of a corporation appear in a foreign district court and consent to the appointment of a receiver and to the transfer by the corporation to the receiver of its assets, they violate the provision of section 64 of the act concerning corporations.
    6. The judicial policy of this state in insolvency proceedings requires that before any act is done which will affect the interest of creditors and stockholders, they should have notice, which policy is opposed by the practice in the federal courts of directing receivers to perform acts affecting interests of creditors and stockholders without notice to them.
    7. The policy of this state requires that a corporation incorporated under its law should be managed by a board of directors and officers responsible for the performance of their trust and subject to certain statutory obligations, which policy is opposed by acts which result in the management of the corporate affairs being taken over by a receiver appointed by a court of a foreign jurisdiction over whom our statute and policy cannot extend and over whom the courts of this state have no control.
    S. Where it appears that a corporation is insolvent or that its business is being conducted at great loss and greatly prejudicial to the interests of its creditors and stockholders, and that its assets have been for some time in the control of a receiver appointed by a foreign district court, this court will appoint a receiver under the statute.
    9. A stockholder intervening in the federal district court for the purpose of questioning the jurisdiction of that court in an action brought by a stockholder against the corporation for the appointment of a receiver, in which action the corporation has appeared and consented to the appointment, does so in the corporate right and is with respect to such right a trustee for the creditors and stockholders and for the corporation.
    10. Whether the expense for legal services incurred by the stockholder in such an action should be borne by the corporation or not is one purely of equity and to be determined by what ought to be done in fairness and equity.
    11. Success or failure of the suit or defence brought or made by á stockholder is not determinative as to whether the corporation should bear the expense.
    12. Where the suit or defence is one which ought to have been brought or made, whether successful or not, it is fair that the corporation should bear the expense.
    13. The district court in Pennsylvania had no jurisdiction to appoint a general receiver of the New Jersey corporation upon a bill filed by a stockholder, and the determination of that court and the circuit court of appeals for the third circuit to the contrary is, under the circumstances of this case, not binding upon this court.

      14. The elements which enter into the amount of compensation of counsel considered, and compensation fixed for services rendered in the Pennsylvania litigation and also for services rendered as counsel for complainant who secured the appointment of a receiver in this court. ■
    On bill. On appeal from receiver’s rejection of claim.

      Messrs. Runyon & Autenreith (Mr. Henry W. Runyon) and Mr. Horace L. Cheyney (of the New York bar), for the appellants.

      Messrs. Collins & Corbin (Mr. Gilbert Collins) and Mr. Francis B. Bracken (of the Philadelphia bar), contra.

   Lane, V. C.

The claim of the appellants, members of the bar, is for legal services rendered to complainant, Hitchcock, under the following circumstances:

Defendant, American Pipe and Construction Company, is a corporation of this state. On September 19th, 1917, a bill in equity was filed in the United States district court for the eastern district of Pennsylvania by two stockholders of the corporation against the corporation. The bill alleged that the corporation was in financial difficulties and that if creditors should be permitted to resort to legal process the result would be the immediate discontinuance of the business of defendant and the sacrifice of its assets, but that if the assets were properly conserved and administered for its creditors and stockholders under the direction of the court much of its property could be saved. It prayed for the appointment of a receiver, with power to operate and carry on the business, and for an injunction enjoining defendant and all other persons from interfering with, transferring, selling of disposing of any of its property, and for “other relief.” On September 22d an answer was filed by the corporation, admitting the allegations in the bill. On the same day the district court ordered, adjudged and decreed that Robert Wetherill, the president of the corporation, be appointed receiver of the defendant and of its property. He was given permission to operate the business, and all other persons were directed to turn over to him its property, and were enjoined from interfering, transferring, selling or assigning any of its property. On October 22d the appointment was made permanent. So far as appears from the record no notice whatever was given to any person except defendant, which appeared and consented to all of the proceedings. On October 31st, 1917, complainant, Hitchcock, a stockholder of the corporation (holding legal title in trust for another) intervened in the federal court for the purpose of questioning its jurisdiction. After hearing, on or about December 17th, the district court refused to disturb its decree. Appeal was taken to the circuit court of appeals and that court on March 29th, 1918, affirmed the determination of the district court. Application was made to the United States supreme court for a writ of certiorari, which writ was granted, and the ease is now ir. the supreme court undetermined.

The grounds upon which the jurisdiction of the district court was attacked were that that court had no power (at least in the absence of statute) at the instance of a stockholder, to appoint a general receiver of a corporation foreign to the district in which the court was sitting for the reason that such action would be an unwarranted interference with its internal affairs and that the court was without power to appoint a receiver of a corporation where no other specific relief was prayed for.

Complainant, on October 19th, filed a bill in the United States district court for the district of New Jersey, praying for an adjudication of insolvency and the appointment of a receiver under the provisions of section 65, &c., of an act concerning corporations, revision of 1896 Comp. Stat. p. 1640); an order to show cause was allowed but no final determination reached by the court. In June, 1918, complainant filed a bill in this court praying for an adjudication of insolvency and the appointment of a receiver under the statute; an order to show cause was allowed; the matter came on for hearing before me, and on July 2d I handed down my conclusions, which resulted in the appointment of a receiver. An order was made under the provisions of section 75 of the statute directing creditors to bring in their claims. Representation was then made that defendant’s business was in such shape as that the federal court of Pennsylvania might properly discharge its receiver and that counsel intended to make application .to this court for a discharge of the receiver here appointed under the provisions of section 69 of the act. Proceedings were taken in the federal court which resulted in that court authorizing the discharge of the receiver, whereupon proceedings were taken in this court under the provisions of section 69, which resulted in an adjudication that the debts of the corporation had been paid or provided for and that there remained sufficient capital to enable it to resume its business, and the receiver was directed to transfer to the corporation any rights which he might have in or over its property. This adjudication was made after an independent examination of the situation by this court uninfluenced by the determination of the federal district court. Before the order was made under the provisions of the sixty-ninth section, the present claimants presented their claim to the receiver for services rendered to complainant in the federal district court, both of Pennsylvania and New Jersey, which claim, at my suggestion, in order to save time, was disallowed by the receiver, and an appeal immediately taken by claimants. To secure payment of whatever amount might be allowed by the court upon a consideration of the appeal and also to secure the payment of such counsel fees as this court might allow counsel for complainant for services rendered in this court, the corporation deposited collateral with the receiver as trustee.

The insistence of claimants is that throughout the proceedings in Pennsylvania complainant acted in the right of the corporation, that legal services which were rendered to him were in effect rendered to the corporation and that either counsel have a direct claim upon the corporation for compensation for such legal services or complainant, Hitchcock, has a claim which would include disbursements made and incurred by him for the legal services. Whichever way it is put the question to be determined is whether the corporation is liable for the value of legal services rendered in the Pennsylvania litigation to complainant, Hitchcock. If there is any question of procedure or as to by whom the claim should be presented, orders may be taken so that the meritorious question may be properly presented. No such question was raised by defendant, and it has been assumed that the meritorious question was properly before the court. In this case I ignore the fact that complainant, Hitchcock, is a dry trustee and that counsel have no claim against him for compensation. He acted merely for convenience. The real beneficial owner of the stock is the mother of one of counsel (Mr. Cheyney), and although counsel may not have intended to charge her if unsuccessful, yet this does not dispose of the matter, for as I will hereafter point out the question as to whether the corporation should compensate counsel is one purely of equity. That counsel did not intend to charge a client if unsuccessful in a suit of this kind is of the utmost importance. It makes it incumbent upon the court to fully investigate to determine if the suit be of the nature commonly known as strike suits. And the caution with which this court proceeds in actions where there is suspicion that the stockholder is not acting in the real interest of the corporation is illustrated by General Investment Co. v. Bethlehem Steel Co., 102 Atl. Rep. 252; 88 N. J. Eq. 237. In that case an appeal was taken to the court of errors and appeals. An application for a stay of the order of the court dissolving the temporary restraint was made. It was denied. The appeal was then, I understand, abandoned. Eor reasons which are apparent I think, from what I shall hereafter state, this case is not within that class.

In reaching a determination it is useful to consider the reasons which actuated the court in proceeding under the statute to appoint a receiver. They will be found embodied in written conclusions filed, not reported (and which will not be reported because of their length). The court held that, first, the bill filed in the district court alleging that the corporation was in such financial condition as that it could not meet its maturing obligations as they matured and that if creditors were permitted to resort to legal process the business would be immediately discontinued and the assets of the defendant sacrificed, showed a condition of insolvency within the meaning of our statute (67 N. J. Eq. 602; 84 N. J. Eq. 415; 85 N. J. Eq. 181; 71 N. J. Eq. 70; 73 N. J. Eq. 286), which would justify an adjudication of insolvency and the appointment of a receiver; second, the bill in the district court and the proofs before this court showing that the business of the company had been conducted in such a manner as that it had been obliged to resort to a moratorium to protect its assets; that the management of its affairs had been for nine months in the hands of a receiver of a foreign court; that its stock had declined on the market from ninety in 1912 to five in 1917; that no dividends had been declared since 1914, and that its working capital was almost exhausted, disclosed that the business of the company had been conducted at great loss and greatly prejudicial to the interest of its stockholders, so that its business could not be conducted with safety to the public and advantage to the stockholders within the meaning of section 65 of an act concerning corporations, as amended (P. L. 1912, at p. 535); third, to bring a case within the language of section 65 as amended it need not appear that there has been either fraud or mismanagement; fourth, the effect of the decree of the district court being to take from the corporation all of its assets and to remove from its stockholders the power to manage its affairs through directors without in anywise affecting- the corporate liabilities, there was a complete suspension of business; (attention was drawn to the distinction between the position occupied by the receiver acting under the order of the district court and the position which would be occupied by a receiver appointed under the statute of this state. Under the statute, the receiver represents the corporation and its creditors and stockholders, he exercises all of the privileges and franchises of the corporation; has title to all of its property; becomes, to all intents and purposes, the corporation plus. The receiver appointed by the district court does not stand in the same position; he has, at most, custody and control over assets of which the corporation, as an entitjg has been deprived; he has no title unless title has been conferred upon him by the corporate act. The corporation as such remains liable for all liabilities whatéver the outcome of the litigation may be. Payments through the receivership reduce them only pro tanto.) Eifth, when the directors and officers of the company appeared in the district court and consented to the appointment of a receiver and the transfer by the corporation to the receiver of its assets, they deliberately violated the provisions of sections 63 and 64 of an act concerning corporations (2 Comp. Stat. p. 1638). In response to the plea of defendant that this court should not appoint a receiver, I said: “Our legislation requires that, upon the happening of insolvency, the directors and officers shall be under certain disabilities and certain obligations and the assets shall be dealt with in a certain way and distributed in a certain manner. The method of judicial procedure in this court and in the federal courts is essentially different. Our judicial policy requires that before any act is done which will affect the interests of creditors and stockholders, the creditors and stockholders should have notice. There are certain statutory powers which are vested in the receiver and which he may exercise without the sanction of the court and for the performance of which he is answerable to creditors and stockholders as any other trustee. Indeed, it has often been remarked by Yice-Chancellor Garrison from the bench that an order permitting a receiver to perform a certain act without notice to creditors and stockholders is, as to them, as if it had never been made; that it afforded no protection whatever to the receiver.- The federal courts have adopted the practice of authorizing the receiver to perform acts, part with property, borrow money and pay out money without notice to other than the defendant corporation or its representatives, or, in some instances, to committees which have been permitted to intervene on behalf of creditors and stockholders. It seems to have been considered in the federal courts that the corporation represents the creditors and stockholders. As a matter of technical law it may, but where, as in this case, as is conceded, and in most cases of similar nature, the application for the appointment of a receiver is made with the acquiescence, if not at the instance, of the directors and officers, it seems to me that in no trae sense can the corporation be said to represent its creditors and stockholders. It may be said that an act of the receiver in the federal courts, even if approved by the court prior to its taking place, is still open to attack by creditors or stockholders upon the passing of the final accounts, or at some other time. The creditor and stockholder in such event is not only under the necessity of attacking an act of the receiver, but an act approved by the court. Whatever may be the actual merits of the two systems, our policy is clearly indicated by our legislation and our adjudicated cases. Again, it is the policy of our law that a business incorporated under the law of this state shall be managed by a board of directors and officers. These officers and directors are responsible for the performance of their trust and are subject to certain statutory obligations. In the instant case, the officers and directors have completely abdicated their functions, and the business of the corporation has been, since September, 1917, managed and controlled by an officer, over whom our statute and policy cannot extend, and over whom the courts of this state have no control, no matter to what extent his acts may affect the internal affairs of the corporation.

“Whether this company should, under the conditions existing in September, 1917, and now existing, be permitted to resume its business and continue its operations, has become a matter for determination by the courts of this state governed by the policy of this state.

“The reasons which actuate me in, at this time, appointing a receiver are that: the corporation being enjoined from exercising its privileges and franchises, it is contemplated by the legislature that there should be in the place and stead of the corporation a statutory officer appointed by the court, with power to exercise such privileges and franchises, and charged with the duty of protecting creditors and stockholders, and of enforcing in their interest and in the interest of the public, the provisions of the statute under which the company was incorporated; there are, or may be, assets within this jurisdiction or other jurisdictions, over which the receiver in the federal court cannot obtain control; plans of reorganization may be proposed which should be subject to the scrutiny of the receiver and of this court; the jurisdiction of the federal court is, as indicated by the allowance of a writ of certiorari by the supreme court of the United States, at least arguable, and it may, at any time, be necessary for a receiver here appointed to intervene; the jurisdiction of the federal court resting primarily upon consent, the affairs of the corporation cannot in many instances there be administered with any effect without the consent, and in some instances the affirmative act of the corporation, and the moment the disabling decree is made the corporation is deprived of its power to act in any respect whatsoever without the approval of this court; it will be necessary in the administration of the affairs in Pennsylvania that the corporation be represented by someone empowered to act for it; it may be that under the statute, this court can neither permit the company to resume its business or dissolve it unless a receiver be appointed.”'' I further said:

“Before concluding, I desire also to point out that it is the policy of our law when a corporation has become insolvent that no preferential payments be made. Creditors should be paid pro rata. In the administration of the affairs of this corporation in the federal court certain of the creditors are being paid and certain are not. If a condition of bankruptcy should intervene, the result will be that during the time that this company has, while in this insolvent condition, been gradually liquidating its debts, preferences will have been created.”

When complainant, Hitchcock, intervened in the district court in Pennsylvania and attacked the jurisdiction of that court he did so not in his own right but in the .right of the corporation. He did that which the management ought to have done. His act was made necessary by the bold violation on the part of the officers and directors of the provisions of sections 63 and 64 of our statute. The difference between the action of the directors in this case and the action of directors in consenting to the appointment of a receiver by this court can no better be expressed than in the language of Vice-Chancellor Stevenson in Elm v. International Steam Pump Co., as follows:

“The duty imposed by this section is not often performed, and for this reason: It is generally more satisfactory, when a corporation gets into the condition that this corporation was in, to have a receiver appointed as quickly as possible. Consequently, instead of within ten days calling together the stockholders, the honest directors procure the institution of the action which now has been brought in this court, and .which any stockholder or any creditor can bring; and then they come before the court, with the corporation, and they consent to an immediate, summary hearing. The statutory decree is passed, and thereupon, the statutory receiver is appointed; and counsel will bear in mind that no statutory receiver can be appointed until after the disabling decree, the final decree is passed.”

The action of complainant, Hitchcock, was necessary because of the fact that the directors consented to appear in the district court. The jurisdiction of that court, if jurisdiction it had, rested entirely on this consent and that consent, in view of the consequences which followed, was a violation of the duty and obligation of the directors to the creditors and stockholders and to the state of the creation of the corporation imposed upon them by its law.

The case was within that class in which a stockholder is permitted to sue or defend in the right of the corporation (7 Rul. Cas. §§ 308, 311); in such a suit the stockholder actually represents the corporate right; the decree is res adjudícala against the corporation and its stockholders; the proceeds, if any, go to the benefit of the corporation. Ellerman v. Chicago Railway Co., 49 N. J. Eq. 217; Willoughby v. Chicago Railway Co., 50 N. J. Eq. 656; Appleton v. American Malting Co., 65 N. J. Eq. 375; Goodbody v. Delaney, 80 N. J. Eq. 417. It is settled that a request on the corporate management to act is not necessary where it is apparent that it will not act, as in this case. Appleton v. American Malting Co., 65 N. J. Eq. 375. I can conceive of no good reason why, if the suit is one which should have been brought, or the defence is one which should have been made, by the corporation, the expense of the suit or of the defence should not be borne by the corporation, the benefits accruing to the corporation. I have found no case bearing directly upon the proposition. The reason unquestionably is that, in most cases, there has been a sharp conflict of opinion between the corporate management and the stockholder which has led the courts to remit the stockholder for his compensation to the proceeds of the litigation. The courts have practically said to the stockholder, that, differing with the management, he must proceed at his own risk, and the farthest the courts would go to aid him would be, if the action appeared bona fide, to permit him to sue in the corporate right. In the case at bar I think there would be little difficulty if the ease in the supreme court were argued and decided favorably to complainant, Hitchcock, but the course the proceedings has taken has rendered the determination of the supreme court of academic interest only except upon the question of costs involved. If it were proper to attempt it, I think that that court could not be induced to decide the case where the issue involved the matter of costs only. Be that as it may be, defendant corporation has insisted, as a condition to the determination by this court of the right of the claimants, that the certiorari in the supreme court should be dismissed. Such dismissal, however, is without prejudice to the rights of the parties. The difficulty arises because complainant, Hitchcock, so far, has been unsuccessful in the federal courts, but I conclude that this is not determinative.

Whatever the holding of the federal courts may be as to the jurisdiction of the district court my conclusion is that it was the duty of the directors and officers of the corporation, in view of the provisions of the sixty-third and sixty-fourth sections of our statute and of the policy of our law, which contemplates that a corporation created under our statute should be governed by a board of directors subject to being called to account for their acts by our courts, which policy is violently opposed by proceedings which vest the control of all of the assets for an indefinite time in an appointee of a court of a foreign jurisdiction and which divest the corporate managers of all control over its assets, to decline to submit to the exercise of such jurisdiction, and they having failed to do so, the stockholder properly intervened in the right of the corporation for the purpose of undoing the acts of the officers and directors in consenting to the exercise of such jurisdiction. If application had been made to this court, after knowledge that the directors contemplated filing the answer they did in the district court before it had been filed, to enjoin such action, I should not have hesitated in granting such an injunction, nor would I have hesitated, if it appeared necessary to effectively prevent its being filed, to appoint a receiver, and if application had been made after the answer had been filed for the appointment of a receiver, I should not have hesitated in appointing a receiver, because of the performance of the act and of the fact that the assets were in the control of a foreign receiver, either under the statute or the ordinary jurisdiction of this court (Morse v. Metropolitan Steamship Co., 87 N. J. Eq. 278), and I should probably have directed him to intervene in the district court and do that which complainant, Hitchcock, has done, in which event, of course, the charge would he one which would be borne by the corporation.

When I first approached this problem I assumed that, before claimants could succeed, they must prove a debt which might be recovered against the corporation in an action at law. I was in error. When the stockholder sues or defends he acts as trustee for the creditors and stockholders represented by the corporate entity. The corporation, in a suit brought- by a stockholder, is made a party because it represents creditors and stockholders as the cestui que trust of the stockholder suing, so, where the stockholder defends, the corporation being already a party, he represents as trustee for the time being and in reference to the particular right the creditors and stockholders and their usual representative, the corporation. Rights between a trustee and cestui que trust are of equitable cognizance, so that the question whether the corporation should bear the expense in- . curred by the stockholder in such an action is one purely of equity and to be determined by what ought to be done in fairness and equity.

. The success or failure of the suit or defence is not determinative. Success raises a very violent presumption that the suit or defence should have been brought or made and that the corporation should bear the expense. Failure raises the reverse presumption; but it is not conclusive. In this case, assuming that the district court and the circuit court of appeals were right and that the district court had jurisdiction, I think the defence should have been made and that the corporation should bear the expense, hut I am prepared to go further. The question involved in the Pennsylvania litigation was one of jurisdiction. The insistence.was that the district court had no jurisdiction of the subject-matter of the litigation. The question was one purely of law, its determination did not require a finding of fact. A judgment rendered by a court having no jurisdiction of the subject-matter is open to collateral attack.

That the district court had no jurisdiction of the subject-matter I think is clear. The bill prayed for no specific relief other than the appointment of a receiver. It is conceded, of course, that a court of equity may take under its control assets of a corporation, foreign or domestic, with the view to ultimate distribution of such assets among creditors and may appoint receivers of a solvent corporation in some instances where, for one reason or another, the board of directors ought not to be left in control. Morse v. Metropolitan Steamship Co., supra; Atwater v. Baskerville, 104 Atl. Rep. 310; 89 N. J. Eq. 121. But I have never, unless the instant case is an exception, heard of a case in which it was contended that a court of equity might by judicial fiat prescribe a moratorium in favor of a corporation. When a court takes under its control and puts in custodia le gis assets of a corporation with a view to ultimate distribution, creditors and stockholders are provided with a remedy for the enforcement of their demands. But where a court appoints a receiver merely to take the place of the management of the corporation to act for an indefinite time, creditors and stockholders are deprived of their ordinary legal remedies and no adequate substitute provided. There is a distinction between the power which is exercised by a court, where a bill is filed for the winding up of the affairs of a corporation or charging that the directors of a corporation ought not to be left in control, although the corporation may be solvent, in appointing receivers and in refraining from directing immediate disposition of the assets pending rehabilitation or the election of a proper board, as the case may be, and the power which the federal courts sought to exercise in the instant case in appointing a receiver under a bill where no ultimate relief of any kind is asked. That the bill was not considered as praying for any ultimate relief is clearly indicated by the opinion of the district court. It is too clear for argument that the appointment of a receiver is never justified except as incidental to other relief. Hogsett v. Thompson, 258 Pa. 85. The remarks of the Pennsylvania court in that case, although there the appointment of a receiver for an individual was concerned, are applicable to the appointment of a receiver of a corporation. The statute of Pennsylvania referred to by the circuit court of appeals, the act of June 16th, 1836 (P. L. 789 § 18 5), conferring upon the several courts of common pleas the jurisdiction and the powers of a court of chancery and the supervision and control of corporations other than those of a municipal character is construed by Judge Sergeant, in Commonwealth v. Bank of Pennsylvania, 3 W. & S. 184. (at p. 193), as follows: “This gives the courts all the powers and jurisdiction a court of chancery over corporations, to be exercised in the ordinary mode in which a court of chancery acts, whether by bill, injunction or otherwise, as the equity of the case may require.” In the case of Blum Bros. v. Girard National Bank, 248 Pa. 148, relied upon by the federal courts, the appointment of the receiver of the «foreign corporation was incidental to a distribution of its assets for the benefit of creditors and others ultimately entitled thereto. This case is in line with what I said in Atwater v. Baskerville, supra. The determination of the circuit court of appeals for the third circuit is in direct conflict with that of the circuit court of appeals for the second circuit in Maguire v. Mortgage Co. of America, 203 Fed. Rep. 858, although the circuit court of appeals for the third circuit stated that this was not so. This statement of the circuit court of appeals for the third circuit must be accorded little weight in view of the allowance by the supreme court of the United States of its writ of certiorari. Even if the statute of Pennsylvania may be considered as investing in its courts of equity visatorial powers over corporations, and even if thes° visatorial powers may be extended to foreign corporations, visatorial powers cannot be extended to include the right to appoint a receiver where no charges of mismanagement are made, where no ultimate relief is prayed for, solely for the purposes of permitting the corporation’s affairs to be managed, for an indefinite space of time, free from attacks by creditors or others, in order that it may be determined whether or not the corporation may, at some future time, be in a position where it can proceed in the ordinary way. The rule in this state is in accord with the general rule. Goff v. Electro-Pneumatic Brake Co., 104 Atl. Rep. 193; 89 N. J. Eq. 258. And I point out that nothing that I have said or intimated is to be considered as opposed to what I have already said in Atwater v. Baskerville, supra, and Clark v. Painted Post Lumber Co., 89 N. J. Eq. 409. I have no doubt of the power of this court to appoint a receiver of a foreign corporation and wind 'up its affairs, so far as assets within this state are concerned, and to deal wi£h assets within the state, under our statute, at the suit of a creditor or stockholder. Nor would I have any doubt but that the Pennsylvania court might, if any statute gave it jurisdiction, act upon the assets within its control, at the suit of a stockholder.

I am of the opinion that the district court had no jurisdiction to make the appointment under the bill filed in that court and that if it is necessary to do so this court may, under the circumstances of this case, disregard the determination of the federal courts to the contrary.

The receiver appointed in this jurisdiction was a general receiver under the statute. The determination of rights in the assets of the corporation, at least in such assets as came within the control of the receiver, became a proper subject-matter for determination in this court. Reynolds v. Stockton, 140 U. S. 254; 35 L. Ed. 464. The collateral which is now in the hands of the receiver as trustee may be considered as assets within his control. The course which the case has taken, which makes it impossible to secure a final determination by the supreme court of the United States, makes it necessary that this court should, if essential to determine the rights of claimants, decide whether claimants or the corporation was right in the Pennsylvania litigation.

It is suggested that claimants could not recover against the corporation under the Pennsylvania law. No decision in Pennsylvania to this effect has been brought to my attention. One of the witnesses for defendant testified that there was no law or statute in Pennsylvania under which recovery could be had. This at most is saying that the witness knows of no such rule. It is far from saying that it has been decided otherwise. I must assume, therefore, that the rule in Pennsylvania would, if the case arose, be the same as that which I now conclude is the rule in this jurisdiction.

The result is that claimants are entitled to be paid reasonable compensation for the services rendered in the Pennsylvania litigation.

The only question in my mind is, and upon this I express no . opinion because the matter is not properly before me, whether the officers and directors whose improper acts caused the expense should not be obliged personally to bear the burden. And it may be a question whether they ought not tó be made personally to bear the entire burden of the expenses incurred due to the Pennsylvania receivership.

There was offered in evidence a letter dated July 10th, 1918, addressed by Mr. Cheynejr, of counsel with complainant, to Mr. Bracken, of counsel with defendant. The letter expressed dissatisfaction with the outcome in this court and requested an appointment in order that the situation might be discussed and the litigation ended. The letter was written after I had declined to permit counsel for complainant to act as counsel for the receiver and counsel were undoubtedly disappointed. They had, figuratively speaking, been patted on the back for the work they had done and then the court had refused to permit them to occupy a position from which they might receive some compensation. My refusal to permit them to act as counsel for the receiver indicated no lack of faith either in their integrity or ability. In cases of this nature, where the appointment of a receiver is the outcome of litigation, it is essential, in order that the best results should be achieved, that not only the receiver but his general counsel, if any be retained, should be impartial and so unidentified with the preceding litigation as not only to be in fact impartial, but all parties interested in the corporation should be convinced of his impartiality. I am speaking now of the receiver and his general counsel. I do not mean to intimate that in a proper case the receiver may not retain counsel previously identified with the litigation, to conduct litigation on behalf of the receiver. The result which has been accomplished in this case might have been accomplished if counsel for-complainant had been permitted to act as -counsel for the receiver, but the court was not justified in taking any chances. I do not think that the letter of counsel, taken in connection with the circumstances, indicates that tire litigation was of a strike nature. '

The question is as to the amount to be allowed.

I referred the matter to the receiver, Mr. Frank P. McDermott, as master, to take testimony of experts, particularly directed to the Pennsylvania end of the litigation. Four Pennsylvania lawyers, apparently of equal standing, were produced before the master, two on each side.. The two for claimants testified that the services rendered were worth in the neighborhood of $10,000, while the two for the defendant testified that the services were not worth more than in the neighborhood of a $1,000. It would seem that even in the legal profession it is impossible to get expert testimony, where the experts are produced by the parties, which can be relied upon. My view is that the figure fixed by the experts for defendant is utterly ridiculous. The services rendered by counsel involved intervention by a stockholder in the district court in Pennsylvania, argument upon the question of the jurisdiction of that court, appeal to the circuit court of appeals; preparation of briefs and argument in that court; application for a writ of certiorari in the supreme court; preparation of a brief thereon; counsel were opposed by some of the most astute members of the Philadelphia bar. The question was one of great importance and apparently of considerable difficulty as indicated by the decisions of the district court and the circuit court of appeals adverse to claimants’ position, and by the allowance of a writ of certiorari by the supreme court.

I have examined the briefs both pro and con- and I am convinced that the question could not have been better presented. There is no yard-stick to measure the amount which should be allowed for compensation of counsel. In the ease of Soper v. Bilder, 100 Atl. Rep. 858; 87 N. J. Eq. 564. I indicated what elements might properly be taken into consideration, the importance and difficulty of the question involved, the ability of counsel, the amount of labor, the amount involved, the result. In the Pennsylvania litigation there was more involved than mere protection of the rights of the holder of sixty-eight shares of stock. The proper administration of the affairs of a corporation with assets of several millions of dollars was the real question involved.

So, with respect to the allowance which ought to be made to counsel for services rendered in this court. The case was not that of an ordinary application for the appointment of a receiver, nor was it that of the ordinary litigated case where there is no question of jurisdiction or discretion, but merely a question of fact as to insolvency. So far as counsel knew at the time the application was made there was no precedent in this state. Reference to Gallagher v. Asphalt Co., 67 N. J. Eq. 441, seemed to indicate that this court might properly, even if it adjudged the corporation insolvent, decline to appoint a receiver because of the appointment of a receiver in the Pennsylvania jurisdiction. Counsel had no knowledge of the unreported case of Elm v. International Steel Pump Co., in which Vice-Chancellor Stevenson adjudged a corporation, the administration of the affairs of which had been taken over by the federal district court in New York, insolvent upon a creditor’s bill, for substantially the same reasons that I appointed the receiver in this ease. Counsel’ were therefore not only obliged to be prepared to prove the corporation insolvent but also to convince the court that under the circumstances any discretion which might rest in this court should be exercised in favor of the appointment of a receiver. The application was resisted by eminent counsel both of this state and Pennsylvania, and every consideration which could be thought of to induce the court to decline to act was brought to bear by counsel. The decision of this court, although it came hard on the heels of the argument, was not a snap decision, but carefully considered. I had the advantage of counsel for complainant because I was in the International Steam Pump Company Case and secured the appointment of the receiver there. The result achieved in this court was not only the appointment of a receiver but the vindication of the public policy of this state.

It is hard for judges in considering the question of the amount of counsel fees to keep out of their minds the amount of their own compensation. They are prone to forget that the assumption is that lawyers of more than mediocre ability will remain on the bench because of love of the exercise of power, of interest in the work, of the dignity of the position, of its comparative permanency, without regard to the amount of compensation. That this assumption is warranted is indicated by the calibre of the overworked judges of the federal district courts with their ridiculously inadequate salaries and the figure to which it is suggested that congress should raise their salaries, which, while not so inadequate), is yet wholly inadequate. It must not be overlooked that the lowering of the value of the dollar affects lawyers as well as any other individuals. The value of the dollar consists not in the dollar mark but in what it will purchase, and there is no doubt whatever in my mind but that a dollar in the hand of a lawyer to-day is not worth more than seventy cents was worth in 1914. When we apply this to the figure fixed by the two experts in Pennsylvania, the ridiculousness of the amount which they fix is demonstrated. A jury of laymen or an unbiased member of the bar in active practice is probably a better judge of the value of legal services than a court. In this case I have the judgment of a master who has no interest in the matter. He had been in active practice for years and has acted as advisory master in this court upon many occasions. He has the reputation of charging in his own practice full value for his services, but no more. My judgment coincides with his and the amount which will be fixed for compensation to counsel in the Pennsylvania litigation will be $5,000, and for services rendered to complainant in this court $2,000. The master will be allowed $100. Complainant will be allowed his taxed costs, and there will be included in the taxed costs the stenographer’s fees for the services rendered to the master, amounting to $27.50.

I have excluded from the allowance to counsel for services rendered in this court any compensation for services compensated for by the amount allowed for the Pennsylvania litigation, and I have taken into account in fixing the amount allowed for the Pennsylvania litigation the fact that counsel get $2,000 as an indirect result of the litigation in Pennsylvania for services rendered in this court. If this were not taken into consideration the allowance to counsel for work performed in Pennsylvania would be greater. Claimants will be directed to dismiss their ceridorari in the supreme court, but not until after actual payment to them of the amounts fixed.


source: Caselaw Access Project

author: Lane, V. C.

license: Public Domain

text:
    Joseph Giammares and Tony Caffaro v. Allemania Fire Insurance Company of Pittsburgh, Pennsylvania, and James A. Edgar.
    [Decided November 21st, 1918.]
    1. A suit in equity to reform a contract of insurance or to enjoin an insurance company from setting up certain defences, in aid of an action at law, is not an action within the meaning of the provisions of the policy providing a short period of limitation.
    2. Delay of upwards of a year before instituting an action to reform' the policy, &c., unaccompanied with injury to the insurance company is not such laches as to warrant withholding relief.

      8. Where a policy of insurance issued by an agent having knowledge, communicated to him by the insured, that the building stands on leased ground and that the property is encumbered by a chattel mortgage, does not contain notations to such effect, the company is estopped from setting up in an action at law that the policy is void under a provision that it shall be void if the building stands on ground not owned by the insured, or if the interest of the insured is other than unconditional ownership.
    4. Failure of the insured to read the policy and thus discover the omissions is not such negligence as will bar relief.
    In bill, &c.

      Mr. George J. Plechner and Mr. Freeman Woodbridge. for the complainants.

      Mr. I. Benjamin Glueckfield, for the defendants.
   Lane, V. C.

The facts, as I have found them, are as follows: Complainant Caffaro was the owner of a building standing on leased land. He applied for insurance through a broker to the agent of defendant insurance company; the agent was informed that the building stood on leased ground; the company issued its policy without a notation to that effect. The policy was delivered by the agent to the broker and by the broker to Caffaro, neither of whom read it. Subsequently, Caffaro sold the building and contents to Giammares. As part of the consideration, Giammares gave Caffaro a chattel mortgage. The policy was sent to the agent, through the broker, for a, notation, to the effect that Giammares was the owner and for the addition of a clause protecting the chattel mortgagee. The fact that there was a chattel mortgage was brought to the attention of the agent. He returned the policy with a notation with respect to the change of ownership, but without the chattel mortgagee clause and without a notation to the effect that there was a chattel mortgage, to the broker, who in turn delivered it to Caffaro. Neither the broker, .Caffaro or Giammares read the policy. Caffaro and Giammares cannot read English. The broker can. A fire occurred and an action at law was instituted a few days before the expiration of the period of limitation, in which action the insurance company set up the defence that the policy was void because the building stood on leased ground and there was a chattel mortgage on the building and contents, which facts rendered the policy void under provisions thereof that it should be void if the interest of the insured was other than unconditional ownership, or if the building s.tood upon ground not owned by the insured. After the expiration of the period of limitation fixed by the policy, this suit was instituted to reform the policy, or in the alternative, for an injunction enjoining defendant from setting up the defence referred to upon the ground of estoppel in pais. Neither the broker, Caffaro nor Giammares had notice of the omissions in the policy until after the fire.

The defendant insurance company first contends that the suit is barred by the limitation of one year prescribed by the policy. I think not. Rosenbaum Brothers v. Council Bluffs Insurance Co. (United States Circuit Court for the Northern District of Iowa, Judge Shiras), 3 L. R. A. 189; Abraham v. North German Fire Insurance Co. (same court; same judge), 3 L. R. A. 188. And see note to Harrison v. Hartford Fire Insurance Co., 47 L. R. A. 711. A consideration of Kelsey v. Agricultural Insurance Co., 78 N. J. Eq. 378, and Kupferschmidt v. Agricultural Insurance Co., 80 N. J. Law 441, will indicate that the suit to reform the policy in that case was brought after the expiration of the period of limitation fixed by the policy.

The defendant insists, second, that irrespective of the provisions of the policy the complainants are guilty of laches. The policy in question was issued January 8th, 1917; the fire occurred March 25th, 1917; a suit was commenced in the supreme court March 22d, 1918; this suit was commenced on May 31st, 1918. Generally, mere delay will not be sufficient to warrant withholding relief. The delay must be injurious to defendant. I cannot see that in this case defendant has been injured. Kelsey v. Agricultural Insurance Co., supra.

The defendant insists, third, that the contract of insurance being evidenced by a written document, and the policy containing a provision that its terms cannot be changed, or altered, except by a written notation, the court cannot either reform the contract or apply the doctrine of estoppel in pais. While the precise question has not been settled by the courts of this state, yet I think there is authority clearly indicating how it should be determined. In Franklin Fire Insurance Co. v. Martin, 40 N. J. Law 568, the court of errors and appeals, speaking through Mr. Justice Depue, said: “If the proposal for insurance be prepared by the agent of the company, and he misdescribe the premises, with full knowledge of their actual condition, and there be no fraud or collusion between the agent and the insured, the contract of insurance may be reformed in equity, and made to conform to the condition of the premises as they were known to the agent.” In Lloyd v. Hulick, 69 N. J. Eq. 784, the court oE errors and appeals, speaking through the present chief-justice. held that a deed might be reformed where it did not conform to the provisions of a written contract. In Sloss-Sheffield Steel and Iron Co. v. Aetna Life Insurance Co., 74 N. J. Eq. 635, Vice-Chancellor Howell said that contracts inter partes may be reformed by this court whenever by reason of a mutual mistake the written instrument fails to express the agreement on which the minds of the parties met, or where there is a mistake by one of the parties and fraud or other inequity attempted on the part of the other. This case was reversed by the court of errors and appeals in 75 N. J. Eq. 545, but only on the question of fact. In Seymour v. German-American Insurance Co., 83 N. J. Eq. 37, it appeared that the insurance policy contained a provision stamped with a hand stamp “'Warranted by the assured that the within described building is occupied exclusively for dwellings above the first or grade floor.” The policy had been issued as a renewal of a policy which described the premises as insured “while occupied as a dwelling and for manufacturing of oil stones.” The defendant’s agent transmitted the policy to complainant, who, failing to notice the stamped words, paid the premium and placed the paper in his safe, supposing it to conform in all respects to the one that had preceded it. The court (Vice-Chancellor Stevens) permitted reformation. The case was affirmed in the court of errors and appeals on the opinion below. 84 N. J. Eq. 206. In Koch v. Commonwealth Insurance Co. of New York, 87 N. J. Eq. 90, Vice-Chancellor Learning did not doubt but that if the insurance company had knowledge that the insured property actually was used as a printing office it would have been proper to have decreed reformation. In Martin v. Jersey City Insurance Co., 44 N. J. Law 273, the supreme court held that knowledge by the president of an insurance company who had exercised the power of making and renewing contracts of insurance that the insured was making additions to the insured buildings with an oral permission to do so, estops the company from defending an action brought upon the policy upon the ground that by reason of such additions there had been an increase of risk; and further, that knowledge by the company of the existence of subsequent insurance, followed by any words or acts on the part of the company by which the insured is induced or permitted to believe that the contract of insurance is still subsisting, and the property of the insured is still protected, is a waiver of the condition or an estoppel against an assertion that a forfeiture of the policy has occurred because of a failure of the insured to comply with the condition to give notice of such subsequent insurance and have it endorsed upon the policy or acknowledged in writing.

I have not overlooked the cases of Dewees v. Manhattan Insurance Co., 35 N. J. Law 366; Bennett v. St. Paul Fire and Marine Insurance Co., 56 N. J. Law 377; Dimick v. Metropolitan Life Insurance Co., 69 N. J. Law 384; Kupferschmidt v. Agricultural Insurance Co., 80 N. J. Law 441. These were all actions at law, and I do not think that their effect is to modify the general rule that permits a court of equity to reform a contract or to apply the doctrine of estoppel in pais where there has been either a mutual mistake or a mistake on one part and fraud or other inequitable conduct on the other.

It is impossible to reconcile the cases from other jurisdictions. See the note to Bostwick v. Mutual L. Ins. Co., 116 Wis. 392; 67 L. R. A. 705, particularly section 1; section 3, subdivision b, subsection 1; section 4, subdivision a, subsection 1; subdivision C, subsection 3; subdivision a, subdivision b, subdivision C, section 9. Although the supreme court of the Hnited States in a life insurance case (New York Life Insurance Co. v. Fletcher, 117 U. S. 519; 29 L. Ed. 934) held where both the assured and the insurer are deceived by fraudulent acts of an agent in inserting in the application false answers, where the assured answered truthfully, if both parties acted Iona’fide, the policy should be canceled and the premiums returned, and that a party insured is presumed to have read his application and to be cognizant of the limitations therein expressed, and that a retention of the policy containing a copy of the application was an approval of the application by the assured, yet the same court, in Continental Life Insurance Co. v. Chamberlain, 132 U. S. 304; 133 L. Ed. 341, after considering the Fletcher Case, held that where the insured stated to an agent the exact facts with respect to other insurance, and the agent then wrote “no other,” although in fact there was other, the insurance company is estojoped from denying the interpretation put upon the facts by the agent. In Glens Falls Insurance Co. v. Michael (Indiana Supreme Court), 74 N. E. Rep. 964; 8 L. R. A. (N. S.) 708, the court held that the issuance without written application to a life tenant of a fire insurance policy without inquiry as to the state of title, no representations being made by assured upon that' question, and the assured paying the premium and accepting the policy without notice of a provision in the policy that it shall be void if the interest of the assured be other than unconditional and sole ownership, is a waiver of such provision. So, the supreme court of Arkansas, in Great Southern Fire Insurance Co. v. Burns, 175 S. W. Rep. 1161; L. R. A. 1916B, 1252, held that an insurer issuing a standard policy upon a parol application in which no reference is made to encumbrances upon the property waives a provision printed on the back of the policy making it void if the property is encumbered by a chattel mortgage. The court: in the latter case said: “The effect of a directed verdict would have been to hold that the contract of insurance was void from the beginning, and that the policies never in fact had any force or validity because of the anti-mortgage provisions inserted therein by the insurance company without the knowledge of the insured. If that view should be adopted, the insurance company would not only have wrongfully received and accepted the premium from the assured, but would have also misled them into the belief that their property was insured when in fact it was not.” It seems to me when a person applies to the agent of an insurance company, authorized to act, and informs the agent with respect to the facts that the insured may upon receipt of a policy assume that the policy is a valid and binding obligation on the part of the insurance company. As Vice-Chancellor Stevens said, in Seymour v. German-American Insurance Co., with respect to the situation presented before him, if the contention of the insurance company be sound, it issued the policy and took the premium when the policy was void acl initio to its knowledge. Either the agent of the insurance company mistakedly omitted to place on the policy a notation to the effect that the building stood on leased ground and subsequently a notation to the effect that there was a chattel mortgage, or in issuing the policy intentionally omitted the notations, in which event he committed a fraud upon the insured for which the company is responsible. It is no answer to say with respect to the notation in reference to the chattel mortgage that no additional premium was received. The defendant company by its act led the insured to believe that his property was still covered by insurance.'

The principles enunciated in such cases as Dimick v. Metropolitan Life Insurance Co., 69 N. J. Law 334, and Insurance Co. v. Fletcher, 117 U. S. 519, are not at all applicable in the case at bar. In such cases involving life insurance the contract consists of the. written proposal, written representations by the insured and the policy. In fire insurance generally, as in this ease, there is no written proposal, the oral request, including statements and representations by the insured, takes its place. The contract is not reduced to writing by the parties. The policy is a unilateral affair, prepared by the company with a view primarily of protecting its interests, and this is so, so far as the written as distinguished from the printed portion of the policy is concerned, notwithstanding that the form is standard. Its acceptance and retention by the insured does not have the same effect, at least in equity, as the written representations of the insured in a life policy accepted by the company forming a part of the contract. In considering the matter of the responsibility for written answers in a proposal for life insurance, the questions for whom the seribner is agent, and the duty of the insured before signing, to see to it that the answers are properly transcribed, as well as questions arising under the law with respect to warranties are involved. No, such questions are involved in a case like this. The agent who received the oral request and • representations, who issued the policy, did so in each instance as the agent of the company. He did not act as agent for the insured for an instant. The company alone is responsible for his acts. His knowledge and fraud are imputed to the company. It may be that in a life case the knowledge and fraud of the agent may be imputed to either the insured or insurer as he may act as agent for either. And this is the reason underlying the first head note in Insurance Co. v. Fletcher. In Continental Insurance Co. v. Chamberlain, 132 U. S. 304, the supreme court of the Hnited States held that in interpreting the meaning of the term "other insurance” the agent acted as the agent of the insurer alone and the company was bound by his interpretation. I think the insured in a life ease may safely assume that the policy issued by the company is in accord with the written pro posal. So the insured in a fire case may safely assume that a policy issued is in accord, so far as the description of the property and the insured interests therein are concerned, with the oral request; he may safely assume that the policy is not, to the knowledge of the insurer, void ab initio.

The defendant insists, fourth, that because of the failure of the insured or his broker to read the policy, there can be no relief. Here again there is a wide divergence of opinion in foreign jurisdictions. Some have followed the rule adopted by the Wisconsin supreme court in Bostwick v. Mutual L. Ins. Co., 116 Wis. 392; 67 L. R. A. 705, which is to the effect that the principles of caveat emptor apply to the sale of an insurance policy with as much rigidity as in the case of a sale of merchandise. Others have adopted a contrary rule. 67 L. R. A. 727 et seq.; see note to Dolvin v. American Harrow Co., 28 L. R (N. S.) 882 et seq.

I think the rule to be applied in this state is to be .gathered from a consideration of the following cases: Lloyd v. Hulick, 69 N. J. Eq. 786, in which the chief-justice said: "Its (that is, the deed) delivery by the defendants to the complainants without a disclosure of the fact that it contained these covenants was equivalent, it seems to me, to a declaration on their part that the deed was drawn in conformity to the provisions of the contract. It is true that the complainants might readily have discovered, by an examination of the deed before accepting it, that it was not what they had bargained for, and it may be conceded that prudence upon their part required a scrutiny of the deed before its acceptance by them. But I am not able to perceive that their failure to discover the fraud disentitles them to relief. In the transaction of business men ordinarily deal with one another in the belief that each is honest.” Seymour v. German-American Insurance Co., supra, in which Vice-Ohancellor Stevens said: “The facts appear to me to show mutual mistake — mistake bv the company’s agent in stamping the objectionable matter on the printed policy — and mistake by the complainant, who supposed that the policy was like the one which had immediately preceded it and who was guilty of no more carelessness than Lloyd when he took his deed from Hulick under the supposition that it conformed to the prior written contract.” See also the cases of Kelsey v. Agricultural Insurance Co., 78 N. J. Eq. 378, and Koch v. Commonwealth Insurance Co. of New York, supra.

The complainants, Caffaro and Giammares, could not read English. The delivery of the policy following the oral application was a representation that the policy conformed to the facts stated in the oral application.

I am of the opinion that the defendant insurance company is estopped from setting up in the action at law that the policy is void either because the building stood upon leased ground or because of the existence of the chattel mortgage.

It may be a different question as to whether the policy should be reformed so as to express an agreement on the part of the insurance company to pay to the chattel mortgagee the amount of his loss. The insurance company never intended to make any such contract. The testimony is to the effect that the agent was forbidden by the company to make such a contract. I desire to be informed by counsel whether the equities between the parties cannot be worked out without a finding as to whether the policy can be reformed as above indicated. I wish counsel for complainants would notify meat once whether they consider it necessary that the policy be reformed by writing in the chattel mortgage clause.


author: Lane V. C. (orally).

text:
    In the matter of the alleged contempt of Thomas J. Hand.
    [Decided December 2d, 1918.]
    A party to a pending litigation against whom, in such litigation, there is pending an application to punish for contempt, who commits publicly, but without the presence of the court, an assault and battery upon a person supposed by him to be the individual who gave the information which resulted in the institution of the contempt proceedings and therefore who might be a material witness, is guilty of a contempt of court, although he was mistaken in the identity of the individual, the act being one having a tendency to interfere with and obstruct the due administration of justice.
    On motion to punish for contempt.

      Mr. Arthur T. Vanderbilt, for the motion.

      Mr. John A. Matthews, contra,

   Lane V. C. (orally).

It is stipulated that the matter be now considered as if a writ of attachment had been issued to the sheriff and the respondent arrested and brought into court to answer for the alleged contempt set forth in the papers which preceded the granting of the order to show cause and the defence of the defendant is a general denial. The testimony that was taken upon the return of the order to show cause is to be considered as having been taken upon the return of the writ of attachment and the hearing as having been had under the two hundred and thirteenth rule.

In this case it appears that proceedings were taken in this court against respondent under what is commonly called the abatement statute. An order was issued requiring respondent to show cause why he should not he enjoined from continuing the nuisance complained of. The order restrained respondent from removing personal property from the building referred to in the pleadings. It was returnable October 7th. On that day on the hearing it developed that respondent, after notice of the injunction, but before it was served, had removed from the building a large quantity of liquor and had stored it in another place. It was suggested that the respondent was guilty of a contempt of this court. After a colloquy between counsel and the court, counsel for respondent suggested that respondent return the liquor and asked time in order that he might determine whether in fact the liquor came within the scope of the injunction. I gave him until October 11th. It is fair to say that I announced that if the liquor was returned no further proceedings would be taken in tire matter of the contempt. On October 8th I allowed an order returnable on the 11th why respondent should not be punished for contempt for removing the liquor. On October 9th respondent proceeded to search for the person who gave the information to complainant upon which complainant acted in obtaining from respondent evidence that he had removed the liquor. He thought he had found the individual in the person of an old scissors grinder, or knife grinder, some seventy years old, who runs a shop next door to respondent’s saloon. The house in which the liquor was stored is next door to the scissors grinder’s shop. Respondent taxed the old man with having given the information. The old man denied it. There was a heated conversation. I believe the testimony of the old man that respondent cursed and swore at him. Respondent, also, according to his own testimony, brought to the attention of the old man the fact that respondent had the renting of the premises and that be might take away his shop from the old man. lie finally struck him. The act of respondent, I have concluded, was a contempt of this court. It has been held that an assault, upon a witness, an assault upon a person, whether under subpoena or not, who is or is known or supposed to be a witness or will be a witness, is a contempt. 13 C. J. tit. “Contempt ” § 51 p. 38. The gravamen of the offence lies not in the assault, or in the injury to the individual, but in the tendency to interfere and obstruct the due administration of justice. There is no doubt but that if respondent had proceeded to the vicinity and had announced that if anyone testified against him in the then pending proceedings, he would commit an assault and battery on him, the act would constitute a contempt. What respondent did is tantamount in its effect to that very thing. He thought he had found the person who had given information upon which this court had acted and he proceeded to assault him — a clear warning to anyone in the vicinity that if they testified against respondent or gave information against him they would suffer or might suffer the same fate. Respondent, therefore, will he adjudged guilty of a contempt of this court.

How, with respect to the punishment: I am frank to say that when the facts were first brought to my attention, I concluded that if the testimony showed that an offence had been committed, I would send the respondent to jail and for a term not less than three months. I have changed my mind. While the fact that respondent did not know that what he was doing was a contempt of this court cannot excuse him, yet it may be taken into consideration in mitigation of sentence. While the fact that respondent was under the influence of liquor cannot excuse him (he denies that he was under the influence of liquor, but I am under the impression that he was to some extent, at least; I cannot conceive of the man committing the assault that he did if he had not been, to some extent, under the influence of liquor), it may be taken into consideration in fixing the sentence. There is no doubt but that respondent was laboring under a great mental strain. Proceedings had been taken in this court which had the effect of completely wiping out his business, an unprecedented proceeding. His whole business, his whole livelihood was being, by the act of this court as he thought arbitrarily, taken away from him. I have also taken into consideration the fact that he has two children, I think, who would suffer if he were sent to jail, and the fact that this is the first case in which it has been held that an offence of this nature is a contempt. It has been generally assumed that before an act of this nature can constitute a contempt, the assault and battery must have been actually committed upon one who is a witness. I hold otherwise. Under all the circumstances, I will sentence respondent to pay a fine to the State of New Jersey in the sum of $150, and the costs of this proceeding, including a counsel fee to counsel for the application under the authority of the case of Hilton v. Hilton, 89 N. J. Eq. 422.

I will allow counsel fee of $100. Respondent will be committed to the common jail of the county of Essex until he shall have paid the fine and costs. I will withhold the warrant for a reasonable length of time in order that the costs may be taxed.


text:
    Philip Hilton v. Joseph Hilton.
    [Decided January 11th, 1919.]
    1. The use of the designation “Jos. Hilton & Co.” under the circumstances of this case, is a violation of an injunction restraining the use of the name “Hilton’s” or “Hilton” either alone or in conjunction with other words, &c., in such manner as to confuse the public, &e.
    2. While the rule may be that the similitude must be sufficient to confuse an ordinarily prudent man, the test of care or prudence is the precaution that an ordinary man would take in reference to the particular subject-matter.
    3. The gravamen of an unfair competition case is the injury likely to be done complainant, not the likelihood of injury to the public. The careless of the public may not be entitled to protection, but if the business of the parties is such as caters to the careless, complainant may be entitled to protection against their being deceived.
    4. The proceedings to punish for contempt being in the nature of execution, no greater proof is necessary than was necessary to secure the injunction in the first instance.
    5. In an unfair competition case proof of actual confusion is not necessary, nor is it on proceedings to punish for contempt.
    C. Form of order in contempt proceedings for violation of injunction in unfair competition case settled.
    On proceedings to punish for contempt.

      Messrs. Pitney, Hardin & Skinner (Mr. Hardin, Mr. Skinner and Mr. Ward), for the complainant.

      Mr. Selick J. Mindes and Mr. Robert H. McCarter, for the defendant.
   Lane, V. C.

The application is for an order adjudging respondent in contempt for acts alleged to constitute a violation of an injunction of this court and to punish him therefor.

On July 18th, 1918, respondent was enjoined by a decree of this court entered on remittitur from the court of errors and appeals “from using the name ‘Hilton’s’ or ‘Hilton,’ alone or in conjunction with other words, in such manner as to lead or induce the public to believe that the goods manufactured or sold by him are manufactured or sold by complainant, and that the business conducted by defendant is the same as or a part of the business conducted by complainant, from using any emblem or device resembling the trade emblem of complainant in any way in his business and from conducting his business so as to deceive the public and induce it to believe that the goods manufactured or sold by defendant were manufactured or sold by complainant, and that the business conducted by defendant is the same as or a part of the business conducted by complainant.”

The question is one solely of fact. The legal and equitable rights of the parties have been settled by the final decree. ,

An extended argument was made in an attempt to show that the opinion of the court of errors and appeals indicated that the law was otherwise than as considered by this court on the determination of the main cause. An examination of the opinion of'this court in the maih cause and of the opinion of the court of errors and appeals wall indicate that the view’ of this court as to the law was not othenvise than as indicated by the court of errors and appeals. This court never assumed that it might with propriety enjoin the use by a man of his name except wdiere he was using it in his business in such a manner as to deceive the public, palm off his goods as the goods of another or lead the public to believe that his business was that of or a part of that of another. As I indicated in Hilton v. Hilton, in previous contempt proceedings (89 N. J. Eq. 417), I conceive that the difference between the court of errors and appeals and this court was one of fact. I assumed that the word “Hilton” or “Hilton’s” could not be used in a competitive business, practically, without deceiving the jmblic. It was for this reason that I advised the final decree so wide in its scope. With this view the court of errors and appeals differed. As I conceive it, the only question before me now is whether or not defendant is so using the word “Hilton” alone or in conjunction with other words and is so conducting his business as either to lead or induce the public to believe that the goods manufactured or sold by him are manufactured or sold by complainant, or that the business conducted by defendant is the same as or a part of the business conducted by complainant, and that this is a question of fact.

The final decree has the effect of an adjudication that the manner in which the business was being conducted at the time it was made was within the ban of the injunction. After the final decree was entered and served, defendant changed his signs by adding the words “J. Hilton, Prop.” Upon application to punish him for contempt, I found that the additional words “J. Hilton, Prop.,” did not save the situation, for the reasons which I then indicated. 89 N. J. Eq. 417. After the adjudication of contempt, defendant again changed his signs and now uses the term “Jos. Hilton & Co.” to designate his business. He had altered his signs so that they are as dissimilar as they can be from the signs of complainant, and yet have thereon the words I have indicated, and not have thereon words drawing attention to the fact that they are not the stores of the established Hilton Company. The store dressings, &o., are precisely the same as they were at the time the main cause was determined, so that to outward appearances the stores of the Hilton Company and Joseph Hilton look the same, as in the nature of things they must. The labels of defendant have been changed so that they are dissimilar from labels of complainant, and the remarks which I have made with resj>ect to the signs apply to them. There is in this case the same kin$ of evidence as there was in the main case as to confusion. Customers have come into the Hilton Company stores believing they were in the stores of Joseph Hilton. Mail has been received by the Hilton Company intended for Joseph Hilton. Mistakes have been made by individuals desiring to communicate witli Joseph Hilton by telephone. A witness produced by defendant himself testifies that, although he was familiar with the stores of complainant and defendant he did not know, until advised by a salesman in the employ of defendant, that all of the stores were not operated by one concern. Defendant insists that he is not responsible for mistakes due to carelessness and relies upon Rosenthal v. Blatt, 80 N. J. Eq. 90. What Vice-Chancellor Learning there said was that “concrete instances of confusion which can only be appropriately attributed to extreme carelessness or inattention on the part of customers are clearly inadequate to establish a similitude which does not in fact exist.” He then said that he was unable to believe that the manner in which the name “Page of London” was being used by defendant in that ease was operative to deceive or mislead any reasonable persons. The rule, of course, is that the similitude must be sufficient to confuse an ordinarily prudent man, but the test as to the care or prudence is not the precautions which a reasonably prudent man would take when investing money, or what not, but the precautions which he would take ordinarily m determining, in buying a suit of clothes, that he was in the store he thought he was in. An ordinary individual, I think, in making up his mind as to whether he is in a store operated by a certain concern, the name of which he knows, gives but a cursory glance to the sign. If the most prominent word in the name of the operator of the store he desires to enter appears prominently over the store of a competitive business, he is quite likely to assume that the stores are operated by the same concern. The name “Hilton” is the same prominent feature of complainant’s designation as it is of defendant’s'. There is no distinction, I think, in the public mind between the word “company” written out and “Co.” Defendant in his designation has retained the most prominent name in complainant’s designation; has substituted for the word “the” the diminutive “Jos.”; has substituted for “company” written out the designation “Cp.,” and has put between “Hilton” and “Co.” the symbol The gravamen of the case is the injury likely to be done complainant, not the likelihood of injury to the public. The careless of the public may not be entitled to protection, but if the business of the parties is such as caters to the careless, complainant is entitled to protection against their being deceived. Defendant is not attempting to use his own name “Joseph Hilton” alone. What he is doing is using a trade designation which contains a part of his own name in conjunction with another word also a part of complainant’s designation. Complainant himself is not using the designation “The Hilton Company” solely. He is also using and has always used to designate his business the terms “Hilton” and “Hilton’s.” There is more involved in the case than the mere use of one’s name in one’s business.

The case is somewhat analogous to those dealing with the right of a corporation to assume a corporate' name. Under the Corporation act (2 Comp. Stat. p. 1603 § 8) a corporation is forbidden to assume a name in use by another existing corporation or so nearly similar thereto as to lead to uncertainty and confusion. Under this statute, American Glucose Sugar Refining Company has been held to be too nearly similar to Glucose Sugar Refining Company (56 Atl. Rep. 861); L. Martin & Wilckes Company too nearly similar to the L. Martin Company (75 N. J. Eq. 39); affirmed on this branch of the case (75 N. J. Eq. 257); the Edison Automobile Company of Washington too nearly similar to the Edison Storage Battery Company (67 N. J. Eq. 44); Eureka Rubber Manufacturing Company too nearly similar to Eureka Eire Hose Company (69 N. J. Eq. 159); affirmed, 71 N. J. Eq. 300.

Defendant in his advertisements has indicated that his only stores are at the addresses mentioned in the advertisements, as also has complainant, but I do not think this saves the situation. In the first place, I do not believe it prevents confusion. I think little attention is paid by readers of advertisements to statements of this kind, and that notwithstanding their presence, customers are likely to go to the stores of defendant believing them to be those of complainant, and vice versa; and, moreover, as I said in the previous contempt proceeding (89 N. J. Eq. 417), I think complainant is entitled to have the public know not only that Jos. Hilton & Co. is not the Hilton Compaq, but also that it is not the business known as the Hilton Company prior to defendant’s entering the field. What I said (89 N. J. Eq. 417) must be taken in connection, with what I now say. T will not repeat. See International Silver Co. v. Roger, 72 N. J. Eq. 933. It was insisted by counsel with defendant that in the determination of this matter the rule of the criminal law must be applied and that defendant must be proven guilty beyond a reasonable doubt. This is a purely civil contempt. I acquit defendant of any actual intent to contemn the authority of the court. The injunctive decree being in the form it is defendant was obliged to experiment until he should find a way of using the name, if he desired to use it, which would not be within its ban. Any imprisonment which will be ordered will be remedial in purpose; coercive in character. Staley v. South Jersey, &c., 83 N. J. Eq. 300. The proceedings are not instituted to punish for his past offences but to compel a discontinuance of an existing practice, and if defendant goes to jail he will be imprisoned only so long as he continues the obnoxious use of the name. It is analogous to an execution at law. I think, therefore, as I thought at the time of the prior contempt, that no greater proof is necessary than was necessary to secure the injunction in the first instance, and that the language of Vice-Chancellor Howell, in the case of Rubber and Celluloid Harness Trimming Co. v. Rubber-Bound Brush Co., 81 N. J. Eq. 419; aiffirmed, 81 N. J. Eq. 519, to the effect that proof of actual confusion is not necessary, is applicable. But if I were bound by the rule as to reasonable doubt, I have no difficulty in concluding that I have no reasonable doubt, but that the manner in which defendant conducts his business is such as that the public is led to believe that the goods manufactured or sold by him are manufactured or sold by complainant and that the business conducted by him is the same or part of the business conducted by complainant. Defendant, of course, labors under the handicap that originally I had the notion that the name could not be used by defendant in any such manner as he would desire to use it without creating confusion in a competitive business, but I have tried throughout this case to look upon it with an open mind. I have also observed the stores in New York myself, particularly those on Thirty-sixth street and Thirty-seventh street and Broadway, and perhaps cannot but help being influenced by the impression made upon me by actual observation.

I will advise an order adjudging respondent in contempt. Counsel may prepare a form of order. I think, perhaps, the order should provide for a certain length of time within which the defendant may be permitted to discontinue the existing practice, and if he does not discontinue within the time stated, then that a warrant issue upon application, upon notice, directing his commitment to the common jail of the county of Essex until he shall have discontinued the practice. Care should be taken in framing the order that it be conclusive, so that an appeal may be taken as counsel stated in open court at the conclusion of the hearing and the delivery of the oral conclusions that an appeal was intended. Let the order be settled on one day’s notice.


text:
    Hoover Steel Ball Company v. Schafer Ball Bearing Company.
    [Decided January 27th, 1919.]
    1. Payments made at a time when a corporation is insolvent and has suspended its business in the sense that it has ceased to meet its maturing pecuniary obligations as they accrue, to a creditor, with notice of the insolvency, whose debt arose by reason of an advance by him to the corporation at a time when it was insolvent to his knowledge, are voidable under section 64 of the Corporation act and may be recovered by a receiver.
    . 2. A creditor who has advanced money to a corporation insolvent to his knowledge and has taken a pledge of all of its assets, the advances not being made in pursuance of any plan of rehabilitation, repayment being provided for in monthly installments in amounts which the creditor must have known the corporation could not pay except at the expense of nerv creditors unless extraordinary circumstances intervened, is charged with knowledge, of. insolvency at the time of payments which in fact existed.

      On bill, &e. On appeal of administrator of Daniel H. Tolman from determination of the receiver on claim.

      Messrs. Bilder & Bilder (Mr. David H. Bilder), for the receiver.

      Mr. Benjamin F. Jones and Mr. Porter (of the New York bar), for the claimant.
   Lane, V. C.

The Tolman estate is the holder of notes aggregating $5,000 made by defendant corporation on or about October 27th, 1917, and secured by a chattel mortgage. The total amount of the notes originally was $6,000. They were payable $500 each month. The first two notes were paid in due course. In prior conclusions in this case I found that tire chattel mortgage was given at a time when the corporation was insolvent and had suspended its ordinary business in the sense of suspension of payment of its pecuniary obligations as they matured to the knowledge of Tolman, and I held void a pledge of steel made at the same time to secure another debt. The Tolman estate admitted the invalidity of.the chattel mortgage for want of proper record. It filed its claim with the receiver for the balance of $5,000 due on the notes, which claim the receiver rejected upon the ground that the payments of the two notes were in violation of the sixty-fourth section of the Corporation act. (2 Comp. Stat. p. 1638), for the reason that at the time they were made the corporation was insolvent and had suspended business to the knowledge of Tolman. I set forth the facts with considerable detail in my prior conclusions, which may be considered with these. I found that the company at the time of the original transaction was insolvent in the sense that there was a general inability to meet pecuniary obligations as they matured by means of available assets or an honest use of credit, and that it had suspended its business in the sense that it had ceased payments of the pecuniary obligations as they matured and was not about to resume paj'ments and that no plan was proposed by which the company was to be put upon its feet, nor was it contemplated that the moneys raised should be used for the purpose of putting the corporation in the position of paying its maturing obligations. The most that can be said is that the officers of the company hoped that the money advanced by Tolman might enable them to complete their experiments so that they might have something which would put them in a position to negotiate with creditors. Tolman was, in fact, advancing capital at usurious rates secured by a pledge of all the company’s available assets. The company was not in need of funds to tide it over a temporary embarrassment. It was in need of working capital. In consideration of the advance of some $9,000, the corporation stripped itself of its available means of raising money. The notes and chattel mortgage were for short terms and not given in pursuance of any plan of rehabilitation.

The law is settled that payments made to creditors resulting in preferences when a corporation is insolvent, to the knowledge of the creditor, may be recovered. Miller v. Audonried, 67 N. J. Eq. 252; affirmed, 68 N. J. Eq. 658; Jessup, Receiver, v. Thomason, 68 N. J. Eq. 443. I do not mean to intimate that payments may not be made where the suspension of business has been so complete, or the payments are made so out of the ordinary course of business as that they may be recovered, even if creditors have not actual knowledge of insolvency. I conclude that at the time the payments were made Tolman had notice of the insolvency, and of the suspension of business in the sense that I have held that the company had suspended business. Both pajnnents were made within sixty daj's after the giving of the chattel mortgage which, with the pledge held by Tolman, covered all of the property of the corporation. As I have stated, the money was not advanced pursuant to any plan of rehabilitation. It was an advance of capital rather than a loan of money to tide over a temporary embarrassment. Tolman’s knowledge of the situation at the time the notes were given was such that lie was bound to know'that the company never could succeed and resume its business unless something extraordinary happened. The company was not manufacturing and was.not in receipt of an income. He knew, or was charged with knowing, that within the short space of sixty days it could not commence manufacturing with profit. He must be assumed to know that the payments were at the expense of new creditors of the company. The money was used to prefer certain creditors. He in turn was preferred at the expense of others. Nothing was brought to his attention which would warrant him in assuming that there had been the slightest change in the situation. Under the circumstances, it was his duty to have ascertained the condition of the company at the time of the payments.

I conclude that Tolman took the two payments of $500 charged with notice of insolvency and that the payments created voidable preferences.

Inasmuch as the dividend on the Tolman general claim will be in excess of $1,000, there is no necessity that any actual repayments be made.

The receiver may allow the claim of the notes secured by the chattel mortgage as a general claim for $6,000. He may figure the dividend for the general creditors as if he had $1,000 more than he has in his possession, and may deduct that $1,000 from the dividend payable to Tolman’s estate.

No costs to either party.

Settle order on one day’s notice.