Syllabus.

HOLLINS v. BRIERFIELD COAL AND IRON

COMPANY.

APPEAL FROM THE CIRCUIT COURT OF THE UNITED STATES FOR THE MIDDLE DISTRICT OF ALABAMA.

No. 29. Argued October 27, 30, 1893. Decided November 20, 1893.

The trustee of a mortgage upon the real estate of an Alabama corporation commenced a suit in the Circuit Court of the United States for the foreclosure of the mortgage. In his bill he set up that some stockholders were liable for unpaid assessments on their stock, and, while asking for a foreclosure of the mortgage and sale of the property, he prayed that other creditors of the corporation might be permitted to intervene and become parties, and have their claims adjudicated, and that a full administration be had of the estate. About three months after the commencement of that suit, a contract creditor, who had not reduced his claim to judgment, filed his bill in equity in the same court, suing for his own benefit and that of all creditors who should become parties, asking to have the mortgage declared void, to have the property sold, and the proceeds applied to the payment of the debts of the creditors, parties to the suit, and for a liquidation. The plaintiff in the second suit did not intervene in the foreclosure suit. In due course a decree was entered in the foreclosure suit for the sale of the property. The court then entered a decree dismissing the creditor's bill upon the merits. Held, That this was error, and that the bill should have been dismissed for want of jurisdiction.

Simple contract creditors of a corporation, whose claims have not been reduced to judgment, and who have no express lien on its property, have no standing in a Federal court of equity, to obtain the seizure of their debtor's property, and its application to the payment of their debts. This rule is not affected by the fact that a statute of the State in which the property is situated, and in which the suit is brought, authorizes such a proceeding in the courts of the State, because the line of demarcation between equitable and legal remedies in the Federal courts cannot be obliterated by state legislation.

This rule is not affected by the fact that when such a suit is brought in a Federal court, another suit is pending there for the foreclosure of a mortgage upon the property of the corporation.

In such case the defence that the rights of the plaintiff at law should have been exhausted before commencing proceedings in equity is a defence which must be made in limine, and, if not so made, the court of equity is not necessarily ousted of jurisdiction.

Neither the insolvency of a corporation, nor the execution of an illegal

Statement of the Case.

trust deed, nor the failure to collect in full all stock subscriptions, nor all together give to a simple contract creditor of the corporation any lien on its property, or charge any direct trust thereon.

Case v. Beauregard, 101 U. S. 688, Sanger v. Upton, 91 U. S. 56 and Terry v. Anderson, 95 U. S. 628, distinguished; and shown not to conflict with the subsequent cases of Wabash, St. Louis & Pacific Railway v. Ham, 114 U. S. 587; Fogg v. Blair, 133 U. S. 584; and Hawkins v. Glenn, 131 U. S. 319.

When a corporation becomes insolvent, the equitable interest of the stockholders in the property and their conditional liability to creditors, place the property in a condition of trust, first for creditors, and then for stockholders; but this is rather a trust in the administration of the assets after possession by a court of equity, than a trust, attaching to the property, as such, for the direct benefit of either creditor or stockholder.

THE facts in this case were as follows: The Brierfield Coal and Iron Company was incorporated under the laws of Alabama, May 4, 1882. On September 1, 1882, a conveyance was made by the company to Preston B. Plumb, as trustee, to secure an issue of $500,000 in bonds. On July 25, 1887, the trustee, Plumb, requested a further conveyance and assurance, pursuant to a covenant in the deed of September, 1882, which further conveyance was executed by the company on July 29, 1887. On August 1 he demanded the surrender of all the company's property to him, as trustee. This was done, and he placed John G. Murray in charge to control and manage it. On August 3 he filed a bill in the Circuit Court of the United States for the Middle District of Alabama, against the company, joining as defendants certain stockholders, bondholders, and creditors, though not the plaintiffs in the present suit. That bill set out the organization of the corporation, the stockholders, with the amounts of stock subscribed, and the amounts paid upon such stock, and alleged that the subscribers were liable for the unpaid subscriptions, but that the assistance of the court was necessary for the assessment of such sums. It also set out the issue of the bonds, and their present owners so far as known, a default in the payment of the interest due thereon, the property and indebtedness of the company, the unsecured indebtedness being alleged to amount to about $200,000. The bill further averred that up

Statement of the Case.

to that time the chief industry of the company had been the manufacturing of cut nails from iron; that owing to overproduction in the country this business had become unprofitable to the company, and that it was desired to change the industry from the manufacture of nails to the production of pig iron, and that it had purchased property with a view to carrying on that industry; that it did not have money enough to successfully carry it on. The bill also alleged that the trustee had taken possession, as authorized by the deed of trust; that he could not carry on the business of the company without obtaining money on the credit of the property; and prayed the direction of the court as to whether he should be permitted to borrow such money, and issue certificates of indebtedness therefor. It asked that all creditors of the corporation and claimants against the estate be permitted to make themselves parties and have their claims adjudicated; that a full administration be had of the estate, and, if need be, a foreclosure and sale. Subsequently, Plumb resigned as trustee, and W. L. Chambers was substituted in his place. Proceedings were had in that case, which resulted, on July 8, 1889, in a decree for the foreclosure of the trust deed and a sale of the property. Nearly three months after the commencement of the Plumb suit, and on October 28, 1887, these appellants, as plaintiffs, filed a bill in the same court, making the coal company and sundry stock and bondholders, together with the trustee Plumb, parties defendant. The plaintiffs were unsecured creditors of the company, having claims contracted in 1886 and 1887, four or five years after the issue of the bonds and execution of the trust deed, who sued on behalf of themselves and all other creditors of the coal and iron company, who were willing to come in and contribute to the expenses of the suit. After setting forth their claims, they alleged that the conveyance to Plumb, as trustee, was absolutely void; that a large amount was still due on the stock; they asked to have a receiver appointed, and the property sold in satisfaction of their claims; and that such receiver have authority to collect the unpaid stock subscriptions, to be also applied in satisfaction of their claims. They alleged the pendency of

Argument for Appellants.

the suit brought by Plumb as trustee, but did not ask to intervene therein. After the decree of foreclosure and sale in the Plumb case, and on July 24, 1889, a final decree was entered dismissing this bill. From such decree of dismissal plaintiffs appealed to this court.

Mr. Alexander T. London for appellants.

This bill was filed on the well-established principle that the assets of a corporation, including unpaid stock subscriptions, are a trust fund for the benefit of corporate creditors, upon which they have a lien in equity, and that the directors have no power to waste or dispose of this trust fund.

This doctrine was said by Mr. Justice Miller, for this court, in Sawyer v. Hoag, 17 Wall. 610, 620, to be then of modern date. It has since been so often reiterated and affirmed in this court that I shall content myself with quoting it from the opinion in Sanger v. Upton, 91 U. S. 56, 60, and the citation of a few of the authorities.

In this case Mr. Justice Swayne, for this court, states the rule with great force and clearness. He says: "The capital stock of an incorporated company is a fund set apart for the payment of its debts. It is a substitute for the personal liability which subsists in private copartnerships. When debts are incurred, a contract arises with the creditors that it shall not be withdrawn or applied, otherwise than upon their demands, until such demands are satisfied. The creditors have a lien upon it in equity. If diverted, they may follow it as far as it can be traced, and subject it to the payment of their claims, except as against holders who have taken it bona fide for a valuable consideration and without notice. It is publicly pledged to those who deal with the corporation, for their security. Unpaid stock is as much a part of this pledge, and as much a part of the assets of the company, as the cash which has been paid in upon it. Creditors have the same right to look to it as to anything else, and the same right to insist upon its payment as upon the payment of any other debt due to the company. As regards creditors, there is no

Argument for Appellants.

distinction between such a demand and any other asset which may form a part of the property and effects of the corporation." See also Upton v. Tribilcock, 91 U. S. 45; Scovill v. Thayer, 105 U. S. 143, 150; Handley v. Stutz, 139 U. S. 417, 427; Fogg v. Blair, 139 U. S. 118.

This doctrine is fully recognized in Alabama. Bank of St. Mary's v. St. John, 25 Alabama, 566; Smith v. Huckabee, 53 Alabama, 191; Montgomery & West Point Railroad v. Branch, 59 Alabama, 139.

Where a corporation has wrongfully disposed of its assets or is wasting them, or is insolvent, or where there has been a practical dissolution, a creditor at large of the corporation may maintain a bill to enforce his lien upon the assets and have a receiver appointed to protect the trust fund. Bank of St. Mary's v. St. John, 25 Alabama, 566; Conro v. Gray, 4 How. Pr. 166; Fisk v. Union Pacific Railroad, 10 Blatchford, 518; St. Louis & Sandoval Coal Co. v. Edwards, 103 Illinois, 472; Evans v. Coventry, 5 De G., M. & G. 911; Kearns v. Leaf, 1 Hem. & Mill. 681; Re State Fire Ins. Co., 2 Hem. & Mill. 457; Sanger v. Upton, 91 U. S. 56; Terry v. Tubman, 92 U. S. 156; Terry v. Anderson, 95 U. S. 628; Mellen v. Moline Iron Works, 131 U. S. 352.

The learned counsel for appellees insist that there is no equity shown in the bill, and apart from the merits, the Circuit Court had no jurisdiction to entertain the bill, because the complainants were creditors at large and failed to allege the exhaustion of legal remedies; and he relies upon Taylor v. Bowker, 111 U. S. 110; Scott v. Neely, 140 U. S. 106; National Tube Works v. Ballou, 146 U. S. 517.

Since that brief was filed decisions have been handed down. in this court in the cases of Cates v. Allen, 149 U. S. 451, and Swan Land & Cattle Company v. Frank, 148 U. S. 603; and I presume these cases will be relied upon, so I shall consider them all and endeavor to state as clearly as I can, what I conceive to be the distinction between them and the case at bar.

The distinction between all these cases and the one at bar, in my judgment, rests on the following propositions, which are sustained by the highest authority: