Source: https://supreme.justia.com/cases/federal/us/287/348/
Timestamp: 2019-04-19 20:40:45+00:00

Document:
1. To prevent disruption of his business by suits of hostile creditors and to cause the assets to be nursed for the benefit of all concerned, a debtor in Pennsylvania, where the law permits appointment of a receiver for the business of a corporation but not for that of an individual, caused a corporation to be formed in Delaware and conveyed to it all of his property in exchange for substantially all of it shares and its covenant to assume payment of his debts. Three days later, joined with a simple contract creditor, he sued the corporation in a federal court in Pennsylvania, invoking jurisdiction on the ground of diversity of citizenship, and, with the consent of the corporation, obtained on the same day a decree appointing receivers and enjoining executions and attachments.
(1) That the conveyance and the receivership were fraudulent in law as against nonassenting creditors. P. 287 U. S. 353.
(2) A creditor who, shortly after the decree, brought an action resulting in a judgment against the debtor in a Pennsylvania state court was entitled to an order either for payment out of the assets held by the receivers or for leave to issue execution. P. 287 U. S. 357.
(3) Refusal to grant relief in either of these forms was an abuse of discretion. Id.
2. A conveyance made with intent to hinder and delay creditors, though with no intent to defraud them, is illegal under the Statute of Elizabeth (13 Eliz., c. 5) and under the Uniform Fraudulent Conveyance Act, adopted in Pennsylvania. P. 287 U. S. 354.
3. In any case not covered by the Uniform Fraudulent Conveyance Act, in Pennsylvania, the Statute of Elizabeth is still the governing rule. Id.
4. It is a general rule in the federal courts that a creditor who seeks appointment of receivers must first reduce his claim to judgment and exhaust his remedy at law. P. 287 U. S. 355.
5. Departures from this rule, though allowed in some cases where the defendant acquiesces, are to be jealously watched. P. 287 U. S. 356.
Certiorari, 286 U.S. 538, to review the affirmance of an order refusing permission to levy an execution from a state court upon property in possession of receivers appointed by the federal court.
District Court in Pennsylvania praying that leave be granted him to levy an execution upon property in the possession of receivers appointed by that court. An order refusing such leave was affirmed by the Circuit Court of Appeals for the Third Circuit. 55 F.2d 234. The case is here on certiorari.
citizenship. The bill of complaint alleged that creditors were pressing for immediate payment; that one had entered suit and was about to proceed to judgment; that the levy of attachments and executions would ruin the goodwill and dissipate the assets, and that the business, if protected from the suits of creditors and continued without disturbance, could be made to pay the debts and yield a surplus of $100,000 for the benefit of stockholders. To accomplish these ends, there was a prayer for the appointment of receivers, with an accompanying injunction. The corporation filed an answer admitting all the averments of the bill and joining in the prayer. A decree, entered the same day, appointed receivers as prayed for in the complaint, and enjoined attachments and executions unless permitted by the court. Four days thereafter, on January 16, 1931, the petitioner began suit against Robinson in the Court of Common Pleas, and on February 4, 1931, recovered a judgment against his debtor for $1,007.65 upon a cause of action for money loaned. On February 26, 1931, he submitted a petition to the United States District Court in which he charged that the conveyance from Robinson to the corporation and the ensuing receivership were parts of a single scheme to hinder and delay creditors in their lawful suits and remedies, and he prayed that he be permitted to issue a writ of fieri facias against the chattels in the possession of the receivers, and to sell them so far as necessary for the satisfaction of his judgment. The petition was denied, and the denial affirmed upon appeal.
Web Co. v. Dienelt, 133 Pa. 585, 19 A. 428; Atlas Portland Cement Co. v. American Brick & Clay Co., 280 Pa. 449, 124 A. 650; In re Elletson Co., 174 F. 859, aff'd, 183 F. 715; Kimball v. Thompson, 4 Cush. 441, 446; Dearing v. McKinnon Dash & Hardware Co., 165 N.Y. 78, 58 N.E. 773; Means v. Dowd, supra.
The conveyance to the corporation being voidable because fraudulent in law, the receivership must share its fate. It was part and parcel of a scheme whereby the form of a judicial remedy was to supply a protective cover for a fraudulent design. Harkin v. Brundage, 276 U. S. 36; Decker v. Decker, 108 N.Y. 128, 135, 15 N.E. 307. The design would have been ineffective if the debtor had been suffered to keep the business for himself. Hogsett v. Thompson, supra. It did not gain validity when he transferred the business to another with a capacity for obstruction believed to be greater than his own. The end and aim of this receivership was not to administer the assets of a corporation legitimately conceived for a normal business purpose and functioning or designed to function according to normal business methods. What was in view was very different. A corporation created three days before the suit for the very purpose of being sued was to be interposed between its author and the creditors pursuing him, with a restraining order of the court to give check to the pursuers. We do not need to determine what remedies are available for the conservation of the assets when a corporation has been brought into existence to serve legitimate and normal ends. Ordinarily a creditor who seeks the appointment of receivers must reduce his claim to judgment and exhaust his remedy at law. The Uniform Fraudulent Conveyance Act may have relaxed that requirement in many of the states (Purdon's Pennsylvania Digest, Title 39, §§ 351, 359, 360; cf. New York Debtor and Creditor Law, Article 10, Consol.Laws, c. 12; American Surety Co.
remedy is exhausted is misused when it is exercised in aid of such a purpose. Only exemplary motives and scrupulous good faith will wake it into action.
The receivership decree assailed upon this record does not answer to that test. We have no thought in so holding to impute to counsel for the debtor, or even to his client, a willingness to participate in conduct known to be fraudulent. The candor with which the plan has been unfolded goes far to satisfy us, without more, that they acted in the genuine belief that what they planned was fair and lawful. Genuine the belief was, but mistaken it was also. Conduct and purpose have a quality imprinted on them by the law.
There remains a question of procedure. The prayer of the petitioner was that he be permitted to issue execution upon his judgment in the state court. Cf. 55 U. S. Sampson, 14 How. 52. If there had been any substantial doubt that the conveyance and the receivership were voidable obstructions, the federal court might have refused to permit the tangle to be unraveled in the courts of the state. It might have retained the controversy in its own grasp and made a decision for itself. But, in truth, there was no substantial doubt as to the quality of conveyance and receivership, no genuine issue to be tried. In such circumstances, the petitioner was entitled to an order in the alternative either for the payment of his judgment out of the assets in the hands of the receivers or in default thereof for leave to issue execution. The refusal to grant relief in one or other of these forms is a departure from the bounds of any legitimate discretion which is not without redress.
The decree is reversed, and the cause remanded to the District Court for further proceedings in conformity with this opinion.

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