Source: https://supreme.justia.com/cases/federal/us/152/596/
Timestamp: 2019-04-25 13:55:17+00:00

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Justia › US Law › US Case Law › US Supreme Court › Volume 152 › North Chicago Rolling Mill Co. v. St. Louis Steel Co.
North Chicago Rolling Mill Company v.
A garnishee who occupies the double position of debtor to the principal defendant in a definite or ascertained amount and also that of a creditor of such principal debtor by way of unliquidated damages arising out of the breach of a contract in existence when the garnishment proceedings were instituted can, after an order at law subjecting the defined indebtedness to the payment of the garnishor, invoke the aid of a court of equity to restrain the garnisheeing creditor from enforcing the payment of the amount due until the unliquidated damages can be ascertained and set off against such indebtedness on the ground that the principal debtor is insolvent and a nonresident of the state in which the garnishee resides and in which the garnishment proceedings are had.
a judgment where there is a meritorious, equitable defense thereto which could not have been set up at law or which the party was, without fault or negligence, prevented from interposing.
The adjustment of demands by counterclaim or setoff, rather than by independent suit, is favored and encouraged by the law, to avoid circuity of action and injustice.
The insolvency of the party against whom a setoff is claimed is a sufficient ground for equitable interference, and in Illinois and some other states, the nonresidence of the party against whom the setoff is asserted is also held to be sufficient ground therefor.
It is settled in England, where the law differs in no material respect from that of Illinois, that a garnishee order does not effect a transfer of the debt to the garnishor or create the relation of creditor and debtor between him and the garnishee.
It is a recognized principle that the rights of the garnishor do not rise above or extend beyond those of his debtor; that the garnishee shall not, by operation of the proceedings against him, be placed in any worse condition than he would have been in had the principal debtor's claim been enforced against him directly; that the liability, legal and equitable, of the garnishee to the principal debtor is a measure of his liability to the attaching creditor, who takes the shoes of the principal debtor and can assert only the rights of the latter.
claim for unliquidated damages growing out of a breach of contract between them -- in existence at the commencement of the garnishment proceedings -- a good ground for the exercise of equitable jurisdiction, after an order or judgment at law declaring the sum due the principal debtor applicable to the payment of the garnishor, to stay the enforcement of such order or judgment until the unliquidated damages due the garnishee can be ascertained and set off against the amount certain owing by him to the principal debtor?
In November, 1883, the St. Louis Ore and Steel Company, of St. Louis, Mo. (hereafter styled the "St. Louis Company") and the North Chicago Rolling Mill Company, of Chicago, Illinois (hereafter called the "Chicago Company"), were each engaged in the manufacture of steel rails for railroads. The St. Louis Company was also a miner of iron ore and the maker of pig metal. On November 6, 1883, the St. Louis Company entered into a contract with the Missouri Pacific Railroad Company for the sale and delivery to the railroad company of 24,000 tons of steel rails, in quantities of 2,000 tons per month from January to December, 1884, inclusive, for which the railroad company agreed to pay for each monthly delivery of rails, on receipt of bills of landing and invoice at the rate of $18 a ton cash, and one ton of old rails for each ton delivered.
On November 19, 1883, the St. Louis Company entered into another contract with the Missouri Pacific Railroad Company by which it agreed to sell to the railroad company the further quantity of 18,000 tons of steel rails, to be delivered at the rate of about 1,500 tons per month, commencing January 1, and ending in December, 1884, for which the purchaser was to pay, for each delivery of 1,500 tons at the rate of $37.50 a ton, in cash, on the 20th day of the month succeeding the delivery.
steel rails, to be delivered free on board the cars at Chicago, in about equal amounts (1,500 tons), during each month of the year 1884 at the rate of $35 per gross ton (2,240 pounds), to be paid by the St. Louis Company on the tenth day of each month for all rails delivered during the previous month. The contract specified that the rails to be furnished by the Chicago Company should weigh 52, 56, 59, or 63 pounds per lineal yard, as per templet to be furnished by the St. Louis Company, and were to be drilled for bolts at certain distances from the ends of the rails, according to their weight.
"and in the absence of the furnishing of cars upon which to load said rails, enabling the said first party [the Chicago Company] to make their deliveries as herein specified, then the said second party [the St. Louis Company] shall make their settlements and pay for said rails on the tenth day of the month, the same as though said rails had been delivered, and the nondelivery of cars shall in no way relieve the said second party from the prompt payment for the rails on the tenth day of the month, as specified herein."
The rails, so far as delivered, were manufactured in varying weights, upon orders given by the St. Louis Company.
On December 22, 1883, the Chicago Company entered into a contract with R. M. Cherrie & Company, of Chicago, for the purchase of 50,000 tons of iron ore, to be mined and shipped during the year 1884 from the Pilot Knob Mine, in the State of Missouri, owned and operated by the St. Louis Company. This ore was to be delivered at the Chicago Company's works in quantities of from one to seven thousand tons per month, as required by the Chicago Company, and payment therefor was to be made on the fifteenth day of each month for ore delivered during the previous month. This contract, if not made by Cherrie & Company as agents of the St. Louis Company, was guaranteed by the latter so far as the quality of the ore and its delivery, were concerned.
of their creditors, of whom the St. Louis Company was a large one. Upon the failure of Cherrie & Company, the St. Louis Company assumed the former's ore contract with the Chicago Company, and thereafter, between the 4th and 21st days of July, 1884, delivered to the Chicago Company iron ore and pig metal to the amount or value of $44,916.82, for which payment was to be made by the Chicago Company on August 15, 1884.
On July 10, 1884, the St. Louis Company, being indebted to the Chicago Company in the sum of $21,536.56 for steel rails delivered during the previous month (June), made default in paying the same, and the next day (July 11, 1884) informed the Chicago Company by letter of its inability to pay for the June delivery of rails, and asked, as a special favor, to let the matter rest for a little while, as the Chicago Company had in its possession funds arising from the sale of ore and pig metal which were being delivered during the month of July. To this request no reply appears to have been made.
On July 12, 1884, the St. Louis Company again wrote the Chicago Company, expressing a doubt as to its ability to pay its debts promptly, and suggesting an arrangement by which the receivers of the Wabash Railroad Company should take certain rails and settle directly with the Chicago Company. This arrangement was not, however, consummated.
and the provisional instructions were renewed. Hitchcock promptly qualified both as provisional and permanent receiver.
as receiver, whether he would be prepared to pay in cash on the tenth of each month following the delivery of rails ordered by him under said contract, to which he had replied that he was not in possession of money sufficient to pay cash for such rails, but that the court under whose orders he was acting had power to make provision therefor; that to this the Chicago Company had replied that it was ready and willing to furnish the rails as ordered, upon being notified that he was prepared to pay therefor on the tenth of the month following delivery.
The correspondence fully established the facts thus reported by the receiver. It is further shown in the correspondence between the receiver and the Chicago Company that the receiver proposed to pay for the rails which might be ordered and delivered under the contract with the St. Louis Company in receiver's certificates, which the Chicago Company declined to receive. The receiver admitting that he could not pay for the 1,500 tons ordered for the next month, those rails were, for that reason, not manufactured by the Chicago Company.
The Chicago Company received no orders for rails from the St. Louis Company or its receiver for the month of July or for any subsequent month during the year 1884. Nor did the receiver ever notify the Chicago Company that he was prepared to pay for the rails according to the terms of the contract between the two companies.
their indebtedness to the St. Louis Company. The two suits of the Joliet Company were removed in September, 1884, to the law side of the United States circuit court for the Northern District of Illinois. The Chicago Company made answer in November, 1884, and a supplemental and amended answer on February 25, 1885, setting forth the transactions and matters of account between itself and the St. Louis Company, admitting an indebtedness to the latter for ore and pig iron amounting to $44,916.82, and setting up counterclaims to the amount of $56,807.50, which included the sum of $28,390.16 as damages for the failure of the St. Louis Company to carry out the steel rail contract, by receiving and paying for the rails in compliance with the terms of that contract.
To this answer replication was made, and upon the issues formed the cause was tried before a jury. The Chicago Company introduced proof tending to establish its claim for the $28,390.16 as damages, but upon motion of the plaintiff, this evidence was stricken out, and the claim for damages was disallowed by the court on the ground that, being unliquidated, it could not properly be set off at law. The disallowance of the claim for damages left a balance of $16,473.28 due by the Chicago Company to the St. Louis Company. A verdict was directed for the plaintiff for that amount, and judgment was rendered against the Chicago Company, January 13, 1886, for the sum of $16,473.28.
This garnishment proceeding was, under the Illinois statutes, in the name of the St. Louis Company, and judgment was rendered in its favor against the Chicago Company for the amount of the verdict for the use of the Joliet Company and others entitled to share therein.
In the garnishment proceedings under the attachment suit of the Iron Mountain Company in the Superior Court of Cook County, a similar judgment was rendered against the Chicago Company as garnishee. By the laws of Illinois, the sum adjudged against the Chicago Company as garnishee was a quasi-trust fund for the use of both attaching creditors -- the Joliet Company and the Iron Mountain Company.
1884, Robert M. Olyphant, as trustee, filed what is called an "ancillary bill" in the United States circuit court for the Northern District of Illinois against the St. Louis Company for the purpose of reaching the assets of the company in that jurisdiction. This bill recited the proceedings had, and the orders made, in the original suit and asked the court to administer the assets of the company in that jurisdiction.
The Chicago Company, having secured a stay of proceedings in both of the garnishment cases, thereupon filed its bill or petition on January 18, 1886, against the St. Louis Company, the Joliet Company, and the Iron Mountain Company on the equity side of the United States Circuit Court for the Northern District of Illinois in the ancillary suit of Olyphant v. St. Louis Company. This bill or petition of the Chicago Company, after setting out the rail and ore contracts, the default of the St. Louis Company in failing to perform the rail contract, and the resulting damages to the Chicago Company, the garnishment proceedings at law in the state and federal courts, and the denial of its right therein to set off its claim for damages against the St. Louis Company, alleged that the St. Louis Company was insolvent and that, being both insolvent and a nonresident, the Chicago Company was entitled to relief in equity by having its damages liquidated and then set off against the judgments in the attachment suits. The prayer was for an injunction and relief by way of equitable setoff, and for judgment over for any balance due it by the St. Louis Company.
The Iron Mountain Company filed its answer in March, 1887, admitting that the claim on which its attachment suit was brought against the St. Louis Company had been settled and disclaimed any further interest in the proceedings.
valid, it arose out of transactions distinct from the subject matter of the suit in which such setoff was claimed; that it did not exist on July 21, 1884, when the garnishment process was served; that from that date, the garnishor acquired a lien upon and a right to the fund due from the garnishee, in the nature of an equitable assignment, which could not be disturbed or affected by any subsequent breach of the rail contract by the St. Louis Company. A general replication was filed by the Chicago Company.
While this suit of the Chicago Company for equitable relief was pending, the St. Louis Company effected a compromise with its bond creditors by issuing new mortgage securities in lieu of the old bonds, and thereupon the Olyphant suits against the St. Louis Company in the United States circuit courts for the Eastern District of Missouri and for the Northern District of Illinois were dismissed. The decree of dismissal of the Illinois suit provided, however, that the petition of the Chicago Company should stand, and be proceeded in as an original bill.
On April 9, 1887, the Joliet Steel Company assigned and transferred its two judgments for $9,101.85 and for $10,760.41, respectively, against the St. Louis Company, to David K. Ferguson, who, as such assignee, thereafter, in May, 1888, applied to be made, and was made, a party to the suit of the Chicago Company.
"Without ruling upon other questions discussed by counsel, it is sufficient to say that the claim for unliquidated damages growing out of the failure of the St. Louis Company to receive rails under the rail contract after the failure of that company, and after the commencement of the suit in attachment, and the service of the writ of garnishment upon the Chicago Company, was properly rejected by the court in the trial of the action at law, and cannot now be set off against the judgment rendered against the garnishee. The intervening petition is dismissed, without prejudice to the right of the Chicago Company to prosecute an action against the St. Louis Company."
From the decree dismissing this bill the present appeal is prosecuted, and the errors assigned by the appellant may be embraced in the general proposition that the court below erred in declining to adjudicate and determine the amount of the damages sustained by the Chicago Company from the breach of the rail contract, and set off the same against the judgment at law, and in dismissing the bill, even though such dismissal was without prejudice to the right of the Chicago Company to bring suit for the recovery of such damages.
were allowed to be removed from the jurisdiction of the court or applied otherwise than to the debt of the Joliet Company.
It is not shown by the record that the St. Louis Company was restored to a state of solvency before the final decree; but if that fact had been properly shown, it was not set up as a defense in the present suit, and it cannot now be invoked on behalf of the Joliet Company or its assignee.
settlement in cash according to the contract, but this proposition was not accepted.
Under these circumstances, there was a clear breach of the rail contract on the part of the St. Louis Company. The first default occurred on July 10, 1884, in failing to pay the amount then due the Chicago Company. It was further in default in not giving an order to manufacture rails for July, which was continued during the succeeding months of the year 1884. So that at the close of December, 1884, when the time for the final performance of the contract expired, there were about 10,618 tons of rails that the St. Louis Company had failed to order, receive, and pay for at the contract price of $35 per ton. Steel rails continued to decline from July, 1884, to January, 1885, the price running down to $29.50 a ton between those dates.
would claim damages. That it sustained damages to the extent of the difference between the contract and the market price of steel rails is clear beyond all controversy. The liability of the St. Louis Company for these damages is equally clear, but the amount thereof, being unliquidated, could not properly be set off in the attachment proceeding at law. Under these circumstances and conditions, has the Chicago Company any right to relief in equity, by way of equitable setoff? Would it be just and equitable to compel the garnishee to pay its indebtedness to the St. Louis Company for the benefit of a stranger, and then be left to either lose its valid claim for damages or follow its nonresident insolvent debtor into another jurisdiction in the effort, more or less experimental and expensive, to collect such claim? If the St. Louis Company was the beneficial plaintiff in the judgment at law, or the case stood alone between it and the Chicago Company, there could be little or no doubt that a court of equity would, under the facts stated, afford the latter relief by way of equitable setoff.
Cross-demands and counterclaims, whether arising out of the same or wholly disconnected transactions and whether liquidated or unliquidated, may be enforced by way of setoff whenever the circumstances are such as to warrant the interference of equity to prevent wrong and injustice.
Again, it is well established that equity will entertain jurisdiction and afford relief against the collection of a judgment where in justice and good conscience it ought not to be enforced, as where there is a meritorious equitable defense thereto which could not have been set up at law or which the party was, without fault or negligence, prevented from interposing. Illustrations of these general principles are found in the cases of Leeds v. Marine Ins. Co., 6 Wheat. 565; Scammon v. Kimball, 92 U. S. 362; Crim v. Handley, 94 U. S. 652; Embry v. Palmer, 107 U. S. 3; Knox Co. v. Harshman, 133 U. S. 154; Marshall v. Holmes, 141 U. S. 589.
the law to avoid circuity of action and injustice. Railway Co. v. Smith, 21 Wall. 255.
By the decided weight of authority, it is settled that the insolvency of the party against whom the setoff is claimed is a sufficient ground for equitable interference. Leeds v. Marine Ins. Co., 6 Wheat. 565; Lindsay v. Jackson, 2 Paige 581; Gay v. Gay, 10 Paige 369; Pond v. Smith, 4 Conn. 302; Robbins v. Holley, 1 T. B. Mon. 194; Hinrichsen v. Reinback, 27 Ill. 295; Raleigh v. Raleigh, 35 Ill. 512; Hall v. Kimball, 77 Ill. 161; Chicago, Danville &c. Railroad v. Field, 86 Ill. 270; Doane v. Walker, 101 Ill. 628; Davis v. Milburn, 3 Ia. 163; Tuscumbia &c. Railroad v. Rhodes, 8 Ala. 206; Wray v. Furniss, 27 Ala. 471; Keightly v. Walls, 27 Ind. 384; Wulschner v. Sells, 87 Ind. 71; Laybourn v. Seymour (Minn.), 54 N.W. 941; Rothschild v. Mack, 115 N.Y. 1; Richards v. La Tourette, 119 N.Y. 54; Schuler v. Israel, 120 U. S. 506.
"While it may be true that in a suit brought by Israel against the bank, it could, in an ordinary action at law, only make plea of setoff of so much of Israel's debt to the bank as was then due, it could, by filing a bill in chancery in such case -- alleging Israel's insolvency, and that, if it was compelled to pay its own debt to Israel, the debt which Israel owed it, but which was not yet due, would be lost -- be relieved, by a proper decree in equity, and as a garnishee is only compelled to be responsible for that which, both in law and equity, ought to have gone to pay the principal defendant in the main suit, he can set up all the defenses in this proceeding which he would have in either a court of law or a court of equity."
It is suggested by the appellees that this was merely "incidental to the point decided in that case," but the proposition it announces is supported by sound principle and authority, and the Illinois decisions are in full accord therewith.
decisions, including those of Illinois, that the nonresidence of the party against whom the setoff is asserted is good ground for equitable relief. Quick v. Lemon, 105 Ill. 578; Taylor v. Stowell, 4 Metc. (Ky.) 175; Forbes v. Cooper, 88 Ky. 285; Robbins v. Holley, 1 T. B. Mon. 18; Edminson v. Baxter, 4 Hayw. 112; Davis v. Milburn, 3 Ia. 163.
It is not deemed necessary to review these cases and make quotations from them. They fully establish the principles for which they are cited. There is nothing in the Illinois statutes on the subject of attachment and garnishment inconsistent with the doctrine of the foregoing decisions. Applying the principle they announce to the present case, it admits of no doubt that the Chicago Company is entitled to the relief it seeks as against the St. Louis Company. The question then remains whether the attachment proceedings, or the garnishment process thereunder, resulting in the order or judgment at law declaring the Chicago Company's ascertained indebtedness liable to the payment of the Joliet Company's judgment against the St. Louis Company, in any way changes or defeats the equity or right of the Chicago Company to the same relief?
Chicago Company and the St. Louis Company. The rights and equities existing and to arise out of those contractual relations were in no way terminated or defeated by that service. The legal operation and the effect of the garnishment proceedings, and of the final order therein made, were only to impound what was legally and equitably due from the garnishee after the adjustment of the claims between the latter and the principal debtor and place it beyond the control of the debtor and subject to collection for the benefit of the attaching creditor. The claim made by the appellee that the garnishment service operated as an equitable assignment to the garnishor of the due indebtedness from the garnishee cannot be sustained either upon reason or authority. The final order in that proceeding does not have the legal effect and operation of transferring the Chicago Company's due indebtedness to the St. Louis Company and from the latter to the Joliet Company. The Illinois statutes in relation to garnishment are substantially the same as the generality of statutes on that subject, and contain no provision sustaining the proposition that either the service of the writ or the order made in the proceedings operates to transfer the debt, but only binds it, and prevents the principal debtor from receiving it.
The English law upon the subject of garnishment and its effect differs in no material respect from that of Illinois, and in Chatterton v. Watney, 17 Ch.D. 259, it was held that a garnishee order did not have the effect of transferring the debt from the garnishee.
In the case of Ex Parte Chinery, 12 Q.B.D. 342, it was held by Lord Justice Cotton that a garnishee order absolute was not a final judgment against the garnishee, and did not make the garnishor a creditor of the garnishee. In the subsequent case of In re Combined Weighing and Advertising Machine Co., 43 Ch.D. 99, the effect of a garnishee order was again under consideration, and it was held that the garnishee order did not affect any transfer, legal or equitable, of the debt owing by the garnishee or create the relation of creditor and debtor as between the garnishor and the garnishee.
"A garnishee order attaching the debt, and enabling the person who has obtained the order to give a good discharge, does not come within the principle of equitable assignment,"
"I cannot see that this statutory relation, which was created originally by the common law procedure act of 1854, and was perpetuated in the rules under the Judicature Act, is really a relation involving the creation of a fresh debt. There cannot be said to be any equitable debt. There is no assignment in equity, and I cannot see that there is any legal debt. There is an order of a court of common law that a sum equal to the original debt shall be paid by the garnishee to the judgment creditor, or, as an alternative, that execution may issue, but I think that the relation which is created by that section, and the order made under it, does not create a debt at all."
"It is plain to my mind that there is no transfer of the debt. It is equally plain to my mind that the garnishee order does not make therefore the garnishor a creditor of the garnishee. What the order does is this: it gives the garnishor certain statutory rights. It enables the garnishor to say to the garnishee, 'You shall not pay to your creditor the money which you owe him.' It enables him to give a valid receipt and discharge for the money. It enables him, in the event of the money's not being paid, to obtain execution. He has all those rights, but there is no transfer of the debt and he is not created a creditor."
v. Wilson (Iowa), 51 N.W. 1157; Huntington v. Risdon, 43 Ia. 518.
From these propositions and authorities, it follows that the Chicago Company is entitled to assert against the Joliet Company the equitable setoff it could enforce against the St. Louis Company in respect to its claim for damages.
It is hardly necessary to observe that the appellee Ferguson, having taken an assignment from the Joliet Company pendente lite, occupies the same position as his assignor, and is subject to the same equity. It is sought to defeat this right of the Chicago Company by invoking in favor of the Joliet Company and its assignee, Ferguson, the doctrine of relation, so as to antedate the claim for damages. This cannot be done, for two reasons: first, because the breach of contract, on which the claim for damages is based, had in fact commenced before the garnishment writ was served; second, if that had not been the case, the contract for the nonperformance of which the right for damages arises was in existence when the garnishment proceedings were instituted.
"Under these circumstances, we think he cannot be held as trustee, for it would be against justice that he should be held to pay a creditor of his debtor the only money by which he can partially indemnify himself."
"The answer of the trustee, on which it was discharged, is in effect that at the time of the service of process, it had in its deposits, to the credit of the defendants, $927.10, and that at the same time it held three promissory notes, which it had discounted for the benefit of the defendants, and on which they were endorsers; that since said service, these notes have all matured; that the liability of the endorsers has been made absolute by due demand and notice. The makers and endorsers have all become insolvent, and the notes remain in its hands, wholly unpaid, except that a small sum has been received on one of them. The amount due on each note is considerably more than $927.10. The counsel for the trustee contends that it has the right to set off the sum of money due from the defendants on any one of these notes against the deposit. We regard it as settled that if, before final answer, the debtor becomes indebted to the trustee on any contract entered into before the service of the writ, the latter shall have a right of setoff, and be chargeable only with the final balance, if one should be due. Boston Type Co. v. Mortimer, 7 Pick. 166; Smith v. Stearns, 19 Pick. 20; Nickerson v. Chase, 122 Mass. 296; Eddy v. O'Hara, 132 Mass. 56, 61; Pub.St. c. 183, § 27."
as against the attaching creditor, should not, however, extend to any matter originating by the action of the garnishee subsequent to garnishment, as otherwise it would be in the power of the garnishee to defeat the right of condemnation, which should not, by any means, be allowed."
In the first of the above-cited cases, the liability of the garnishee was conditional and indeterminate at the time of the service of the garnishment process, and his right to claim against the principal debtor did not become fixed until long after the service of process, so that the garnishee had no cause of action against the principal debtor when the attachment writ was served; also, in each of the other cases, the setoff allowed matured after the service of garnishment, but arose under a contract entered into before the service of the writ. In other words, the principle established by these cases is that whatever rights the garnishee may have under existing contracts with the principal debtor, he is entitled to have the benefit thereof as against the attaching creditor.
The latter clause of the quotation from the case of Farmers' & Merchants' Bank v. Franklin Bank, supra, lays down the correct rule to be applied in cases of this character, and that rule is that while the garnishee may not, after service of the writ, by his own action acquire setoffs or counterclaims against the principal debtor to the prejudice of the attaching creditor, he may properly avail himself of all claims fairly arising out of contracts with the principal debtor which were in existence when the attachment was commenced, and under or out of which his claim against the principal debtor arises.
any balance due the complainant from the St. Louis Company, a personal decree should have been rendered therefor.
The judgment of the court below is accordingly reversed, and the cause remanded, with directions to proceed therein in conformity with this opinion.
MR. CHIEF JUSTICE FULLER, having been of counsel, and MR. JUSTICE WHITE, not having been a member of the Court when the case was argued, took no part in its consideration and decision.

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