Court Opinion

ID: 5239788
Source: CourtListenerOpinion
Date Created: 2022-01-06 17:22:56.224769+00
Date Added: 2024-06-11T08:27:47.220690
License: Public Domain

Smith, J. (dissenting):
The relief which the plaintiffs seek herein is to compel the individual defendants to restore to the defendant corporation upwards of $7,000,000, claimed to have been unlawfully diverted by them through their influence as directors of the defendant corporation, of which plaintiffs are stockholders. After the commencement of the action, in a suit prosecuted in the United States District Court for the Northern District of Illinois by the American Steel Foundries Company against the defendant corporation, a receiver was appointed of all of the assets, choses n action and claims of whatsoever kind or nature belonging to said corporation, and by supplemental decree in that action the receiver, one Jacob M. Dickinson, was specifically vested with the claims and choses in action existing in favor of the corporation and against its present or former directors, or any of them, with authority and direction to prosecute such claims as he might be advised, and to intervene in any pending suits when it should be necessary or proper. Upon the 18th day of September, 1915, the said Dickinson was appointed ancillary receiver by the District Court for the Southern District of New York, with powers similar to those conferred by the decrees in the Illinois court. After having qualified as such ancillary receiver the said Dickinson brought suit against these individual defendants in the State of New York, asking the same relief which is here sought. Thereafter, upon permission of the said United States District Court in the Southern District of New York, plaintiffs made application to make said receiver a party defendant in this action. The defendants, having by supplemental answer set up the fact of the appointment of said receiver and his commencement of an action in this State for the *762same relief as is sought by the plaintiffs here, made a motion to compel the plaintiffs to reply, for the purpose of testing, if the facts alleged in the supplemental answer should be admitted, the effect thereof upon the status of the present action. The plaintiffs procured an ex parte order to examine the individual defendants before trial. The defendants thereupon made a motion to vacate such order. These three motions were argued together, and resulted in the denial of plaintiffs’ motion to make the receiver a party defendant, in the granting of the defendants’ motion to compel the plaintiffs to serve a reply to the supplemental answer, and in the granting of the defendants’ motion to set aside the order to examine the defendants before trial. Plaintiffs are appealing.
The governing law of this case is found, in the opinion of Mr. Justice Gray, in the case of Porter v. Sabin (149 U. S. 473). In that opinion it is stated: “When a court exercising jurisdiction in equity appoints a receiver of all the property of a corporation, the court assumes the administration of the estate; the possession of the receiver is the possession of the court; and the court itself holds and administers the estate, through the receiver as its officer, for the benefit of those whom the court shall ultimately adjudge to be entitled to it. [Oases cited.] It is for that court, in its discretion, to decide whether it will determine for itself all claims of or against the receiver, or will allow them to be litigated elsewhere. It may direct claims in favor of the corporation to be sued on by the receiver in other tribunals, or may leave him to adjust and settle them without suit, as in its judgment may be most beneficial to those interested in the estate * * In that case the converse of the proposition here found was presented. There a receiver had been appointed by the State court, and it was sought to bring an action against the receiver in the United States court. This the United States court refused to allow, holding: “The whole property of the corporation within the jurisdiction of the court which appointed the receiver, including all its rights of action, except so far as already lawfully disposed of under orders of that court, remains in its custody, to be administered and distributed by it.”
Within this rule of law, when the receiver was appointed by
*763the United States court, that court took into its possession all of the assets of the corporation, including all its claims and the claims of the corporation against these individual defendants. That court clearly had authority to stay the plaintiffs’ action and to institute an action through its receiver within the State or Federal court, for the same relief. The receiver is not an independent actor. He is the arm of the court — always its representative. The commencement of the action against these defendants by the receiver was, therefore, the assumption by the United States court of this prosecution. That action under the direction of that court became the superior action, because it was instituted by a court with full power to determine that defendants’ liability should be adjudicated therein. In Attorney-General v. Guardian Mutual Life Ins. Co. (77 N. Y. 272) it was held: “ The Supreme Court having acquired jurisdiction of proceedings for winding up the affairs of the corporation, and having appointed a receiver, has jurisdiction to stay the suit of a creditor brought to recover assets to which the receiver is entitled, in whatever court such suit may be pending.”
The opinion in part reads: “The order which is the subject of this appeal is an order of the Supreme Court made on the application of the receiver staying further proceedings in a suit commenced in the Court of Common Pleas, of the city and county of Hew York, by William S. Carlisle and wife, who were the holders of paid-up policies in the Guardian Company amounting to about $500, against that company, the Universal Life Insurance Company, and certain officers of those companies for substantially the same cause of action as in the suit subsequently commenced by the receiver. If the court below had power to grant the order staying and enjoining further proceedings in the Carlisle suit, and to do this upon motion and without a suit commenced for that purpose, this court cannot interfere or review the exercise of its discretion. We think that the Supreme Court had jurisdiction to enjoin the further prosecution of the Carlisle suit. That suit was commenced before the receiver of the Guardian Company was appointed, and the relief asked was in part prevented from being obtained in that action by the appointment of a receiver upon the application of the Attorney-General. The receiver as the representative of *764all the creditors, was the proper person to prosecute the action to recover the assets of the Guardian Company, and he commenced an action for that purpose, with the sanction as it must he presumed of the court which appointed him. If the Carlisle suit was continued and a recovery had therein, the receiver would have been entitled to receive the fruits of the judgment.”
The facts in the present case do not present an exact parallel with the facts in the case cited, but the determinative principle is the same.
But the situation here presented is unusual. With full power in the United States court to stay this action it has not chosen so to do. It has granted permission to plaintiffs to have the receiver made a defendant herein. What the purpose of that court may be is not disclosed. That court could not by order make the receiver a defendant in an action in the State court. Such relief must be sought in the State court, where this motion was properly made. Only after the receiver be made a party herein can the United States court direct that the defendants’ liability be herein determined. It may be, perchance, that if the receiver be made a party defendant herein the action commenced by the receiver will be discontinued or stayed, and the prosecution of the' defendants continued in this action. This the United States court may do, and it will not be presumed that that court intends to subject the defendants to double prosecution for the same relief. A double prosecution is repugnant to the conscience of the court and to its sense of fair play. Even if permitted by the United States court, this court would not lend itself thereto. The rights of the defendants are within the court’s protection, as well as those of the corporation or its representative. As this application has the approval of the United States court it should be granted in order that that court may be in a position to choose in which action these defendants shall he prose cuted. When granted, however, because the action by the receiver is of superior right, and to save the defendants from double prosecution, the proceedings in this action should be stayed until the action commenced by the receiver be discontinued or the proceedings therein stayed by the United States court.
*765But defendants insist that this action has ipso facto abated as the result of the commencement of the action by the receiver, bio authority is cited so holding, and I do not agree to the contention. That such is not deemed to follow, as viewed by the United States court, is indicated by the granting of its permission to make this motion. The general practice, after the commencement of the action by the receiver, is to make application to stay the stockholders’ action—not to declare it abated. This practice is in itself a recognition by the court and the bar of the fact of the pendency of the stockholders’ action, until stayed either by the United States court or the State court. The cause of action still exists. A new party has arisen with superior right to enforce that cause of action. The United States court might, as before indicated, for sufficient reason decide to abandon the receiver’s action after its commencement, in which case the stockholders’ action, though stayed, might be revived for the purpose of continuing the prose: cution. This seems- to me the more reasonable view, and one that will protect the rights of the corporation in any contingency. The defendants are without just complaint, if accorded in either action their right of complete defense, and if they be not harassed by the prosecution of two actions for the same relief.
It is not claimed here by any party that the proceedings in this action have been stayed by the United States court. That such a stay was not intended is shown by the order of that court permitting this application, and by the decision of that court in the Hidden case (American Steel Foundries v. C., R. I. & P. Ry. Co., 231 Fed. Rep. 1003, opinion by Mayer, J.), recited in plaintiffs’brief.
I recommend, therefore, the reversal of the order denying plaintiffs’ motion to make the receiver a party defendant and' the granting of the motion, and a stay of this action thereafter until the receiver’s action be discontinued or stayed by the United States court.
The second appeal is from an order compelling the plaintiffs to reply to the new matter set up in- the supplemental answer of the defendants, wherein are shown the appointment of the receiver and his commencement of a similar action against them. The purpose of this motion, as stated by counsel, is that if such matters shall be admitted, as they must be by a *766reply, it may be summarily decided by a motion upon the pleadings whether the appointment of a receiver and the bringing of an action by the receiver for the same relief ipso facto causes the abatement of this action. If I am right in the conclusion which I have reached in discussing the first appeal, the matters alleged in the answer do not constitute a legal defense to the plaintiffs’ cause of action. The defendants will have the same right of summary review if the reversal of the order compelling the plaintiffs to reply is put upon the legal ground that the matters alleged in the supplemental answer, to which a reply is sought, do not constitute a legal defense to the action, and the defendants are allowed to appeal from such order to the Court of Appeals.
This brings us to the third appeal — from the order setting aside an order for the examination of the defendants before trial. The order for examination before trial specifies no particular subject upon which an examination may be had. The examination of the defendants should be allowed to show any interest of the defendants in the Rock Island Railroad Company, or in the Chicago, Rock Island and Pacific Railroad Company, for whose benefit these moneys are alleged to have been diverted from the defendant corporation, and to show that said moneys were diverted in the interest of the said railroad companies, and not for the benefit or profit of the defendant company. Further, the defendant should be examined upon the value of the debenture bonds of the said railroad company, given to the defendant corporation as security for these moneys diverted. These are all matters of which the plaintiffs must make proof in order to establish their cause of action. It is contended that specific facts are not alleged to show the necessity of such examination to plaintiffs. But the rule as to statement "of specific facts will be relaxed where a fiduciary relation exists, and defendants have knowledge of their acts which the cestuis que trustent cannot have, A denial by a trustee of the allegations of the complaint cannot destroy plaintiffs’ right to examine as to surrounding circumstances from which the facts sought to be proven may be inferred. I think the order vacating the order for defendants’ examination before trial should be reversed and the motion denied. The order for examina*767tion, however, should be modified as above stated and thereafter stayed for like reason, as indicated in the discussion of the first appeal.