Cates v. Allen/Opinion of the Court

Complainants were simple contract creditors, who had not reduced their claims to judgment, and therefore had no standing in the United States circuit court, sitting as a court of equity, upon a bill to set aside and vacate a fraudulent conveyance. The suit was originally brought in the state court, under sections 1843 and 1845 of the Code of Mississippi of 1880, which provided that the chancery courts of that state should have jurisdiction of bills exhibited by creditors who have not obtained judgments at law, or, having judgments, had not had executions returned unsatisfied, to set aside fraudulent conveyances of property or other devices resorted to for the purpose of hindering, delaying, or defrauding creditors, and might subject the property to the satisfaction of the demands of such creditors as if the complainants had had judgment, and execution thereon returned 'No property found;' and that 'the creditor in such case shall have a lien upon the property described therein from the filing of his bill, except as against bona fide purchasers before the service of process upon the defendant in such bill.'

These sections were considered in Scott v. Neely, 140 U.S. 106, 11 Sup. Ct. Rep. 712, and it was therein determined that the circuit courts of the United States in Mississippi could not, under their operation, take jurisdiction of a bill in equity to subject the property of the defendants to the payment of a simple contract debt in advance of any proceeding at law, either to establish the validity or amount of the debt or to enforce its collection. It was there shown that the constitution of the United States, in creating and defining the judicial power of the general government, had established the distinction between law and equity, and that equitable relief in aid of demands cognizable in the courts of the United States only on their law side could not be sought in the same action, although allowable in the state courts by virtue of state legislation, (Bennett v. Butterworth, 11 How. 669; Thompson v. Railroad Co., 6 Wall. 134; Scott v. Armstrong, 146 U.S. 499, 512, 13 Sup. Ct. Rep. 148;) and that the Code of Mississippi, in giving to a simple contract creditor a right to seek in equity, in advance of any judgment or legal proceedings upon his contract, the removal of obstacles to the recovery of his claim caused by fraudulent conveyances of property, whereby the whole suit involving the determination of the validity of the contract and the amount due thereon is treated as one in equity, to be heard and disposed of without a trial by jury, could not be enforced in the courts of the United States, because in conflict with the constitutional provision by which the right to a trial by jury is secured.

The principle that a general creditor cannot assail, as fraudulent against creditors, an assignment or transfer of property made by his debtor until the creditor has first established his debt by the judgment of a court of competent jurisdiction, and has either acquired a lien upon the property, or is in a situation to perfect a lien thereon, and subject it to the payment of his judgment, upon the removal of the obstacle presented by the fraudulent assignment or transfer, is elementary. Wait, Fraud. Conv. § 73, and cases cited. The existence of judgment, or of judgment and execution, is necessary-First, as adjudicating and definitely establishing the legal demand; and, second, as exhausting the legal remedy.

This was well settled in Mississippi prior to the enactment in question. In Partee v. Mathews, 53 Miss. 140, it was ruled by the supreme court that no creditor but one who has a lien by judgment or otherwise, in full force at the time the bill is filed, can attack in equity a transfer of property as fraudulent; and that, as between equitable and legal assets, the creditor must exhaust legal means, by the issue of execution, and its return nulla bona, in order to reach the first; while, as to the latter, a judgment which acts as a lien on the property sought to be charged would be sufficient as the basis of a bill.

In Fleming v. Grafton, 54 Miss. 79, the subject was very much considered, and the English and American authorities cited to a large extent, and the opinion concludes: 'Courts of equity are not ordinarily tribunals for the collection of debts. Some special reason must be offered by the creditor before they will extend aid to him. If he is a judgment creditor, he must show that he has a lien, either by judgment, if the statute gives such lien; if it arises from the execution, he must show that one has been issued; or, if it arises from a levy of the writ, that must have been made.'

In Scott v. Neely it was said by Mr. Justice Field, speaking for the court: 'In all cases where a court of equity interferes to aid the enforcement of a remedy at law, there must be an acknowledged debt, or one established by a judgment rendered, accompanied by a right to the appropriation of the property of the debtor for its payment; or, to speak with greater accuracy, there must be, in addition to such acknowledged or established debt, an interest in the property, or a lien thereon, created by contract or by some distinct legal proceeding. Smith v. Railroad Co., 99 U.S. 398, 401; Angell v. Draper, 1 Vern. 398, 399; Shirley v. Watts, 3 Atk. 200; Wiggins v. Armstrong, 2 Johns. Ch. 144; McElwain v. Willis, 9 Wend. 548, 556; Crippen v. Hudson, 13 N. Y. 161; Jones v. Green, 1 Wall. 330. * *  * It is the existence, before the suit in equity is instituted, of a lien upon or interest in the property, created by contract or by contribution to its value by labor or material, or by judicial proceedings had, which distinguishes such cases for the enforcement of such lien or interest from the case at bar.'

The mere fact that a party is a creditor is not enough. He must be a creditor with a specific right or equity in the property, and this is the foundation of the jurisdiction in chancery, because jurisdiction on account of the alleged fraud of the debtor does not attach as against the immediate parties to the impugned transfer, except in aid of the legal right.

Doubtless new classes of cases may by legislative action be directed to be tried in chancery, but they must, when tested by the general principles of equity, be of an equitable character, or based on some recognized ground of equity interposition. This will be found to be true of the decisions in Holland v. Challen, 110 U.S. 15, 3 Sup. Ct. Rep. 495; Whitehead v. Shattuck, 138 U.S. 146, 11 Sup. Ct. Rep. 276, and like cases.

The fact that section 1845 aims to create a lien by the filing of the bill does not affect the question, for, in order to invoke equity interposition in the United States courts, the lien must exist at the time the bill is filed, and form its basis; and to allow a lien resulting from the issue of process to constitute such ground would be to permit state legislation to withdraw all actions at law from the one court to the other, and unite legal and equitable claims in the same action, which cannot be allowed in the practice of the courts of the United States, in which the distinction between law and equity is matter of substance, and not merely of form and procedure. And, as the ascertainment of the complainants' demand is by action at law, the fact that the chancery court has the power to summon a jury on occasion cannot be regarded as the equivalent of the right of trial by jury secured by the seventh amendment. Whitehead v. Shattuck, 138 U.S. 146, 11 Sup. Ct. Rep. 276; Buzard v. Houston, 119 U.S. 347, 7 Sup. Ct. Rep. 249.

The result is that this decree must be reversed, as the case comes directly within Scott v. Neely, from the rule laid down in which we have no disposition to recede. It is suggested that the bill might to sustained under the prayer for general relief, as brought for the administration of the assets under the assignment, but such relief would not be agreeable to the case made by the bill, which was directed to the setting aside of that instrument. The circuit court was therefore in error in proceeding in the case.

The bill was originally filed in the state court, and removed December 15, 1886, under the act of March 3, 1875, (18 Stat. 470,) on the ground of diverse citizenship. By the fifth section of that act, if, in any suit 'removed from a state court to a circuit court of the United States, it shall appear to the satisfaction of said circuit court, at any time after such suit has been brought or removed thereto, that such suit does not really and substantially involve a dispute or controversy properly within the jurisdiction of said circuit court, * *  * the said circuit court shall proceed no further therein, but shall dismiss the suit, or remand it to the court from which it was removed, as justice may require, and shall make such order as to costs as shall be just.' Under the act of March 3, 1887, (24 Stat. 553,) a circuit court may remand a case upon deciding that it was improperly removed. So far as citizenship and amount were concerned, the plaintiffs were entitled to file their petition for removal; but the nature of the controversy was such that the suit was not properly cognizable in the circuit court for the reasons heretofore given. While there are cases where the courts of the United States may acquire jurisdiction by removal from state courts when jurisdiction would not have attached if the suits had been originally brought therein, those are cases of jurisdiction over the parties, and not of jurisdiction based upon the subject-matter of the litigation, and furnish no rule for the disposition of cases such as that before us. But it is not to be concluded where diverse citizenship might enable the parties to remove a case but for the objection arising from the nature of the controversy, that, if such removal has been had, the suit must be dismissed on the ground of want of jurisdiction. On the contrary, we are of opinion that it is the duty of the circuit court, under such circumstances, to remand the cause. The circuit court has jurisdiction to determine whether or not the case was properly removed, and this court has jurisdiction to pass upon that determination.

In Thompson v. Railroad Co., 6 Wall. 134, an ordinary action at law was brought in the state court and removed to the United States court, where a bill in equity was substituted by leave of court, and the suit progressed as a suit in chancery. It was held that the distinctions between the two kinds of proceeding could not be obliterated by state legislation, and the decree was reversed, and the cause remanded, with directions to dismiss the bill without prejudice. In the case before us, a bill in equity, sustainable in the state court, was removed by the complainants under the act of 1875, and it was the duty of the circuit court, upon ascertaining that it was improperly removed, to remand the case. Under the acts of congress that court was not compelled to dismiss the case, but might have remanded it, and we may therefore direct it to do now what should have been done in the first instance. Railway Co. v. Swan, 111 U.S. 379, 4 Sup. Ct. Rep. 510.

It will be for the state court to determine what orders should be made, if any, in regard to the amounts complainants have received under the decrees of the circuit court. As the removal was upon the application of appellees, they must be cast in the costs.

The decree of the circuit court is accordingly reversed, with costs against the appellees, and the cause remanded to the circuit court, with directions to render judgment against them for costs in that court, and to remand the cause to the chancery court of Lee county, Miss., and it is so ordered.

Mr. Justice BROWN and Mr. Justice JACKSON dissented.

Mr. Justice BROWN, with whom was Mr. Justice JACKSON, dissenting.