In re Watts

M. Zier & Company, a corporation located at New Albany, Indiana, engaged in the boiler manufacturing business, was hopelessly insolvent on and prior to December 30, 1902, and some thousands of dollars had been drawn from its treasury by the manager of its affairs for the purpose of making certain payments, of which $3,100 had been paid to Ryerson & Son, a corporation of Chicago, Illinois, and a large creditor of the Zier company, previously to December 30, and $9,600 was on that day placed by M. Zier, the manager of the company, in the hands of his attorney to be paid over to Zier's sister-in-law, who was a stockholder and creditor of the Zier corporation. It was arranged by Zier's attorney with the Chicago corporation on December 29 that the latter should apply for the appointment of a receiver of the Zier corporation, and that the New Albany Trust Company should be appointed receiver, and this resulted in a complaint filed by the Ryerson corporation, represented by W. W. Watts, a member of the bar of Kentucky, in the circuit court of Floyd county, Indiana, charging that the Zier company was insolvent and was dissipating its property and assets, and praying for the appointment of a receiver, 'and that the court shall make such orders as shall be necessary and proper for the preservation of said property, for the continuance of said business for the purpose of completing unfinished contracts,' etc., to which defendant voluntarily appeared and consented to the appointment of the New Albany Trust Company as receiver. The appointment was accordingly made, and the trust company immediately qualified and proceeded to administer the estate and wind up its affairs.

On January 16, the trust company, as receiver, filed its report and petition, giving an inventory and appraisement of the assets of Zier & Co., the receipts and expenditures of the receiver to that date, the particulars in respect of outstanding contracts; raising the question as to the further operation of the plant, and advising an order for a meeting of the creditors to consider that subject; requiring creditors to prove their claims, and enjoining them from the prosecution of suits except by intervention. A list of the creditors was attached, which included the Inland Steel Company, John C. Thurston, and the Dey Time Register Company.

The court entered an order directing such meeting to be held January 24, and notice by mail to be given, which was done, and the meeting was held on that day, a large number of creditors being represented, including the Inland Steel Company. An order was thereupon entered for payment of rent, the completion of unfinished contracts, for the continuance of the operation of the plant to a specified extent, for the issue of certificates of indebtedness to a small amount, but that no new contracts should be made. It was further ordered that creditors be notified by mail and by publication to file their claims on or before May 11, and 'that all creditors and other persons be and they are hereby enjoined and restrained from prosecuting any claim or suit against this estate except by intervention in this cause or by first obtaining leave of this court.'

February 6, 1903, the Inland Steel Company, John C. Thurston, and John Dey, doing business as Dey Time Register Company, creditors of the Zier corporation to the amounts of $935, $15, and $100, respectively, filed their petition in bankruptcy in the United States district court for the district of Indiana against that corporation to have it declared a bankrupt. The petition alleged that the company was hopelessly insolvent and had committed, within four months next preceding the filing of the petition, acts of bankruptcy, which were specified. It was further alleged that it was necessary, for the preservation of the estate of Zier & Company and for the benefit of its creditors alike, that a receiver in bankruptcy be appointed at once to take charge of the affairs of said company. On February 11 a further petition was filed by the Inland Steel Company, and, on the same day, a supplemental petition, in which the appointment by the circuit court of Floyd county of a receiver and his being put in charge of the insolvent's property, were set up as additional acts of bankruptcy.

The district court thereupon appointed Frederick D. Connor as receiver, and directed that he should take into his possession the plant of Zier & Company and all its other property, and further ordered that the New Albany Trust Company should deliver up to the receiver all the property of Zier & Company and refrain from in any way interfering with him. The receiver immediately qualified by giving bond as required by the court.

February 13, 1903, and before the receiver of the district court had made demand for the property, on learning of Mr. Connor's appointment as receiver, Mr. Watts, after consulting with the local attorneys of Zier & Company, communicated with the district judge and requested that the Federal receiver should not proceed until he, Mr. Watts, could procure an order from the Floyd circuit court permitting him to do so, and could come to Indianapolis, and present to the district judge reasons why the receiver should not have been appointed by that court, and why his order to that effect should be vacated. The district judge immediately caused the court's receiver and the attorneys interested in the case to be notified to take no further steps until a hearing could be had on the questions suggested by Mr. Watts, on February 16, at Indianapolis. No further action was taken by the receiver of the district court, but he presented to the Floyd circuit court a petition setting forth his appointment and qualification, together with a certified copy of the order appointing him, on the morning of Saturday, February 14, and asked the delivery to him of the property and effects of Zier & Company and the discharge of the trust company as receiver. The Floyd circuit court entered an order reciting that Connor, as receiver, came by his attorney, 'and by leave and order of the court, and upon his own motion, makes himself a party to this proceeding, and thereupon by leave of the court files his verified petition showing his appointment as receiver of said M. Zier & Co. by order of the United States district court for the district of Indiana,' and praying for the surrender of the property; 'and the matter of said petition is now continued until the next term of this court.' Saturday, February 14, was the last day of the term, and the next term of the court commenced on the 9th day of

On the same day, February 14, the trust That, with a view to the due observance of the comity existing between the state and the Federal courts, and of avoiding a clash of jurisdiction, petitioner had communicated through its attorneys with the United States district judge and requested the nonenforcement of his order until after the matters in question had been presented to the state court, with the request that that court direct it and its attorneys to lay said matters before the judge of the district court, whereupon the district judge requested counsel to notify the attorneys of the creditors petitioning in bankruptcy that the matter would be heard on Monday, February 6, in Indianapolis, and that in the meantime the order appointing Connor was not to be enforced.

The petition further alleged that the court was about to adjourn over to the first day of its next term, March 9; that the order of January 24 directed petitioner as receiver to go on and complete various contracts; that it had entered upon the work; that the operation of the plant was for the beneficial purposes of the estate; and that the stoppage of the plant would involve loss to the creditors and many complicated questions of damage; that it would work great hardship to leave the estate with the court adjourned and without instructions as to what to do; and that the petitioner was this court's officer, and must be ordered and directed by this court, only, with respect to the property in its hands.

Petitioner averred that the injunction and restraining order of the state court had been knowingly violated by the Inland Steel Company and the Dey Time Register Company; that these two creditors and all other creditors were estopped from prosecuting the petition in bankruptcy, and from seeking to take from petitioner the assets in its hands as receiver; and that all the creditors were enjoined from prosecuting any attempt to take from the receiver any of the assets in its hands except by leave. And, further, that the record in the district court of the United States for the district of Indiana did not disclose all the facts regarding the matters herein; that that court had no information as to the restraining orders, and estoppels, by entry of appearance, participation, and otherwise. That the assets of the Zier company were in custodia legis; that the parties had submitted themselves to this forum; that the court came into lawful custody of the property, and the orders and proceedings were entered and had before the institution of the bankruptcy proceedings, and the attempt to oust this court and receiver therefrom. Petitioner, therefore, asserted its belief that the district court, under the peculiar circumstances of the case, would coincide with the state court, if it should deem wise to enter orders specifically restraining the Inland Steel Company, John L. Thurston, and the Dey Time Register Company and their attorneys, Connor, and the United States marshal from further prosecuting any matters in relation to the estate or of the taking of the assets in any manner, except by intervention in this action.

Petitioner prayed for instructions; that it should present the facts to the district court of the United States, either by limited or general appearance in the bankruptcy proceedings, and ask such relief, if any, as this court might direct; and that an injunction be granted.

An order was then entered, prepared by Mr. Watts, embodying matters set up in the petition, granting an injunction, ordering the operation of the plant to continue, and directing the receiver, through its attorneys, to proceed to Indianapolis and there, by a limited appearance, to lay before the district court the facts with regard to the matters herein, and to suggest to that court the orders of this court, and its belief that with full information of the facts the order of that court would at most have been a direction for application to be made to this court for the delivery of the assets to the receiver or trustee of the district court. It was further ordered that the Inland Steel Company John L. Thurston, and the Dey Time Register Company show cause why they should not be punished for contempt in disobeying the orders of this court by taking action without obtaining leave.

On Monday, February 16, Mr. Watts, with the vice president of the New Albany Trust Company, receiver, appeared in the district court at Indianapolis, and the proceedings in the state court, including the petition and order of February 14, were laid before that court, and hearing was had that day and on February 17. At the conclusion of the argument the district judge announced his ruling that the court in bankruptcy had supreme and exclusive jurisdiction in the matter; and asked Mr. Watts and the representative of the trust company if it were not better to avoid the clash of jurisdiction by voluntarily turning the property over to the Federal receiver, indicating at the same time that otherwise it would be his duty to exert the power of the court in vindication of its jurisdiction. Mr. Watts and his colleague thereupon announced that the property would be turned over to the Federal receiver. Mr. Watts at the same time stated to the court that he would do all in his power to see that the proceedings in the state court of February 14 were stricken out, and that he would endeavor to have the state court make an order directing the surrender of the property.

The district court, on February 17, made the following order:

'This cause coming on now to be heard upon the petition of Frederick D. Connor, filed herein on the 16th day of February, A. p. 1903, for the instruction of the court concerning cerning the property and assets of said M. Zier & Company, which are now in the possession of the New Albany Trust Company, as receiver of the Floyd circuit court, in a suit therein pending against said M. Zier & Company, because of their insolvency; and the petitioning creditors in this cause and said Connor, receiver as aforesaid, being now present and represented by George H. Hester and William Wilhartz, their solicitors, and said New Albany Trust Company, receiver as aforesaid, being now present and represented by Henry E. Jewett, its vice president, and by William W. Watts, its solicitor, and after argument by counsel, the said New Albany Trust Company, as receiver of the Floyd circuit court, by its said vice president, having voluntarily offered and agreed, by and with the consent and approval of said William W. Watts, its solicitor, in open court, to surrender full and immediate possession and control of the property and assets of said M. Zier & Company, in its possession or under its control, as receiver of the Floyd circuit court, to said Connor, as receiver of this court, upon the presentation by him to said New Albany Trust Company of a certified copy of the order for his appointment as such receiver heretofore made by this court. It is now hereby ordered by the court that said Connor, receiver as aforesaid, forthwith present a certified copy of the order for his appointment as such receiver to the said New Albany Trust Company, and immediately thereupon take full possession and control of the property and assets of said M. Zier & Company that are now in the possession or under the control of said New Albany Trust Company, as receiver of the Floyd circuit court.'

On February 19 the trust company by its vice president filed a report in the Floyd circuit court, in which it stated that, in pursuance of the order of the court, it had appeared before the district judge in Indianapolis on Monday, February 16, and, upon the hearing in that court, the receiver had stated that it was ready and willing to deliver to the receiver appointed by the Federal court all the property and assets of Zier & Company in its hands; that it had not yet been able to make up its accounts as receiver, but was preparing the same to submit to the court, and was willing to turn over all the property to the Federal receiver; and prayed leave from the court to do so. The company further asked that, upon the presentation and approval of its accounts as receiver, its resignation be accepted, and that it be fully and finally discharged.

On the same day Connor demanded of the trust company the property of Zier & Company in its possession, to which that company at once replied that it had that morning filed before the judge of the Floyd circuit court, in chambers, a report, a copy of which was attached; that the judge had stated orally that he wished the property held until the accounts of the trust company as receiver were rendered and passed on; that the company thought this might be done the next day, and desired, if Connor was willing, to defer action until then, because it would 'relieve us of embarrassment in the premises. On the other hand, if you insist on immediate surrender of the property to you, we are bound to say that we believe that to carry out in good faith the understanding with the honorable judge of the United States court of Indianapolis and our vice president, H. E. Jewett, we ought to surrender the property to you at once.' Connor declined to grant further time, and the trust company turned over to him the plant of Zier & Company, which constituted all the property of that company except certain books and cash. Connor immediately took possession of the property and put watchmen in charge to hold the same for him.

On February 20 the United States Tube Company presented to the Floyd circuit court, 'in vacation, at chambers,' a petition signed and verified by D. A. Sachs, in which it was set forth that the trust company, as receiver, had wrongfully turned over and surrendered the possession of the boiler plant of Zier & Company to Connor, the receiver in bankruptcy, and was threatening to turn over to Connor all the other assets of Zier & Company in its hands. Petitioner therefore prayed that the trust company be cited to appear before the court, in chambers, on the afternoon of that day, and show cause why it should not be punished for contempt; and that if the court found that the trust company had violated its orders as represented that it be removed from its office as such receiver and a successor be appointed; and that the trust company be required to account immediately and turn over to its successor the property of Zier & Company. On this petition the judge of the Floyd circuit court on the same day entered an order removing the trust company from the receivership, and directing it to account for the assets of Zier & Company. The order further provided for the appointment of Charles D. Kelso as receiver, and directed him, on qualification, to demand of the trust company and Connor the immediate possession of the property of Zier & Company which came into the hands of the trust company as receiver, and, should Connor fail or refuse to surrender the possession of the assets, that he at once report to the judge for further instructions.

Kelso, having qualified, on the same day reported to the judge at chambers that he had demanded of the trust company the possession of the assets of Zier & Company, and that the trust company had refused to surrender the possession for the reason that it had turned over the possession of the plant to Connor, and that as to the other assets it intended to account forthwith to the judge of the Floyd circuit court; and that he then demanded the property of Connor, who refused to surrender the same. The state court then entered an order that a writ be issued, directed to the sheriff of the county, requiring him immediately to seize and deliver to Kelso all the property which Connor had in his possession, and forthwith to make a return to the court.

February 21, Connor filed a petition in the district court, in which, after setting forth the facts as to the delivery of the possession of the plant of Zier & Company to him February 19, he stated that he retained possession of the same until February 20, when possession was demanded of him by Kelso, as receiver appointed by the Floyd circuit court, which demand he refused; that he was served with a certified copy of the order of the Floyd circuit court, and with a writ issued by that court February 20, to the sheriff, requiring him forthwith to take possession of the plant and the assets; and that the sheriff forcibly took possession thereof, and delivered the same over to Kelso, who was then in possession.

The petition of Connor further stated:

'That this petitioner believes the above-stated proceedings were procured to be had by William W. Watts, Esq., of Louisville, Kentucky, who during the continuation of the New Albany Trust Company, as receiver of M. Zier & Company, represented said trust company as such; that said Charles D. Kelso is now represented by one D. A. Sachs, Esq., of Louisville, Kentucky, an attorney-at-law, and that the petitioner believes that said Sachs also assisted in procuring the orders of the said Floyd circuit court above set out, and the petitioner further says that he verily believes the forcible removal of said property from his possession and control as receiver appointed by this court as aforesaid was brought about by the joint action and efforts of said Charles D. Kelso, as receiver, and Charles D. Kelso, individually, and William W. Watts, as attorney for said New Albany Trust Company, and D. A. Sachs, attorney for said Charles D. Kelso, receiver.'

The petitioner further prayed that Kelso, as receiver and individually, the sheriff, the deputy sheriff, and the custodian of the plant, and William W. Watts, as attorney for the trust company, and D. A. Sachs, as attorney for Kelso, be required and directed to redeliver the property to petitioner, and be cited to appear and show cause why they should not be punished for contempt.

On this petition the district court, February 21, made an order requiring the parties therein named to appear before it at Indianapolis on February 25 to show cause why they should not redeliver the property, and restraining them from in any way interfering therewith; and further ordering that the parties show cause why they should not be punished for contempt. On the same day, the United States district attorney for the district of Indiana filed informations in the district court against Kelso, Watts, Sachs, and others, for contempt of the district court in disobeying and disregarding its orders. Watts and Sachs filed separate answers and pleas to the rule to show cause and to the information against them, which were traversed by the United States district attorney.

William W. Watts, by way of response to the rule, and plea to the information, pleaded that he was not guilty of the alleged contempts stated in the rule and information, or either of them. He denied that he had committed or advised any act of contempt of the orders of the district court, or that he had in any way, directly or indirectly, or by aiding or advising, forcibly, or in any other way, taken from the receiver in the bank-ruptcy proceedings the property of Zier & Company, or any part of it, or in any way, by aiding, abetting, or advising, had withheld the custody of said property or any part of it. But he said that the orders of the district court directing its receiver to take the property of Zier & Company into its custody were void because of want of jurisdiction, and that the possession of the property by Connor, receiver, was wrongfully and unlawfully obtained, and the retaking under the orders and writ of the Floyd circuit court was a lawful and proper taking.

He then set up the various proceedings hereinbefore enumerated, and the part he took therein; adding: 'All this was done solely for the purpose of preventing any possible conflict between the two jurisdictions, and it was believed by this defendant and respondent, and by the said New Albany Trust Company, and by the judge of the Floyd circuit court, that upon such presentation the United States district court would rescind its said order appointing said Frederick D. Connor, as receiver, and directing him to take possession of said property of M. Zier & Company.' Under this authorization he and the trust company appeared at Indianapolis on Monday, February 16, and exhibited to the district court the order of the Floyd circuit court authorizing them to appear, and made a full statement of the situation in the state court, after which and extended argument, the district judge refused in any way to reconsider, modify, or set aside his order, and demanded of the representative of the trust company whether or not it would turn over the property, and of defendant and respondent whether or not he, as counsel for the trust company, would advise it to turn the property over, to Connor, as receiver. 'Under these circumstances, and not otherwise, and believing that the said demand of said judge of the said United States district court was peremptory, this defendant and respondent, as counsel for the said New Albany Trust Company, stated that he would advise the said New Albany Trust Company to turn over the said property to the said Frederick D. Connor, receiver.' On February 17, defendant and the vice president of the trust company left Indianapolis, and defendant supposed that it was not necessary for any order respecting the hearing in the district court February 16 and 17 to be entered, and that no order would be entered. But an order was entered, a fact which he learned several days thereafter.

Defendant, further answering, alleged that on February 19 defendant and the trust company, receiver, appeared before the judge of the Floyd circuit court, in chambers, and defendant, as attorney for the trust company, then filed before the judge of that court a written petition and motion, setting forth what had passed at Indianapolis, in view of which he moved to strike out and expunge from the files the petition and order of February 14, 1903. This was particularly desired, because the district judge seemed to regard the petition and order as offensive. That defendant was in every way in good faith endeavoring to carry out the understanding at Indianapolis, and advised, and at no time gave any contrary advice, the trust company to turn over to Connor, receiver, all the property of the Zier company. The response and plea further averred that Watts was much embarrassed by the condition of affairs, and felt that the judge of the Floyd circuit court might misconstrue his actions in the premises, and, before going to New Albany on February 19, 1903, requested his friend, D. A. Sachs, a lawyer residing in Louisville, Kentucky, to accompany him for the purpose of explaining his action to the judge of the Floyd circuit court, and this Sachs accordingly did. But the judge of that court was not satisfied, and entered a rule on Watts to show cause 'why he should not be punished for contempt.'

On the same day the trust company filed its separate petition, praying for leave to turn over the property, and for its discharge in the premises on the approval of its accounts. But the judge cited it also to show cause.

The pleading further set forth the communication of the trust company to Connor, receiver, and the delivery of the property to him; and that on February 20 defendant appeared before the judge of the Floyd circuit court in obedience to his request. On that day an order was entered removing the trust company as receiver, and appointing Charles D. Kelso as receiver in its stead, and authorizing him to demand of Connor the property of Zier & Company. Before that order was entered the trust company had, in fact, under the advice of Watts, turned over the property to Connor, and the response and plea asserted that defendant did not advise, aid, connive at, or abet the entry of said order, and had nothing whatsoever to do with it.

The response and plea further set forth the report of Kelso, and the entry of an order directing the issue of a summary writ to the sheriff of Floyd county, and stated: 'This defendant and respondent did not procure the entry of said order, or connive at its entry, or advise its entry, and did not know of its entry until after it had been entered. He had no connection whatever with it.'

Defendant and respondent reiterated that all of his acts and doings and advice after his appearance at Indianapolis were with the single purpose of having the trust company turn over all the property and effects to the receiver of the district court, and that he did nothing and said nothing and advised nothing which would in any way delay the execution of that purpose; that he did nothing and said nothing with reference to the removal of the trust company or the removal of Kelso, and in no way did he advise anything looking to the retaking of said property from the hands of said Connor, receiver, and with all these matters he had nothing to do. Transcripts of the records were attached as exhibits.

By his separate response and plea D. A. Sachs denied the commission of any act, or the advising or consenting to the commission of any act, in disobedience of any order of the court in the bankruptcy case, or that he had aided, abetted, or advised the taking from the receiver the property of Zier & Company, or in any way disobeyed or disregarded, or aided or abetted the disregarding of, the orders or decrees of the district court, or been guilty of any contempt in the case. He said that he first heard of the proceedings on February 18 from Mr. Watts, and appeared before the state judge and attempted to explain the matter simply as his friend. He at no time advised disobedience or disregard of the orders of the district court or the taking of the property from Connor, but, on the contrary, advised against that course; and 'that all he did in this matter was without fee or any consideration whatever except through friendship to said Watts.' He then believed, and is still of the opinion, that the receiver of the Floyd circuit court had the rightful possession of the property, and that the district court did not have the right or authority to interfere therewith in the summary way pursued herein. The response then set forth the various proceedings in both courts, and respondent asserted that on Monday, February 23, 1903, he learned for the first time of the making of the order in the district court dated February 17. He denied that he had anything to do with the proceedings other than the action he took with a view of extricating Mr. Watts from the complications, and 'with a view of avoiding any action that might be justly construed as a violation of the orders of either court.' He denied knowledge of a petition or order for the property to be seized, and had nothing whatever to do in any way with the procuring of execution of such an order, or with the forcible taking of the property or any part thereof from the receiver.

The responses and pleas having been traversed, evidence, documentary and oral, was adduced at considerable length, and on March 14, 1903, the district court found Watts and Sachs each guilty of contempt as charged in the information and rules, and sentenced each of them to confinement in the jail of Marion county for sixty days and to pay costs.

In the meantime the property had been restored to Connor, receiver, the $9,600 had been paid over to him, and Zier & Company had been adjudicated bankrupt.

Petitions by Watts and Sachs for writs of habeas corpus and of certiorari, setting forth the foregoing matters and things, were thereupon presented to this court, leave given to file them, and the writs thereupon issued, and it was directed that each of the petitioners be admitted to bail on his personal recognizance in the sum of $500, to be entered into before the judge of the United States court for the district of Indiana.

Messrs. David W. Fairleigh, W. H. H. Miller, Bernard Flexner, and W. M. Smith for petitioners.