Kelley v. Gill/Opinion of the Court

The Gibraltar Investment & Home Building Company, a California corporation with a capital stock of $2,000,000 divided into 20,000,000 shares of ten cents each, was adjudicated a bankrupt in the Southern district of that state. Its debts were about $150,000. Its assets consisted of amounts aggregating $480,921.25 unpaid and overdue on subscriptions to its stock. The subscription of each stockholder was contained in a separate contract which provided for payment unconditionally at specified dates. The court of bankruptcy found that a large majority of the subscribers were nonresidents of the district or were insolvent, and that the full amount due from resident solvent stockholders would be required to pay the claims of creditors and cost of administration. It ordered payment of all unpaid subscriptions and directed the trustee in bankruptcy 'to institute a suit in equity' to enforce collection thereof. Such a suit was brought in that court against Gill and about 3,000 other residents of the district. A motion to dismiss for want of jurisdiction was sustained; and a decree was entered dismissing the bill. Kelley v. Aarons (D. C.) 238 Fed. 996. The case comes here on appeal under section 238 of the Judicial Code (Comp. St. 1916, § 1215).

The question presented is of importance in the administration of bankrupt corporations. To enable the trustee, by means of a single suit in the court of bankruptcy, to determine and enforce payment of all amounts due from stockholders would obviously promote the effective administration of the bankrupt estate; but the aggregate burden thereby cast upon the individual stockholders might be correspondingly heavy. Whether the right to choose the court and the place in which litigation shall proceed, should be conferred upon the trustee or upon the defendant, is a legislative question with which Congress has dealt in the Bankruptcy Act (1898, c. 541, 30 Stat. 544). Section 2, clause 7, confers upon the court of bankruptcy jurisdiction to 'cause the estates of bankrupts to be collected, reduced to money and distributed, and determine controversies in relation thereto, except as herein otherwise provided.' But section 23b prohibits the trustee (with exceptions not here applicable) from prosecuting, without the consent of the proposed defendant, a suit in a court other than that in which the bankrupt might have brought it, had bankruptcy not intervened. The corporation is a citizen of California. It could not have sued these stockholders except in the state courts. The court of bankruptcy was, therefore, without jurisdiction of this suit unless there is something either in the nature of the cause of action or in the relation of stockholders to a corporation or in the character of the suit which prevents the application of the prohibition contained in section 23b.

The trustee seeks to sustain the jurisdiction on the ground:

First: That the suit-a bill in equity against all resident stockholders-is not one which the corporation could have brought 'if proceedings in bankruptcy had not been instituted'; and that a right to bring it arises in the trustee under the amendment of 1910 to section 47, clause a (2).

Second: That the suit is a proceeding concerning property in the actual or constructive possession of the trustee or the bankrupt.

The cause of action sued on is the failure of the several stockholders to perform their several unconditional promises to pay definite amounts at fixed times which have elapsed. The amount payable by one is in no way dependent upon what is due from another. The corporation had a separate right against each alleged stockholder; and the remedy open to it was a separate action at law against each. The trustee rightly assumes that the corporation could not have brought a single suit in equity against all these stockholders, although a very large number of actions at law would be required to make collection of the balances unpaid on the stock. There was no common issue between these alleged stockholders and the corporation; and the liability of each would have presented a separate controversy unconnected with that of any other. Thus elements essential to jurisdiction in equity to avoid multiplicity of actions at law by the corporations were lacking. St. Louis, Iron Mountain & Southern Railway Co. v. McKnight, 244 U.S. 368, 375, 37 Sup. Ct. 611, 61 L. Ed. 1200. That lack is not supplied by the assignment to the trustee. No other property has become involved. No new issues have been raised. The order of the court of bankruptcy that subscriptions be paid up was not a condition precedent to the exictence of the causes of action against the several stockholders; and it added nothing to the rights which had already passed to the trustee. For him, also, the appropriate remedy was a separate action at law against each stockholder. The amendment of 1910 to section 47 of the Bankruptcy Act did not confer new means of collecting ordinary claims due the bankrupt; and the order directing the trustee 'to institute a suit in equity' was impotent to confer equity jurisdiction.

But even if there had been equity jurisdiction, the suit could not have been brought in the federal court. The cause of action sued on would still have been the broken promise of the individual stockholder to pay the balance on his stock. That was a cause of action on which the bankrupt could have sued and sued only in the state court. The cause of action would remain the same, although equity, to avoid multiplicity of actions at law, undertook to deal with three thousand separate claims in a single suit. The mere fact that the bankrupt could not have brought the particular suit would not confer on the court of bankruptcy jurisdiction of the suit of the trustee. Bardes v. Hawarden Bank, 178 U.S. 524, 20 Sup. Ct. 1000, 44 L. Ed. 1175.

Nor can the jurisdiction of the court of bankruptcy be maintained on the ground that this is a suit brought to determine a controversy coucerning property in the possession of the trustee. He had possession merely of contested claims against alleged stockholders. Many of the defendants may prove not to be stockholders. And even those confessedly stockholders are, in respect to the matters in controversy, as much strangers to the corporation and to the estate as any other person against whom the corporation had a cause of action. The fact that an alleged debtor of a corporation is a stockholder, or even an officer, does not enable the trustee to sue him in the court of bankruptcy. Park v. Cameron, 237 U.S. 616, 35 Sup. Ct. 719, 59 L. Ed. 1147.

We have no occasion to consider whether a different rule applies in those cases where an order of the court of bankruptcy is a condition precedent to the existence of any liability, either because stockholders are liable only after a call, or because the liability of stockholders is pro rata and limited to such sums as may, in the aggregate, be necessary to satisfy the claims of creditors.

Decree affirmed.