North Chicago Rolling-Mill Company v. St. Louis Ore Steel Company/Opinion of the Court

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.

In addition to the reasons on which the court below denied relief and dismissed the bill, it is urged by the appellees that the equitable ground for relief, viz. the insolvency of the St. Louis Company, ceased to exist before the final decree was rendered. It is urged that its solvency was shown by the settlement of its debts, and the dismissal of the foreclosure suits against it, and the discharge of the receiver. There are several answers to this suggestion: First. The fact relied upon to establish such restored solvency, viz. the compromise of the company's bonded indebtedness by issuing new obligations secured by mortgage on all its tangible property, fails to show any actual improved financial condition, such as would be available to the Chicago Company in enforcing its claim for damages. Second, as appears in the record, there were other claims against the St. Louis Company, which were not settled by the compromise which terminated the foreclosure suits. Third. The alleged restored solvency of the St. Louis Company was not set up by supplemental pleading of any kind in this suit, although there were ample time and opportunity to do so between March, 1887, and May, 1889, when this cause was finally heard; as a matter of defense arising after the case was at issue, the restored solvency of the St. Louis Company must have been set up by supplemental answer, or other appropriate pleadings. Story, Eq. Pl. § 393. Fourth. Equitable jurisdiction, having once rightfully attached, cannot be defeated by matter subsequently arising, which does not go to the merits of the complainant's case. The state of facts existing when the bill was filed must be looked to, in determining the question of equitable jurisdiction, which, in this case, is rested on the ground of insolvency and nonresidence. The latter fact is not questioned. As to the former, the Joliet Steel Company, by its petition filed May 1, 1886, in the Olyphant foreclosure suit in the northern district of Illinois, asking that the receiver be required to give bond, as such, in the sum of $50,000, to account for the assets received in that jurisdiction, distinctly alleged that the St. Louis Company was an insolvent, nonresident corporation; and on the strength of its petition the receiver gave bond to cover the assets within the jurisdiction of the circuit court of the United States for the northern district of Illinois, and the receiver thereafter, with the consent of the Joliet Company, compromised the claim of the St. Louis Company against Cherrie & Co., and obtained securities and assets thereunder, which 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.

It admits of no question that the St. Louis Company made default in the performance of the rail contract. It failed in the payment of the sum of $21,536.56 on July 10, 1884, for steel rails delivered in June. This default continued throughout the year 1884. Neither the St. Louis Company nor its receiver gave any order or orders for the manufacture of rails for July delivery. On the order for 1,500 tons of rails given for August delivery, the receiver was confessedly not prepared to pay, nor was any provision made by which the Chicago Company could reasonably expect payment, therefor on September 10, 1884. The receiver had made every possible effort to raise funds by the sale of receiver's certificates, and had failed. He had nothing to pay with, except 'certificates,' and the Chicago Company had declined to take them. It was certainly not bound to proceed with the manufacture and delivery of rails under the August order, after being notified in advance that the receiver was not prepared, and did not expect to be in funds, to pay for the same, unless certificates were accepted. For the reason that he had nothing to pay with, except 'certificates,' the receiver considered, as he stated to the president of the Chicago Company, in a letter dated September 26, 1884, that it would have been wrong to have asked the Chicago Company to make and forward rails, without immediate or prospective means of paying for the same. So no further orders were given for rails, although the Chicago Company, repeatedly, during August, September, and October, expressed its readiness and ability to fill all orders when the receiver was prepared to pay therefor according to the terms of the contract. The Chicago Company, early in October, indicated its willingness to reduce the price of the undelivered rails to $30 per ton, upon prompt 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.

It is claimed for the appellee that as the Chicago Company had not rescinded and terminated the rail contract, for the July breaches thereof,-if entitled so to do,-it was not in a position to bring suit for damages when the garnisher's right became fixed. This, however, does not affect the merits of this case. The Chicago Company was not bound to treat the contract as at an end upon the first breach thereof by the St. Louis Company. It had a right to await the expiration of the time for its final performance, and then make its claim for the entire breach. In the view we take of the question, it is not material to determine at what precise date there was such a breach as would entitle the Chicago Comapny to damages upon the entire contract. The material thing is that the contract for the breach of which the claim for damages arises was in existence when the garnishment process was served. It had then been broken in one particular, if not in more; and, from the situation and embarrassed condition of the St. Louis Company, there was almost a certainty that it would fail to perform the contract in the future. The Chicago Company gave repeated notices to the receiver of its readiness and willingness to fulfill the contract on its part. It could only manufacture rails as they were ordered, and their weights specified. It notified the receiver, time and again, that it 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 set-off? 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 set-off.

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 set-off, 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. Insurance 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, 2 Sup. Ct. 25; Knox Co. v. Harshman, 133 U.S. 154, 10 Sup. Ct. 257; Marshall v. Holmes, 141 U.S. 589, 12 Sup. Ct. 62.

The adjustment of demands by counterclaim or set-off, rather than by independent suit, is favored and encouraged by the law, to avoid circuity of action and injustice. Railroad Co. v. Smith, 21 Wall. 255.

By the decided weight of authority, it is settled that the insolvency of the party against whom the set-off is claimed is a sufficient ground for equitable interference. Leeds v. Insurance 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; Railroad Co. v. Field, 86 Ill. 270; Doane v. Walker, 101 Ill. 628; Davis v. Milburn, 3 Iowa, 163; Railroad Co. 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, 21 N. E. 726; Richards v. La Tourette, 119 N. Y. 54, 23 N. E. 531; Schuler v. Israel, 120 U.S. 506, 7 Sup. Ct. 648.

In Schuler v. Israel, 120 U.S. 506, 7 Sup. Ct. 648, it was said by Mr. Justice Miller, speaking for the court, that: '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 set-off 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.

In addition to insolvency, it is held by many well-considered decisions, including those of Illinois, that the nonresidence of the party against whom the set-off 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, 11 S. W. 24; Robbins v. Holley, 1 T. B. Mon. 18; Edminson v. Baxter, 4 Hayw. 112; Davis v. Milburn, 3 Iowa, 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?

The court below seems to have entertained the theory that, while the St. Louis Company may have failed to perform the rail contract, the Chicago Company's right to claim damages for the entire breach thereof had not accrued on July 21, 1884, when the garnishment process was served and the garnisher's rights attached, and, furthermore, that such claim, however meritorious as against the St. Louis Company, could not form the subject of an equitable set-off, especially as against a demand arising out of a disconnected transaction. This proceeds upon the assumption, as appellees here contend, that the garnisher, by the service of the garnishment, acquired a lien upon or equitable right to the funds due from the garnishee, which could not be disturbed or affected by any right or equity subsequently accruing to the latter, as against the principal debtor. The service of garnishment neither changed nor interrupted the contractual relations existing between the 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 garnisher 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. Div. 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. Div. 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 garnisher a creditor of the garnishee. In the subsequent case of In re Combined Weighing & Advertising Mach. Co., 43 Ch. Div. 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 garnisher and the garnishee. Cotton, L. J., said: '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,' so as to make the garnisher a creditor of the garnishee. Bowen, L. J., said: '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.' Fry, L. J., said: '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 garnisher a creditor of the garnishee. What the order does is this: It gives the garnisher certain statutory rights. It enables the garnisher 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 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.'

The proposition here laid down is in harmony with the generally recognized principle that the rights of the garnisher 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. Towner v. George, 53 Ill. 168; Richardson v. Lester, 83 Ill. 55; Henry v. Wilson (Iowa) 51 N. W. 1157; Huntington v. Risdon, 43 Iowa, 518.

From these propositions and authorities, it follows that the Chicago Company is entitled to assert against the Joliet Company the equitable set-off 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.

This unquestioned fact is very material, if not controlling of the case. The court below did not give the fact that the claim for damages arose under and by virtue of a contract in existence prior to the date of the attachment its due weight and importance, as will be seen by a brief reference to the authorities bearing upon the question. Thus, in Type Foundry v. Mortimer, 7 Pick. 166, the garnishee, when summoned, was indebted to the defendant, but was at the same time liable, as accommodation indorser of a note of the defendant, for a large amount, which became due after the garnishment, and was protested for nonpayment, and paid by the garnishee before he made his answer. The court held that the garnishee could set off against his indebtedness to the principal defendant the amount of the note so paid, and, in giving its decision, observed: '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.'

In the recent case of Lannan v. Walter, 149 Mass. 14, 20 N. E. 196, the court said: '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 indorsers; that since said service these notes have all matured; that the liability of the indorsers has been made absolute by due demand and notice. The makers and indorsers 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. Type Foundry 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.'

So, in Farmers' & Merchants' Bank v. Franklin Bank, 31 Md. 404, the court, allowing a set-off which matured after action brought, said: 'There is nothing in the attachment laws in this state to justify the conclusion that it was designed, by allowing garnishment to be made, to place the garnishee in a worse position in reference to the rights and credits attached than if he had been sued by the defendant. The attaching creditor seeks to have himself substituted to the rights of his debtor, as against the garnishee, and by laying his attachment he acquires no superior right to that of his debtor. The right of condemnation must therefore be subject to any such right of set-off or discharge existing at the time of garnishment as would be available to the garnishee if he were sued by the defendant. Any other rule would in many cases work gross injustice, and might be subject to great abuse. * *  * This right of set-off or discharge-and 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 undeterminate 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 set-off 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 set-offs 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.

From the foregoing considerations, we think the court below should have ascertained the damages growing out of the failure to perform the rail contract on the part of the St. Louis Company, and, having ascertained the amount of such damages, the same should have been allowed the complainant as a set-off against the sum of $16,473.28 found to be due from it to the St. Louis Company, and for which the garnishee order or judgment was rendered, and, if that adjustment left 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.