Opinion
No. 1027.
August 14, 1934.
Appeal from the District Court of the United States for the District of Kansas; John C. Pollock, Judge.
Suit by Thomas Lonergan and another against the Wheat Farming Company, for which John S. Bird and another were appointed receivers. From an order denying the application of T.M. Lillard and another, as receivers under appointment of the Supreme Court of Kansas, and Roland Boynton, as Attorney General of the State of Kansas, for possession of the company's property, applicants appeal.
Reversed, with directions.
The controversy is whether receivers appointed by the Supreme Court of Kansas of property of The Wheat Farming Company, a Kansas corporation, or receivers of the same property appointed by the United States District Court for the District of Kansas are entitled to possession.
These are the material facts:
On April 28, 1931, an action in quo warranto was instituted in the Supreme Court of Kansas entitled, The State of Kansas ex rel. Attorney General v. The Wheat Farming Company. The information charged that The Wheat Farming Company was incorporated for several named purposes on September 3, 1927, under the laws of that state; that it was and had been engaged throughout in the business of producing, planting, raising, harvesting, gathering and selling for profit, and for profit alone, wheat, corn, barley, oats and rye and other agricultural and horticultural products, and selling shares of its corporate stock to the public on the sole inducement that great profits were to be derived in corporate farming; that it had bought and owned in the state of Kansas a very large acreage, which it held for the sole purpose of commercial farming; that it had purchased and owned a large amount of farming equipment, farming implements and machinery, which it used in farming operations; and that these acts operated as a surrender and forfeiture of its rights and privileges as a corporation. It was prayed that it be ousted and enjoined from further corporate acts within the state, and that its franchises be seized.
The corporation admitted in its answer that it was and had been since incorporation engaged in producing, planting, raising, harvesting and selling agricultural products; that it owned certain tracts of land used and useful for that purpose; and that it was formed for profit.
Two contract creditors of the wheat company who claimed balances due them were permitted by the Supreme Court to intervene in that proceeding in May, 1931. They asked the Court for an order appointing a receiver of the wheat company in event that Court decreed a dissolution of the corporation. That Court appointed a commissioner to take evidence and make report. He filed his findings of fact and conclusions of law with the Court on September 8, 1932. There were exceptions on both sides to his recommendations.
Pending the cause, two futile attempts were made, one in a state district court and the other in the United States District Court, to procure the appointment of receivers for the wheat company, both of which it successfully opposed, contending that the right of possession of its property was in the state Supreme Court by virtue of the proceedings there.
The cause was finally argued and submitted to the Court on January 23, 1933, and it handed down its opinion on June 10, 1933. State ex rel. Boynton, Atty. Gen., v. Wheat Farming Co., 137 Kan. 697, 22 P.2d 1093, 1099. That Court held in substance that the corporation had wholly failed to exercise its lawful powers and had been at all times engaged in exercising powers which it did not possess. It said:
"Putting aside for the moment other phases of the problem before us, we have no difficulty in arriving at the conclusion that the statute does not authorize the formation of a corporation to engage in a general farming business for the purpose of profit * * *."
In conclusion it said:
"We are of opinion that, under the evidence, it would be justifiable that a complete forfeiture of the charter of each defendant corporation (there was another case against another Kansas corporation under like facts) be ordered and decreed, but are likewise of opinion that it is not necessary or expedient that at this time such an order and decree be entered. In so far as these actions are concerned, they are brought solely on the ground that the corporations are exceeding their statutory purposes and therefore powers, and not because of otherwise improper conduct of their affairs, although some evidence tending to show mismanagement was attempted to be offered. The court is likewise of opinion that these corporations should so arrange their affairs that within a reasonable period of time they will have disposed of all real estate and other property not necessary for use in the lawful exercise of the purpose for which they were created, and if it is impossible to so limit their respective activities, that they will liquidate their assets and dissolve their respective corporations. Jurisdiction of the cause is retained, and if steps are not taken by the respective corporations in line with the above suggestions, then, upon notice, the writ of ouster will issue and such further orders as may be necessary and expedient will be made."
On that day, June 10th, the Court entered judgment against The Wheat Farming Company for costs, ordered that the issuance of a writ of ouster be withheld pending further order, and that jurisdiction of the cause be retained.
On June 9th, 1933, one day before the state Supreme Court delivered its opinion, two non-resident shareholders in The Wheat Farming Company, one the owner of 1018 shares which had cost him about $25,000 and the other the owner of 31 shares who had recently recovered judgment against the company in the sum of $3,348.82 on which execution had been returned unsatisfied at his direction, exhibited their bill in equity in the court below by which they sought from that court the appointment of receivers of all the property of the wheat company. They alleged, among other things, that the wheat company was incorporated and started in business in 1927 with lands of the value of about $300,000 and had continued to accumulate land until it owned about 64,000 acres, which had cost it about $1,879,000; that this land was in separate units averaging about 30 miles apart and lying in several counties in northwest Kansas; that its method of operation by a unified system of several separate units of farm lands with a large amount of suitable power machinery and an organization fitted to conduct the same enabling it to farm on a large scale enhanced the value of its lands and property more than a half million dollars; that sales of separate tracts by its creditors would cause a loss of all the going value of its business and organization; that it had four elevators which had cost it about $78,000; that it had 6,000 acres of rented lands; that it had and used farm implements and machinery for farming purposes that had cost it about $242,000; that the amount of grain raised by it in a fair crop year was about 1,000,000 bushels; that the number of men employed by it was at times as many as 150; that it had made it a practice to borrow sufficient funds each year to cover the tilling and harvesting of its crops, and that on account of the pendency of the action in the state Supreme Court brought by the Attorney General of Kansas attacking its charter powers and the two receivership suits, one in a state district court and one in the United States District Court, it had been unable to borrow needed funds; that in addition thereto some twelve or fourteen suits had been brought against the company on contract obligations; that some of its lands were mortgaged and installments of interest thereon were due; that it owed past due taxes in the sum of about $30,000; that it then had on hand less than $1,000 in cash; that other of its creditors were threatening suit and it was in danger of sacrifice of its property for less than it was worth under the conditions confronting it. It was alleged that its property and assets were in excess of its liabilities; that if its assets were properly conserved and managed for the benefit of its stockholders and creditors in a court of equity they would be sufficient to pay all its liabilities and leave a return to its stockholders; that the intervention of a court of equity for the preservation of the property, assets and business of the defendant and the protection of its creditors was imperatively necessary; that it was essential that a receiver be appointed immediately to take charge of the property and the business of the defendant, to operate the same as a going concern under the orders and direction of the court, to the end that the business of the defendant as a going concern may be conducted and carried on to such time and under such terms and conditions as to the court may seem proper. It was prayed that they be permitted to file their bill on their own behalf and on behalf of all other stockholders and creditors of the wheat company who might join therein; that the court appoint receivers to take charge of, operate and manage the company's business and assets of every kind for such period as the court might order, to protect and preserve its corporate existence, franchises and privileges and its property from being sacrificed; that the rights of complainants and all creditors be ascertained and decreed, liens and priorities fixed; that during the pendency of the suit the court issue an injunction restraining and enjoining all persons from instituting or continuing the prosecution of any action, suits, proceedings at law or in equity, or under any statute, against the defendant and from levying executions and attachments or taking possession of any of defendant's property.
The Wheat Farming Company entered its voluntary appearance and filed its answer on the day the bill was exhibited. It admitted the allegations of the bill to be true as therein stated and alleged that it was not insolvent.
On the same day the District Judge appointed two receivers with the broad powers prayed for in the bill. They were directed to take immediate possession of defendant's properties, "and to conduct and operate said properties of said defendant as a corporation organized for the purpose of engaging in the business of farming and all other powers granted to it in its charter, in the manner and form and in all particulars as said business has been heretofore conducted by said defendant, with such changes, modifications and enlargements thereof as to said Receivers shall seem proper for the best interests of the business as a going concern." All persons were enjoined from in anywise interfering with the receivers' possession and their operation of the property.
On June 24, 1933, the Attorney General of Kansas filed application with the Supreme Court in the case State ex rel. Atty. Gen. v. Wheat Farming Co., there pending and undisposed of, asking that court to appoint receivers of all the company's property. This application was set for hearing on July 3rd, and on the 8th day of that month the Supreme Court sustained the application after finding that The Wheat Farming Company had taken no proper steps since the filing of the opinion of that court on June 10, 1933, to comply therewith; and it thereupon entered this judgment:
"It Is Therefore Now by the Court Ordered that defendant herein, The Wheat Farming Company, be and the same is hereby dissolved, ousted, restrained and enjoined from acting or doing business as a corporation, and that it be ousted, excluded, restrained and enjoined from the exercise of any and all corporate powers, franchises and privileges, and that the defendant's franchise be seized and its charter cancelled."
It thereupon appointed appellants Lillard and Jochems receivers of all property and assets of The Wheat Farming Company in order to effectuate and execute its orders and judgment. It also directed the two receivers and the Attorney General of the state to appear in the District Court of the United States for the District of Kansas and urge upon that court the prior jurisdiction of the Supreme Court of Kansas over the subject matter and the parties and to petition said court to discharge the receivers it had appointed and order them to deliver all of the property of the company to the receivers appointed by the Supreme Court.
In obedience to that order appellants and the Attorney General submitted the same to the United States District Judge on July 18, 1933. The District Judge heard the application, briefs were submitted, and on November 14, 1933, said application was overruled and denied. In the meantime and on June 29, 1933, the two plaintiffs who had obtained appointment in the United States District Court of receivers filed a supplement to their bill setting up that the state Supreme Court had rendered its opinion of June 10, 1933, in the proceedings in quo warranto, stating therein the substance of that opinion in general terms, and thereupon they prayed the court for the issuance of a supplemental order directing the Federal Court receivers to proceed with all reasonable dispatch to carry out the terms and conditions of the decision of the Supreme Court of the State. That court on June 29, 1933, entered this order: that its receivers "shall not, as such Receivers of the defendant The Wheat Farming Company, or in any other manner or form, engage in any activity concerning the improvement of the breed of domestic animals, by importation, sale or otherwise, nor shall they engage in any activities having to do with or having a tendency to accomplish the promotion of immigration.
"2. They shall at once and under appropriate order of this court proceed with all reasonable dispatch to dispose of all real estate and other property belonging to said The Wheat Farming Company, defendant herein, not necessary for use in the lawful exercise of the charter powers of said defendant The Wheat Farming Company as set forth in the charter of said company and all amendments thereto and as limited and defined by the Supreme Court of the State of Kansas, in its decision filed in Cause No. 30251 in said court, entitled The State of Kansas ex rel. Roland Boynton, Attorney General, v. The Wheat Farming Company.
"3. The court hereby specifically reserves full right and jurisdiction to make from time to time further orders herein, including the right to amplify, extend, limit or otherwise modify or change this order, as to the court may seem best."
This appeal is by the receivers appointed by the state Supreme Court from the Federal Court's order of November 14, 1933, denying them possession of the physical property that had belonged to The Wheat Farming Company.
T.M. Lillard, of Topeka, Kan., and W.D. Jochems, of Wichita, Kan. (Roland Boynton, Atty. Gen. of State of Kansas, on the brief), for appellants.
John F. Rhodes, of Kansas City, Mo. (Thomas P. Fenlon, Justin D. Bowersock, and Robert B. Fizzell, all of Kansas City, Mo., on the brief), for appellees Thomas Lonergan and A. Unrein.
Fred Robertson, of Kansas City, Kan. (Edw. M. Boddington and J.O. Emerson, both of Kansas City, Kan., on the brief), for appellees John S. Bird and C.B. White.
Before LEWIS, PHILLIPS, and BRATTON, Circuit Judges.
The state court receivers and the Attorney General filed their written application for possession of the physical property of The Wheat Farming Company in the original cause brought by Thomas Lonergan and A. Unrein against The Wheat Farming Company, entitling the same in said cause. That application and exhibits thereto attached set forth the procedure, orders and final judgment of the state Supreme Court in the quo warranto case before it, instituted in April, 1931, including the appointment of Lillard and Jochems on July 8, 1933, as its receivers and their qualifications to act as such. The record on their appeal was filed here January 25, 1934. Citation signed by the District Judge was duly issued to the parties in the original cause, Lonergan, Unrein and The Wheat Farming Company, and service was accepted by their counsel. At our April term, 1934, Lonergan and Unrein moved to dismiss the appeal on the ground that Bird and White receivers appointed by the Federal Court, were indispensable parties. We denied that motion and sustained a counter motion of appellants that Bird and White be brought in as appellees as proper parties. Thereupon their counsel waived the issuance and service of an alias citation on Bird and White as receivers and entered their appearance in this cause. At final hearing on the merits Lonergan and Unrein petitioned for rehearing of said motion, and it was again argued by their counsel and submitted for further consideration. Bird and White were not parties to the bill in equity in the Federal Court. They were not made parties to appellants' application when they applied to the District Court for an order terminating the proceedings in that court against The Wheat Farming Company and ordering Bird and White to deliver possession to them. They had no interest to be protected as against that application, nor any right to be adjudicated in connection therewith. As equity receivers they merely represented the court in executing its orders and were not legally interested in whether that receivership should continue or be terminated. We therefore conclude that they were not necessary or indispensable parties to this appeal. Their appearance as appellees here might well have been denied. It was at their request and by grace we let them come in. In or out our jurisdiction of the cause would not be affected. It is a matter of procedure of which Lonergan and Unrein have no cause to complain. Had the District Court sustained the application of appellants for possession, Bird and White certainly could not have appealed therefrom. Indiana Southern R. Co. v. Liverpool, L. G. Ins. Co. (Guion v. Liv., Lon Globe Ins. Co.), 109 U.S. 173, 3 S. Ct. 108, 27 L. Ed. 895; In re Cockcroft, 104 U.S. 578, 26 L. Ed. 856; Hinckley v. Gilman, etc., R. Co., 94 U.S. 467, 24 L. Ed. 166; Hovey v. McDonald, 109 U.S. 150, 3 S. Ct. 136, 27 L. Ed. 888; Williams v. Morgan, 111 U.S. 684, 4 S. Ct. 638, 28 L. Ed. 559; Payne et al. v. Niles et al., 20 How. 219, 15 L. Ed. 895; Pierce v. Cox, 9 Wall. 786, 19 L.Ed. 786; Youtsey v. Hoffman (C.C.) 108 F. 699. In Egyptian Novaculite Co. v. Stevenson (C.C.A.) 8 F.2d 576, 580, it is said:
"Indispensable parties have been defined as `persons who not only have an interest in the controversy, but an interest of such a nature that a final decree cannot be made without either affecting that interest, or leaving the controversy in such a condition that its final determination may be wholly inconsistent with equity and good conscience.'"
Again, our September term was pending when the appeal was allowed. When that term closed on January 4, 1934, the January term came on. It was closed on April 5, 1934, and the April term, 1934, came on, and it was at that term that Bird and White entered their appearance as appellees and waived the issuance and service of an alias citation. These facts are analogous to those in Hunn v. Lewis (C.C.A.) 25 F.2d 271, in which certiorari was denied. 278 U.S. 631, 49 S. Ct. 30, 73 L. Ed. 549. It was there contended that, as no citation was issued and served during the term of the Circuit Court of Appeals which was pending at the time the appeal was perfected or during the next ensuing term and not until during the following term, the appeal had become inoperative and no citation could then issue. The appellee was a party to the cause. He had entered his appearance on appeal and accepted service, but the citation to him was not issued until the second term of the court of appeals had opened after the appeal was taken. His motion to dismiss the appeal was denied.
Moreover, after Bird and White had entered their appearances and waived issuance and service of the citation to them during our April term, 1934, they later filed in this court in this cause an additional transcript of the record below covering more than 90 printed pages for our consideration. It deals entirely with administrative orders of the District Judge and discloses the actions of Bird and White as receivers in connection therewith and in execution thereof. On the title page of their additional record they are named as appellees with Lonergan, Unrein and The Wheat Farming Company. They filed no motion to dismiss the appeal or to withdraw as parties, but say in their brief they were indispensable parties and therefore join Lonergan and Unrein in their argument on their motion to dismiss. Their attitude is inconsistent. They voluntarily came in as appellees, bring here an additional record for our consideration, argue the merits, and then join other appellees in their contention that the appeal should be dismissed. We adhere to our ruling that the motion of Unrein and Lonergan to dismiss the appeal was not well taken.
Some contention is made that the Supreme Court of Kansas had no authority to appoint receivers in the proceedings in quo warranto. The Constitution of that state (article 3, § 3) gives that court original jurisdiction in proceedings in quo warranto. In Revised Statutes of Kansas, 1923, under chapter 60 on Civil Procedure, article 16, entitled "Quo Warranto," we find this in section 60 — 1602:
"Such action (quo warranto) may be brought in the supreme court or in the district court in the following cases: * * *
"Fourth, When any corporation does or omits acts which amount to a surrender or a forfeiture of their rights and privileges as a corporation, or when any corporation abuses its power or exercises powers not conferred by law."
In section 60 — 1608:
"If judgment be rendered against any corporation, or against any persons claiming to be a corporation, the court may cause the costs to be collected by execution against the persons claiming to be a corporation, or by attachment against the directors or other officers of the corporation, and may restrain any disposition of the effects of the corporation, appoint a receiver of its property and effects, take an account, and make a distribution thereof among the creditors and persons entitled."
Another section of the state statutes, 17 — 808, provides that on dissolution of any corporation its directors or managers at the time of its dissolution shall be trustees of its creditors and stockholders with power to settle its affairs, unless a receiver is appointed by some court of competent authority. We think there can be no doubt that the Supreme Court of the state had the power claimed to dissolve the corporation and appoint receivers to settle its affairs. Indeed, its action in doing so was in effect a construction of the constitution and statutes of that state relative to the action which it took in this case, binding upon us. We have no reviewing power over the action of that court.
In strictness an information for writ of quo warranto is a proceeding in personam. But the statutes of Kansas (section 60 — 1601) abolished those forms and provided that remedies theretofore obtainable in that manner should be had by civil action, and the statutes noted supra gave the added powers, if they were not implicit for purposes of executing the court's proper orders and judgment. A corporation can be dissolved and its affairs closed and its franchises seized or withdrawn only by the sovereignty that created it and in the way it provides. The information of the Attorney General in instituting the proceeding in the Supreme Court of Kansas, after setting forth the acts of commission and omission of The Wheat Farming Company which constituted as he alleged forfeiture of its rights and privileges as a corporation, prayed that it be ousted from further acting as such, that it be dissolved and its franchises be seized and for such further relief as should be just and lawful. The primary definition of franchises is that they are a mere right or privilege. They may be so exercised as to become in a sense property itself. Facts attributing to them a large value were alleged in the bill in the Federal Court, which plaintiffs asked that court to protect and preserve. They are commonly assessed ad valorem for purposes of taxation. Adams Express Co. v. Kentucky, 166 U.S. 171, 17 S. Ct. 527, 41 L. Ed. 960; Henderson Bridge Co. v. Kentucky, 166 U.S. 150, 17 S. Ct. 532, 41 L. Ed. 953; and Adams Express Co. v. Ohio State Auditor, 166 U.S. 185, 17 S. Ct. 604, 41 L. Ed. 965; Harvester Bldg. Co. v. Hartley, 98 Kan. 732, 160 P. 971. No judgment was sought by the state other than a forfeiture of The Wheat Farming Company's franchises to be a corporation and to do as a corporation. The intangible things involved were seized at the institution of that procedure, so far as there could be seizure; and the judgment that followed operated ex proprio vigore as condemnation of all corporate rights. The appointment of receivers was a just administrative act for the protection of equitable rights and would have been implied in the absence of statute. We therefore think the information of the Attorney General and the action of the Supreme Court thereon was closely analogous to a proceeding in rem (Pomeroy's Equity Jurisprudence, Orig. Ed., §§ 428, 429, 1317; Ennis v. Smith, 14 How. 400, 429, 14 L. Ed. 472, 1 Greenleaf on Evidence, 15th Ed., § 525), and that the jurisdiction of the state Supreme Court over the corporation, its officers and stockholders, including Lonergan and Unrein, the latter being not only a stockholder but director and vice-president, was exclusive and superior to any other court from the time that proceeding was instituted. Gross v. Irving Trust Co., 289 U.S. 342, 53 S. Ct. 605, 77 L. Ed. 1243, 90 A.L.R. 1215; McKinney v. Landon (C.C.A.) 209 F. 300; Relfe v. Rundle, 103 U.S. 222, 26 L. Ed. 337.
The rule as between courts having concurrent jurisdiction over parties and subject matter, when a controversy arises as to which has the better right to possession, has no application here. The proceeding instituted in the state Supreme Court could not have been maintained in the Federal Court, nor the one in the Federal Court in the state Supreme Court. The one in the Federal Court was antagonistic to the one in the state court. The bill there sought to stay the hand of the state court, to nullify its probable action and thwart the purpose of the proceeding in that court. It specifically prayed that the Federal Court "protect and preserve The Wheat Farming Company's corporate existence, franchises and privileges," and that its business be continued as a going concern; and the order of the Federal Court appointing its receivers directed that they "continue and operate said properties of said defendant as a corporation organized for the purpose of engaging in the business of farming," as a going concern. Those orders were somewhat modified by its subsequent order based on a supplemental bill filed by Lonergan and Unrein in which they called the attention of the District Judge to the order of June 10, 1933, made by the Supreme Court in the case pending before it. In that order the Federal Court took to itself the right and authority to direct its receivers to dispose of The Wheat Farming Company's property as had theretofore been adjudged by the state Supreme Court, but reserving the right to thereafter "amplify, extend, limit or otherwise modify or change this order, as to the court may seem best."
It has been observed that Lonergan and Unrein in their bill in the Federal Court did not allege that The Wheat Farming Company was insolvent. The latter in its answer alleged that it was not insolvent. No final relief was asked in that bill. The plaintiffs asked the Court to appoint receivers to take charge of, operate and manage the business and all of the properties and assets of the defendant, to operate the defendant's property and conduct its business, "for such period as the court may order." At best the receivership in the Federal Court was only for conservation purposes. Michigan, by Haggerty, v. Michigan Trust Co., 286 U.S. 334, 52 S. Ct. 512, 76 L. Ed. 1136.
The order below of November 14, 1933, herein appealed from is reversed with directions to vacate it, to at once close the Federal Court receivership, direct Bird and White, its receivers, to deliver all property in their hands as such to Lillard and Jochems as receivers appointed by the state Supreme Court. Costs on appeal to be taxed against Lonergan and Unrein personally.