Baxter v. Moses

Peters, C. J.

This is a creditors’ bill to collect certain debts, principally judgments, which are due from the Androscoggin railroad company; and is before us on demurrer.

It is not claimed that the bill is maintainable under part 10, § 6 of ch. 77 of the R. S. That provides a remedy for a single creditor, by an attachment in equity of some specific property, without asking for a discovery under the "bill. Chapman v. Publishers' Co. 128 Mass. 478 ; Insurance Co. v. Abbott, 127 Mass. 558 ; Donnell v. Railroad, 73 Maine, 567. This is a materially different bill, but one common to the practice of courts of chancery.

It is not an answer to this mode of remedy that another remedy exists by means of the process of foreign attachment either of legal or equitable assets. Those remedies are partial and limited, while this is much more adequate and complete. Besides, the present form of proceeding, although always existing in modern equity procedure, is expressly allowed by the statutes of our state. R. S., ch. 46, § 52. Either remedy does not exclude the other.

The first objection urged by the respondents against the bill, is a want of jurisdiction in the court to act, because the bill contains no allegation that an execution was taken out upon any judgment and nulla bona returned thereon. This defense must prevail, and for the reason stated by Shepley, J., in Webster v. Clark, 25 Maine, 313, who says, "courts of equity are not tribunals for the collection of debts; and yet they afford their aid to enable creditors to obtain payment, when their legal remedies have proved to be inadequate. It is only by the exhibition of such facts, as show, that these have been exhausted, that their jurisdiction attaches. Hence it is, that when an attempt is made by a process in equity to reach equitable interests, choses in action, or the avails of property fraudulently *475 conveyed, the bill should state, that judgment has been obtained, and that execution has beeu issued, and that it has been returned by an officer without satisfaction.” Such has certainly become the settled rule in this state. It has been unhesitatingly affirmed in a series of cases. Hartshorn v. Eames, 31 Maine, 93; Dana v. Haskell, 41 Maine, 25; Dockray v. Mason, 48 Maine, 178; Corey v. Greene, 51 Maine, 115; Griffin v. Nitcher, 57 Maine, 270; Howe v. Whitney, 66 Maine, 17.

Our decisions do not stand alone upon the question. The decided preponderance of authority is the same way. Mr. Bump, in his work on Fraudulent Conveyances, at page 514, gleans the rule from all the cases of the country, and states it in these explicit terms: " The creditor’s right to relief in such case depends upon the fact of his having exhausted his legal remedies without being able to obtain satisfaction. The best and the only evidence of this is the actual return of an execution unsatisfied. The creditor must obtain judgment, issue an execution, and procure a return of nulla bona, before he can file a bill in equity to obtain satisfaction out of the property of the debtor which cannot be reached at law.” In Pom, Eq. Jur. § 1415, it is said, "The general rule is, that a judgment must be obtained, and certain steps taken towards enforcing or perfecting such judgment, before a party is entitled to institute a suit of this character. In this there is an uniformity of opinion, but the difficulty arises in determining exactly how far a plaintiff should proceed after he has obtained his judgment.” In a note, the author explains: "Much of the conflict doubtless results from the effect judgments and writs of execution have in different states. The rule seems to be sustained by the weight of authority that before a creditor’s suit can be brought to reach choses in action and personal property in such a shape or form or under such conditions that no levy can be made at law, execution must have been issued and a return of nulla bona made.” The cases show that, in those states where a judgment is itself a lien upon land, an execution need not issue. In such case equity will proceed to make the lien effectual. Among the cases sustaining the rule as promulgated in our own state, are the following: Tappan v. *476 Evans, 11 N. H. 311; Smith v. Millett, 12 R. I. 59; Adee v. Bigler, 81 N. Y. 349 ; Adsit v. Butler, 87 N. Y. 585 . See also, Idem, 637; Suydam v. Insurance Co. 51 Pa. St. 394; Dormueil v. Ward, 108 Ill. 216 ; Brown v. Bank, 31 Miss. 454 ; Scott v. Ware, 64 Ala. 174 .

The rule has been sustained by the Federal Supreme Court in ‘several cases, and in too strong terms to suppose that it can be considered as reversed by that court by the'observations of Mr. Justice Strong, in relation to it, in the case of Case v. Beauregard, 101 U. S. p. 688, a case cited for the complainant. See Jones v. Green, 1 Wall. 330 ; Taylor v. Bowher, 111 U. S. 110 .

We think that, outside of the authorities, the rule is a reasonable one. It should not be in the power of a creditor to institute such an extraordinary remedy against his debtor, for no other reason than that his debt is overdue. A debtor may be able to relieve himself from threatening insolvency by the time an execution is obtained and demanded of him. His inability or unwillingness to pay should be established by some certain rule. What more reasonable one could be devised than that there shall be a judgment, an execution, and a return of nulla tonal And to remove all uncertainty the official return is conclusive evidence that the creditor has exhausted all legal remedy without succeeding in collecting his debt. It is a beneficent rule for both parties.

The counsel for complainant contends that the demurrer admits the insolvency, and that the admission obviates the necessity of a return of nulla bona. The official return being the only sufficient evidence that the debt can not be legally collected, the demurrer is not a waiver of a right to ask for a production of such evidence. It complains of the insufficiency of the bill, because it does not allege that such evidence exists.

It is contended for the complainant that the rule held to in the cases in this state, before cited, was adopted when we had quite limited powers of chancery, and that with our equitable jurisdiction enlarged, as it now is, the rule should be different. No such excuse was ever given for the rule in its early days. No *477 chancery jurisdiction, however enlarged, takes upon itself the collection of legal debts before legal remedies are exhausted.

Nor is there force, to our minds, in the distinction seen by counsel, that in our own cases, referred to before, the bill complained against the principal debtor together with some third party, while the present bill complains against the debtor only. The distinction does not appear to have been before taken. Many of the cases, where a return of nulla bona was required, Were against debtors alone, and one of the New York cases, before cited, involved the insolvency of a corporation very much as this case does. There is more reason for an application of the rule to the debtor than to parties associated in a bill with him. It is especially for his protection that the rule exists. It is his business that the creditor’s bill usually winds up. The forms of creditors’ bills in the books are of both descriptions, and the rule is the same.

It does not vary the case, that the statute allows the remedy pursued in this case, to a "judgment creditor.” See It. S., c. 46, § 52. It means a judgment creditor who has first exhausted all legal remedy. The original act of 1848, from which the present provision came by revision, but not by legislative alteration, virtually so declared. (See ch. 64, Laws of 1848.) What was at first expressed is now implied. The change in words was to condense the enactment into a more concise expression. There has been no attempt to change the policy of the law, so long understood and adhered to. This view of our statutory provision was taken in the case of Taylor v. Bowker, 111 U. S. 110 .

No doubt, there may be exceptions to the rule requiring a return of nulla bona. Where the common law means cannot for exceptional causes be made to apply, there are cases which decide that equity may do what the law would do if it could apply. Wiggin v. Heywood, 118 Mass. 514 ; Merchants’ Bank v. Paine, 13 R. I. 592. But we have no opinion to express upon any exceptional and hypothetical case at this time. Here there were judgments for many years existing, and no excuse is suggested or appears why further steps were not taken to enforce them.

*478 Another question is whether the statute of limitations applies. This defense may be taken on demurrer where the bill on its face shows its application. Mooers v. Railroad, 58 Maine, 279 ; Story, Eq. Pl. § § 484, 751.

Although the doctrine of equitable limitations lacks somewhat in definiteness, adapting itself, as it does, a good deal to circumstances, still it is well settled, that upon legal titles and legal demands, courts of equity adopt and apply statutes of limitations, acting upon them by analogy to the law. This rule applies to most questions in equity. It does not generally apply in cases of express trust. It may, however, apply in cases arising out of express trusts, where the trust has been repudiated by the trustee, and he assumes a position of hostility to it. Besides applying the legal doctrine of limitations, equity has a favorite doctrine of its own which allows a defense to be based on a mere lapse of time and the staleness of a claim, denominated laches, if the delay has been of a passive character, and acquiescence under other circumstances. The defence of laches or acquiescence, is independent of the statutory rules of limitation, and where no statute directly governs the case, may be founded on a delay, either longer or shorter than the statutory period. And so the defendants in the present case set up both the legal and the equitable defense. Story, Eq. Jur. § 1520, et seq.

■ Before making an application of these principles to the case at bar, it is necessary to know just what facts are alleged. Opposite counsel widely differ as to the meaning of the bill. The bill seems to be in some respects uncertain and contradictory.

The complainant’s counsel insists that the bill makes the officers of the company official and not individual defendants, and that it is really a proceeding against the corporation only. There could be such a bill, that is, one against the corporation only, making the officers of the corporation parties, only for the purpose of obtaining from them a discovery. Such a practice, although anomalous and never much encouraged, grew up at an early period when a person interested in a cause was incompetent to testify. Story, Eq. Jur. § 1501; Story, Eq. Pl. § 235 ; 1 Dan. Ch. 179. But relief should not be prayed for in the bill, *479 and, if it is, demurrer lies. Not general demurrer, however'. The defendant should answer as to the discovery, and demur as to the relief. But after a general demurrer is overruled, the defendant may demur ore terms to the prayer for relief; as there is no other way of properly removing the inconsistency from the bill. Many v. Beekman Iron Co. 9 Paige, 188 ; Wright v. Dame, 1 Met. 237 . But we do not see how it is possible to avoid the conclusion that the officers are made personal parties to this bill. They are charged with malversation in the company’s affairs, and the bill asks for special relief against them for money and property alleged to be in their hands.

If it were a bill against the company only, charging that the company now has assets in its hands, or, what would be the same thing, assets held by agents for the company, it is evident enough that the statute would not be a bar. The complainant has debts and is entitled to collect them if the company has property. And a lien established upon any property of the company, attaches to the property, although in its agents’ and servants’ hands, if held by them for the company.

But it is altogether another and different thing to charge that the company did have funds or assets some ten to fifteen years ago, ■which at that time were wrongfully converted by its agents to their own use. A bill against the company for such acts of its officers would be valueless to creditors, unless the officers are made personally and individually parties thereto. A judgment against the company would not be a judgment against them. It is not an in rem judgment that is obtainable. And here again we are at a loss to know exactly what the bill means. It alleges fraud, but does not recite whether it was practiced by the officers upon the company or creditors. It alleges conversion, but does not intimate whether assented to by the company or not. The complainant does not narrate his grievance frankly. There is a hidden meaning.

If it is sought to reach funds which the officers of the company actually received from or for the company and converted to their own use in 1871, we think the complainant’s claim against the officers is barred by the statute of limitations, and also by *480 his laches ; or, if it is possible that the statute would not begin to run until a return of nulla bona, then by his laches in the long delay before obtaining a return of nulla bona and prosecuting this suit. The bill was commenced in 1881. All of the judgments produced were recovered as early as 1866, except one recovered in 1879, and that was merely the renewal of another judgment recovered in 1867, a fact upon our own records of which we can take judicial notice. Of course, there may be causes or excuses preventing the operation of the statute. IS! one are suggested or appear here.

There is no doubt that the property of a corporation is a trust fund pledged to the payment of its debts, and that directors hold the same under an implied or constructive trust for the benefit of creditors. It is not an express trust; not a purely equitable trust; not such a trust as exists between the directors and the company, (and even that relation is perhaps not a trust in a strict technical sense) it is a trust sub modo —in some respects analogous to a trust — something which the law for equitable purposes construes to be a trust. It is a charge on property rather than any right or interest in it. There is no contract obligation, no direct privity, between stockholders and the creditors of a company. See Perry, Trusts (3rd ed.), § 166. It is an equitable lien to aid in the enforcement of a legal right; to aid in collecting a debt. Story says: (Eq. Jur. § 1252) "Perhaps, to this same head of implied trusts upon presumed intention, although it might well be deemed to fall under the head of constructive trusts by operation of law, we may refer that class of cases, where the stock and other property of private corporations is deemed a trust fund for the payment of the debts of the corporation.” Mr. Thompson, a writer on the liability of directors of corporations, says: "The directors of a corporation are not trustees for its creditors in the same sense in which an agent is the trustee of his principal. In this sense they are the trustees of the shareholders, who have elected them to act as such, and not trustees of strangers to the shareholders.” 6 Sou. Law Rev. (N. S.) 403. In Poole's case, 9 Ch. Div. 322, Jessel, M. R. says the same thing. In Pom. Eq. Jur. § 1047, the directors’ *481 liability to creditors of the company is classified with constructive trusts, although the author doubts the propriety of calling it as much of a trust as even that. Pom. Eq. Jur. § 1044, ei seq.

Constructive trusts, and all trusts, save purely equitable or express trusts, are in equity subject to the statute of limitations. Wood, Limitations, § 58, and cases in note. It is there said: With respect to the operation of the statute of limitations upon cases of trusts in equity, the distinction is, if the trust be constituted by act of the parties, the possession of the trustee is the possession of the cestui qui trust, and no length of such possession will bar; but if a party is to be constituted a trustee by the decree of a court of equity, founded on fraud, or the like, his possession is adverse, and the statute of limitations will run from the time that the circumstances of the fraud were discovered.” Again, the author (§ 215) expresses the same proposition in these other words : " One who is not actually a trustee, but upon whom that character is forced by a court of equity, only for the purpose of a remedy, may avail himself of the statute.” The doctrine could not be more satisfactorily stated. The authorities support this principle with great unanimity. A few only need be cited, those more especially of the class of constructive trust cases to which the present case belongs. Baker v. Bank, 9 Met. 182 ; Peabody v. Flint, 6 Allen, 52 ; Farnam v. Brooks, 9 Pick. 212 ; Kane v. Bloodgood, 7 John. Ch. 90; Stringer's case, 4 Ch. App. 475 ; In re Alexandra Palace Co. 21 Ch. Div. 149 ; Carrol v. Green, 92 U. S. 509 .

It is not inferable from the bill that the acts of the directors in 1871 were of a character such as to constitute a breach of trust, existing between them and the company, which would not be barred by the statute. But if it were so, it is not perceived that it would make the creditors’ claim better. The acts might be without the statute as to the company, and within it as to creditors. The right of the one is distinct from the right of the other and independent of it. Directors may be liable to creditors without any liability to the company or its stockholders. We do not see how the creditors’ claim is enlarged or lessened *482 by any claim of the company against the stockholders. They are not the same. Shel. Subrogation, and cases. Smith v. Hurd, 12 Met. 371 ; Hersey v. Veazie, 24 Maine, 9 ; Smith v. Poor, 40 Maine, 415. It may be otherwise, under the English statutes providing for winding up the business of public companies, under which the liquidator represents shareholders and creditors alike-. In re National Funds Assurance Co. 10 Ch. Div. 118; Flitcroft’s case, 21 Ch. Div. 519. But under our practice the remedy is nothing more than an assistant and collateral proceeding in equity employed by a creditor to collect a legal debt.

Although there is serious question as to the meaning of the bill so far as bearing upon the question of laches or limitation, there can be no doubt upon the first point discussed by us, and therefore the conclusion must be, Demurrer sustained.

Walton, Libbey, Emery, Foster and Haskell, JJ., concurred.