Opinion
No. 228.
July 25, 1938.
Appeal from the District Court of the United States for the Southern District of New York.
Suit in equity by Bryant McQuillen and another against Clarence Dillon, as president of Dillon, Read Co., a joint stock association consisting of more than seven members, and others, to enforce a decree of the federal District Court of Maryland. From a final decree dismissing the amended bill of complaint as not stating a cause of action, the plaintiffs appeal.
Affirmed.
The plaintiffs are shareholders in the National Cash Register Company, a defendant. The defendants are (1) Dillon, Read Co., a joint association organized under New York laws and doing business in the Southern District of New York; (2) individuals who are members of Dillon, Read Co.; (3) The National Cash Register Company, a Maryland corporation; and (4) Karl H. Behr, Edward A. Deeds and Gordon S. Rentschler, directors of that corporation.
In 1934 these plaintiffs filed a bill in equity in the Maryland District Court, in their capacity as minority shareholders suing on behalf of The National Cash Register Company which was there made a defendant along with Dillon, Read Co., Deeds, Behr, Rentschler and others not here involved. The plaintiffs asked that court to cancel certain stock in The National Cash Register Company, alleging that it was illegally issued to the defendants; to enjoin payment of dividends on that stock and to cause restitution to The National Cash Register Company of bonuses and dividends paid thereon, to cancel an option in connection with the stock, to require a general accounting by the defendants, to recover damages for profits realized by the defendants or for injury to The National Cash Register Company, and to recover damages for those transactions which could not be equitably cancelled. Dillon, Read Co. and Deeds were among the defendants in the Maryland action who failed to appear. Behr and Rentschler were among the defendants who apparently were never served or appeared or became parties in any way. Regarding Dillon, Read Co., Deeds and other defendants not here involved as "indispensable parties defendant to the suit because alleged either to own or to have an interest in some of the stock which plaintiffs assert is a cloud upon the title to their own stock", Judge Coleman ordered that substituted service be made upon them pursuant to the provisions of Section 57 of the Judicial Code (28 U.S.C.A. Sec. 118). McQuillen v. National Cash Register Co., D.C., 13 F. Supp. 53. Dillon, Read Co. and two defendants named Patterson and Steffey still failed to appear. A decree pro confesso was entered against them on February 21, 1936, which was made final on April 3, 1936. It was vacated against Patterson and Steffey but still stands against Dillon, Read Co.
The decree, which appears in the record of this proceeding, reads as follows:
"1. That the defendants, Dillon, Read Co., a joint stock association organized and existing under the laws of the State of New York, and all of its members, F.B. Patterson and C.E. Steffey and each and all of them, are hereby ordered and required to surrender to the Clerk of this Court (to be held and disposed of by him as hereinafter ordered) within 10 days after service of a copy of this decree upon each of them, the 400,000 `B' shares of the National Cash Register Company, or in lieu thereof, the 200,000 `C', `A' or common shares or certificates representing such `B', `C', `A' or common shares as more particularly described in the amended bill of complaint, sworn to January 22, 1935. Each and all of the defendants aforesaid shall make such proper endorsements upon such stock certificates as shall be necessary to relinquish to the National Cash Register Company (subject nevertheless to any right, title, interest, liens, claims or encumbrances as hereinafter set forth), any right, title, interest, lien or encumbrance which they or any of them ever had or shall have in or to such shares or in or to the certificates representing the same.
"2. The plaintiffs and their attorneys having liens, rights or claims against such shares or certificates for costs, expenses, disbursements and services rendered by them or any of them, the clerk is ordered and directed to retain such shares in his custody and possession to enable the plaintiffs and their attorneys to have the amounts of their liens, claims or rights upon or against such shares or the certificates representing the same established by petition or other proceeding to be made as the court shall hereafter direct. The right is reserved herein to make such orders respecting the further holding or other disposition of such shares as this court shall hereafter determine. Subject to the rights, liens or claims of the plaintiffs and their attorneys, the 400,000 `B' shares or the equivalent 200,000 `A', `C' or common shares aforesaid are for all other purposes declared to be cancelled and to be null, void and of no effect. The rights, claims or liens of the plaintiffs or their attorneys shall not be deemed to be exclusive.
"3. Nothing herein contained shall affect the rights of those defendants who have appeared herein; to wit, S.C. Allyn, J.H. Barringer, Wm. Hartman, Ezra M. Kuhns, Edward A. Deeds and Lee Warren James. Nor shall this decree in any wise limit or restrict the plaintiffs from pursuing herein their remedies against such other defendants, or against any of the said defendants or against any other persons liable for the grievances herein complained of, which remain unsatisfied, or from pursuing any other derivative rights of action in behalf of the corporation which these plaintiffs may now or hereafter assert.
"4. Leave is granted to the plaintiff or their solicitors to make further application to this court, or in any other appropriate jurisdiction for further relief or for any modifications, changes, amendments or additions to this decree, or for the enforcement thereof as the circumstances and as justice and equity shall require.
"5. Plaintiff shall recover their costs to date from the defendants, Dillon, Read Co.; F.B. Patterson and C.E. Steffey as taxed by the Clerk of this Court."
On September 8, 1936, the plaintiffs filed their bill in the District Court for the Southern District of New York and on October 20, 1936, filed their amended bill. The amended bill alleges that this suit is brought in aid of the Maryland suit and of the decree entered therein. The bill in the court below, like that in the Maryland court, is a minority stockholders' bill brought by the same shareholders on behalf of The National Cash Register Company. In it they pray that the court "adopt" the Maryland decree and enforce it by requiring Dillon, Read Co. to surrender the shares referred to in the Maryland decree, properly endorsed, by declaring the shares and certificates void subject to the terms of the Maryland decree and by punishing the defendants in this suit for their contempt of that decree and their neglect to obey it. For further and alternative relief, they pray that the defendants account for losses arising out of failure to obey the Maryland decree and make restitution of all dividends paid on the "void" shares, that the defendants pay fines for their contempts of the Maryland court, that they be declared trustees of the shares or their proceeds, that they pay costs, that sequestrators be appointed for all of the defendants' property, and that the court grant other and further relief. Throughout the amended complaint the allegations relate to enforcement of the Maryland decree or to aiding its enforcement. Nowhere do the plaintiffs allege that Dillon, Read Co. owned or possessed the shares at the commencement of the Maryland suit or at any time since, nor do they make any such statement in the affidavits submitted on the motions herein. While the opinion of Judge Coleman in McQuillin v. National Cash Register Co., D.C., 13 F. Supp. 53, indicates that the plaintiffs had alleged in the Maryland bill that Dillon, Read Co. owned or had an interest in the shares, he does not state they owned it at the time of the beginning of the suit and while he may have assumed this we find nothing in the Maryland bill justifying the conclusion that they did. Both in the amended bill and in their brief the plaintiffs state expressly that they do not know whether the certificates are in the hands of Dillon, Read Co. or of others.
The defendants filed answers. Dillon, Read Co. denied ownership of any of the shares since some time prior to the commencement of the suit in Maryland. The denial is nowhere contradicted by the plaintiffs though they assert in affidavits that Dillon, Read Co. should have proved the fact in the Maryland suit instead of allowing the decree to go against them pro confesso.
The plaintiffs moved to strike out the answers and for the appointment of sequestrators of the defendants' property. Judge Patterson denied the motions, on the ground that the decree was in personam and a nullity because personal service was wanting. Later, on motion of the defendants, he dismissed the complaint for failure to state a cause of action.
Charles Winkelman and Arthur S. Friend, both of New York City (Arthur Berenson, Bernard Berenson, and Samuel Gottlieb, all of Boston, Mass., and Lawrence Berenson, of New York City, of counsel), for appellants.
Wright, Gordon, Zachry Parlin, of New York City (John T. Cahill, Mathias F. Correa, and Fred J. Knauer, all of New York City, of counsel), for appellees Clarence Dillon, as President of Dillon, Read Co., and Karl H. Behr.
Shearman Sterling, of New York City (Chauncey B. Garver, Clifford M. Bowden, and George W. Moorhead, all of New York City, of counsel), for appellee National Cash Register Co.
McLaughlin Stickles, of New York City (Chester B. McLaughlin, of New York City, and Frank H. Foley, of Mount Vernon, N.Y., of counsel), for appellees Edward A. Deeds and Gordon S. Rentschler.
Before L. HAND, SWAN, and AUGUSTUS N. HAND, Circuit Judges.
There can be no doubt that the Maryland decree so far as it purported to cancel the interest of Dillon, Read Co. in certain shares of stock of National Cash Register Company on the theory that they were unlawfully issued would necessarily rest upon proof that the shares were owned by Dillon, Read Co. at the time of the commencement of suit. There was no such allegation in this or the Maryland bill. The plaintiffs' allegations are entirely vague and uncertain as to whether the stock interest was retained down to the time of bringing suit. The confused allegations in subdivision 15F (at page 25) of the Maryland bill leave us unable to determine whether the statement that the shares alleged to be within the jurisdiction and in the possession of "these defendants" refers at all to Dillon, Read Co., who as they were not officers or directors could not "illegally and improperly issue shares to themselves", or only to "defendant officers and directors" by whom it is alleged in 15F, supra, the shares were "held principally". Indeed, it appears earlier in the bill, under subdivision 12F (2), that certain of the defendants "pretended to sell" to Dillon, Read Co., 50,896 "B" shares and that Dillon, Read Co. sold 16,667 of these "B" shares to Barringer, Allyn and James. It is nowhere specifically alleged that even the balance of 34,229 shares or their substitutes in the form of "C" or "A" shares remained in the hands of Dillon, Read Co. down to the time of commencement of the Maryland suit. No basis is afforded for a process in rem against Dillon, Read Co. in respect to these shares and certainly not as to the balance. The plaintiffs especially rely on Harvey v. Harvey, 7 Cir., 290 F. 653, but that decision, which with due respect we think highly doubtful, if it can be defended at all, Robertson v. Labor Board, 268 U.S. 619, 622, 623, 45 S.Ct. 621, 69 L.Ed. 1119, did not involve the enforcement of a decree quasi in rem by a suit in aid of it in another jurisdiction. The facts there differed from those before us not only in the above respect but also because jurisdiction over the stock interest affected by the decree in rem existed at the time the suit had been brought. We think the whole attempt to reach the stock under Section 57 of the Judicial Code, 28 U.S.C.A. § 118, fails for lack of any showing that Dillon, Read Co. owned any part of it when the court in Maryland attempted to exercise jurisdiction over the res. Jurisdiction depended on proof of their interest in the res at that time. Thompson v. Whitman, 18 Wall. 457, 21 L.Ed. 897. Since the provisions of the Maryland decree that Dillon, Read Co. surrender and endorse the stock certificates are ancillary to a decree quasi in rem, they must fall with it. If, however, those provisions be regarded as independent personal orders, under well-established principles they would be void since there was no personal service in the original jurisdiction. Pennoyer v. Neff, 95 U.S. 714, 24 L.Ed. 565.
While we place our decision on the foregoing ground we do not mean to suggest that the plaintiffs would succeed if Dillon, Read Co. had held the stock at the time when the Maryland suit was brought. Even upon such an assumption plaintiffs would still encounter most serious obstacles. In that event the present suit would involve an attempt to enforce in personam a decree in rem granted in another jurisdiction. The authorities indicate that suit on an in rem decree will not lie under such circumstances. Cooper v. Reynolds, 10 Wall. 308, 318, 19 L.Ed. 931; Graber v. Killits, 6 Cir., 282 F. 185, 197: Pawling v. Willson, 13 Johns., N Y, 192, 206; Skratt v. Carnera, 175 A. 366, 12 N.J.Misc. 826; Smith v. Gordon, 204 N.C. 695, 169 S.E. 634; In re Longshore's Will, 188 Iowa 743, 176 N.W. 902, 903. The plaintiffs would also have to meet the objection that the remedies sought in the New York court are directions to Dillon, Read Co. to surrender and endorse certificates of stock in aid of like personal directions in the Maryland decree granted without personal service of process and the further objection that suit may only be brought on a foreign judgment "which establishes a definite, unconditional liability for the payment of money". Beale, Conflict of Laws, Sec. 449.1; American Law Institute, Restatement of Conflict of Laws, Sec. 449.
The foregoing considerations justify the dismissal of the bill as to Dillon, Read Co. The lower court was correct in treating the decree as a nullity, though we have placed our decision on another ground. As to the remaining appellees, it is enough to say that they were certainly under no duty to observe the terms of a void decree directed solely against Dillon, Read Co., whatever might have been their duty were the decree valid.
Decree affirmed.