The appellants were plaintiffs in the court below and the appellees defendants, and they will be so referred to in this opinion.
The plaintiff Doherty is the receiver of the Brictson Manufacturing Company, appointed by the circuit court of Tripp county, S. D., in quo warranto proceedings in which the charter of that company was canceled. The other plaintiffs are stockholders.
The defendants are: The Brictson Manufacturing Company, Ole A. Brictson, majority stockholder, his wife, Helen, and Michael E. Culhane, Frank L. Weaver, and William M. Giller, attorneys (plaintiffs in equity case No. 312, S. D.) who have appeared ostensibly on behalf of the company in various actions; Olaf Eidem, an attorney and supposed creditor who filed an involuntary petition in bankruptcy in the United States District Court for the District of South Dakota -against the company; R. A. Bielski, who was appointed receiver by that court in equity case No. 312, S. D., wherein a deeree pro confesso establishing a lien against the company in favor of Culhane, Weaver, and Giller was entered; and Martin Engebretson, who was appointed trustee in the bankruptcy proceeding initiated by Eidem, bankruptcy ease No. 3228, S.' D.
The complaint sets up two causes of action.
The allegations of the first are as follows: Ole A. Brictson, since the organization of the defendant company, has held the majority of the voting stock. For several years prior to the dissolution of the company, he and his wife Helen were the only persons actually acting as directors or officers of the company. They have not operated the business since September, 1921. Brictson has claimed the right to collect $10,000 a year from the assets of the company since September, 1921, and his wife, during the same period, has claimed large sums from the company for salary and rents. They have been attempting to secure personal possession and control of the assets and funds of the company in order to appropriate the funds to themselves in satisfaction of their fictitious claims. Since September, 1921, the defendants Culhane, Weaver, Giller, and Eidem have appeared in various legal proceedings, ostensibly on behalf of the company, but in fact on behalf of the defendants Brictson, in efforts to secure funds and property of the company, soi that they might apply them to the payment of the pretended claims of the Brietsons. To prevent such misapplication of funds, the state of Nebraska has successfully prosecuted quo warranto proceedings against the company, and on February 16, 1924, the district court of Douglas county, Neb., entered a deeree of ouster and appointed three trustees to administer the estate of the company in Nebraska, which they are now doing. On May 10, 1928, similar proceedings were instituted by the state of South Dakota in the circuit court of Tripp county, S. D. The plaintiff Doherty was first named temporary receiver by that court. On October 5,1929, that court entered a deeree forfeiting the charter of the company and appointing Doherty permanent receiver of the company for the purpose of winding up its affairs. Before the assets of the company were turned over to the trustees in Nebraska, the defendants Weaver, Giller, and Culhane had claimed fees of $30,000 due them from the company, and had asserted that they had a lien upon the assets of the company for such fees. As a result of litigation in the United States District Court for the .District of Nebraska, they were denied a
*141
Hen, and the decree of that court was affirmed here in Culhane v. Anderson,
The second eause of action includes the pertinent allegations of the first cause, and recites that: In furtherance of the scheme to procure the assets of the company for themselves, the defendants Brictson executed a pretended assignment in the name of the company to themselves of certain assets of the company, and subsequently in the United States District Court for the District of Nebraska sought to enforce said assignment. The assignment, however, was held invalid by that court. The defendant Olaf Eidem filed a petition in involuntary bankruptcy against the company (bankruptcy case No. 3228, S. D.), alleging two acts of bankruptcy: (1) The pretended assignment to Helen S. and Ole A. Brictson, and (2) the appointment of the receiver in equity case No. 312, S. D. Service in the bankruptcy matter was also had on Breed, under like circumstances and with like results as in equity ease No-. 312, S. D. An adjudication in bankruptcy was thereby obtained on default. In furtherance of the purpose to divert the assets of the company to the Brietsons, the Brietsons, Weaver, Giller, Culhane, and Eidem have filed numerous and fictitious claims in the bankruptcy proceedings, have secured the appointment of the defendant Martin Engebretson as trustee in bankruptcy, and controlled his actions. The plaintiffs believe that said Engebretson is a relative of Brictson. Engebretson is friendly to the other defendants, and as trustee in bankruptcy has employed Weaver, Giller, and Culhane to represent him as attorneys. None of the filed claims of the defendants are valid. Unless the proceedings in bankruptcy case No. 3228, S. D., are set aside and further proceedings restrained, the defendants will appropriate for themselves all the assets of the Brictson Manufacturing Company.
The plaintiffs ask for a decree vacating the decree in equity suit No. 312, S. D., vacating the adjudication in bankruptcy in bankruptcy case No. 3228, S. D., restraining the defendants from enforcing the adjudication, requiring the trustee in bankruptcy to account to the plaintiff Doherty for all funds belonging to the company in the possession of the trustee, and for such other relief as they may be entitled to.
The court entered an order providing for the service of subpoenas upon the nonresident defendants, wherever they might be found. Service was had upon the defendants Brictson, the company, and Culhane, in Minnesota; upon Weaver and Giller in Nebraska; and upon the other defendants in South Dakota.
None of the defendants put in an answer. Engebretson, Bielski, and Eidem moved to dismiss the bill on the following grounds: That there was want of equity; that the court had no jurisdiction to hear the suit; that there was a misjoinder of causes of action, a defect of parties plaintiff, and a defect of parties defendant. Culhane, Weaver, and Giller appeared specially and moved to quash the service of subpronas on the ground *142 that the court had acquired no jurisdiction of them. The company moved to dismiss the ■bill on the following grounds: That the first cause of action was invalid for want of equity; that it was not joint as to the plaintiff stockholders and the plaintiff Doherty, within equity rule 26, or at all; that the plaintiffs did not have an interest entitling them to the relief prayed for; that the liability alleged could not be asserted against all the defendants; that the court, as a court of equity, had no jurisdiction to set aside the adjudication in bankruptcy; that the second cause of action was invalid, was not joint as to the plaintiffs, and the liability alleged could not be ásserted against all the material defendants; and that the plaintiffs had no interest entitling them to bring the second cause of action. The Brietsons appeared specially, and! objected to the jurisdiction of the court on the ground that there was no proper service of subpoenas upon them.
The plaintiffs were permitted to amend the complaint by alleging that the plaintiff receiver brought the suit pursuant to authority granted by the court appointing him. The plaintiffs then moved for permission to file an amended and substituted bill of complaint containing this additional allegation: “That this action is maintained by these complainants to assert the rights of the corporation, The Brietson Manufacturing Company, now dissolved and of all parties in interest in said corporation, against the decrees and proceedings herein complained of; that the complainant stockholders join the complainant Windsor Doherty in maintaining this action by the express authority of said Circuit Ctourt of Tripp County, South Dakota, conferring upon them the right to enforce the causes of action herein set forth jointly with said receiver.”
The defendants objected to the filing of the amended complaint. The court sustained the motions of the Brietsons to quash the service upon them; held that the service upon Culhane, Weaver, and Giller was sufficient for the reason ttiát they were parties to equity suit No. 312, S. D.; dismissed the complaint on the ground that there was a misjoinder of parties plaintiff, that the Brietsons were not proper parties defendant, and that there was a misjoinder of causes of action; and denied permission to file the amended complaint.
The plaintiffs appealed from these various orders, and the appeals were consolidated. It is the contention of the plaintiffs that there was no misjoinder of causes of action, no misjoinder or defeet of parties plaintiff or defendant, that the court acquired jurisdiction of the Brietsons by the service of the subpoenas upon them outside of the district of South Dakota, and that the court should have permitted the complaint to be amended.
The controversy here involved is the same controversy as that referred to in the opinion of this court in Whittaker v. Brictson Mfg. Co.,
It also said [page 491 of 43 F.(2d) ]: “Appellants are not without remedy in an independent action to seek to set aside the judgments for want of jurisdiction, fraud, or other grounds of equitable relief.”
And: “While we feel compelled in view of Equity Rule 37 to sustain the judgment of the trial court in both eases, we do so without prejudice to the right of appellants to bring original actions to set aside either or both of these judgments or decrees.”
In a sense, then, this court suggested, if it did not actually invite, the bringing of a proper action or actions to test the validity of the decree in, equity and the adjudication ip bankruptcy complained of.
There are, as we see it, four main questions to be determined:
(1) Was the court justified, in view of the fact that stockholders had joined with the receiver, in dismissing the entire bill ?
(2) Was the court justified in dismissing the bill because the plaintiffs had joined a cause of action to set aside a decree in equity with a cause of action to vacate an adjudication in bankruptcy?
(3) Was the fraud alleged of such a character as to justify a court in granting the relief prayed for?
(4) Was the service upon the Brietsons sufficient?
1. The receiver was the only necessary party plaintiff. A decree in his favor would have inured to the benefit of the stockholders, and a decree against him would have *143 been binding upon them because he was their representative. We see, however, no logical reason why the plaintiff stockholders might not join with the receiver as plaintiffs. They had something more than a mere casual interest in the affairs of the corporation, which had no business and was in the process of dissolution. They were vitally interested in the question whether the assets were to be used for the benefit of the corporation and for their benefit, or for the benefit of the Brictsons and certain lawyers. The presence of the stockholders as parties in the ease in no way prejudiced any of the defendants. They asserted no rights separate or distinct from those of the receiver, and merely joined with him for the benefit of all stockholders in asking that the decree and the adjudication in bankruptcy be set aside. By their amended complaint they offered to show that what they did was done with the authority of the court which had appointed the receiver and had authorized the suit.
Equity rule 37 (28 USCA § 723) provides : “All persons having an interest in the subject of the action and in obtaining the relief demanded may join as plaintiffs, and any person may be made a defendant who has or claims an interest adverse to the plaintiff. Any person may at any time be made a party if his presence is necessary or proper to a complete determination of the cause. Persons having a united interest must be joined on the same side as plaintiffs or defendants, but when anyone refuses to join, he may for such reason be made a defendant.”
Klein v. Peter,
That participation by stockholders or creditors in a suit by a receiver may he denied is indicated by Thomasson v. Guaranty Trust Co. of N. Y.,
Cases which indicate that such a joinder as is here involved is permissible are the following :
Adler v. Seaman,
This court said (pages 837, 839 of 266 F.):
“There is a clear way in which the two suits may become related, and it is the only way. That is by making the Adler receiver a party to the Seaman suit. The court can order him to intervene as party plaintiff and promote the prosecution of thq suit. * * *
“To repeat, the proper procedure was, by leave of court, to bring the receiver into the Seaman suit as a party, so. that the receiver may prosecute the suit, if deemed advisable by the court, or may, as party defendant, be bound by the adjudication.”
The result of this procedure would he to allow the joinder of a stockholder and a receiver.
Gibson v. Vinton,
National Electric Signaling Co. v. Telefunken Wireless Tel. Co. of United States,
Keith Lumber Co. v. Houston Oil Co. of Texas,
Kelly v. Dolan,
Houston v. Redwine,
Battershall v. Davis, 31 Barb. (N. Y.) 323. Here stockholders joined with the receiver in an application for authority to sell assets.
Attorney General v. North America Life Ins. Co.,
Michel v. Betz,
Pacific Fire Ins. Co. v. John E. Morris Co. (Tex. Civ. App.)
While the authorities indicating that stockholders may or may not join as plaintiffs, in aid of a receiver in such an action as this, are unsatisfactory, there appears to be no practical reason why they may not join; and the equity rule, which we think should be liberally construed, seems broad .enough to permit it.
.But, even if it were true, as defendants contend, that the stockholders might not join as parties plaintiff, that would not justify a dismissal of the bill. It would not constitute a defect of parties, but merely an excess or misjoinder of parties. Board of Trustees, etc., v. Oller,
There are cases holding that a misjoinder of parties plaintiff is fatal to the bill. De Croisset v. Vitagraph Co. of America,
However, a dismissal of a complaint because of an excess of parties plaintiff cannot be justified by either logic or common sense. It is the duty of the courts to dispose of controversies after trial and upon their merits whenever possible. The modem tendency of both the bench and the bar is to brush aside technicalities and to bring about a' disposition of suits, not upon some technical rule of pleading and practice incomprehensible to the lay mind, but upon the evidence and in accordance with the law. If a court has before it the necessary parties to enable it to dispose of a ease of whieh it has jurisdiction, it is of little consequence how many other persons may be present as nominal parties. They can be ignored or eliminated at any stage of the proceedings. If they are entitled to no relief, they will receive none.
Aside from the very obvious pi’aetieal reasons whieh require the conclusion that the suit of the receiver be not dismissed because of the presence of the stockholders as plaintiffs, the following cases may be cited in support of it: Aaron v. Security Inv. Co., 51 S. D. 53,
There are remedies, other than the dismissal of the entire bill, available for the elimination of surplus parties: Special demurrer (Willingham, W.
&
C. v. Glover,
Our conclusion is that the lower court was not justified in dismissing the entire bill because of the presence of the stockholders, and that they should have been 'permitted to continue as parties plaintiff.
2. The question whether there was a misjoinder of causes of action depends upon the right or power of a court sitting in equity to vacate an adjudication in bankruptcy made by the same court sitting as a court of bankruptcy.
That the court’s equity jurisdiction is a thing entirely separate and apart from its jurisdiction in bankruptcy seems obvious.
Section 2 of the Bankruptcy Act (44 Stat. 662) provides: “That the courts of bankruptcy as hereinbefore defined, namely, the district courts of the United States in the several States, the Supreme Court of the District of Columbia, the district courts of the several Territories and possessions to which this Act is, or may hereafter be, applicable, and the United States Court in the District of Alaska, aro hereby made courts of bankruptcy, and aro hereby invested, within their respective territorial limits as now established, or as they may be hereafter changed, with such jurisdiction at law and in equity as will enable them to exercise original jurisdiction in bankruptcy proceedings, in vacation in chambers and during their respective terms, as they are now or may be hereafter held, to (1) adjudge persons bankrupt. * * * ” U. S. C. tit. 11, § 11 (11 USCA § 11).
Section 23a of the act provides: “The United States district courts shall have jurisdietion of all controversies at law and in equity, as distinguished from proceedings in bankruptcy, between trustees as such and adverse claimants concerning the property acquired or claimed by the trustees, in the same manner and to the same extent only as though bankruptcy proceedings had not been instituted and such controversies had been between the bankrupts and such adverse claimants.” U. S. G. tit. 11, § 46 (a), 11 USCA § 46 (a).
That the jurisdiction of courts of bankruptcy is exclusive with respect to all questions pertaining to bankruptcy and to the administration of insolvent estates in bankruptcy is well settled. 1 Remington on Bankruptcy (3d Ed. 1923) § 20, p. 44; 3 Hughes, Federal Practice (1931) § 1425, from which we quote the following: “In utilizing the federal District Courts as courts of bankruptcy, instead of creating a new organization, the courts of bankruptcy are none the less separate and distinct courts. As such they exercise the powers and jurisdiction in bankruptcy proceedings quite separate and distinct from the powers and jurisdiction inhering as District Courts.” New Lamp Chimney Co. v. Ansonia B.
&
C. Co.,
Exclusive jurisdiction of the bankruptcy court cannot be surrendered. U. S. Fidelity & Guar. Co. v. Bray,
The attempts of other courts to interfere with the jurisdiction of the bankruptcy courts have been consistently resisted. New Lamp Chimney Co. v. Ansonia Brass & Copper Co.,
U. S. Fidelity
&
Guar. Co. v. Bray,
The court then pointed out that the allegations of the bill intended to invoke reconsideration and modification of the referee’s order allowing certain claims as preferred claims for labor and material, a determination of the right of the holders of those claims to have them paid at their face value, an inquiry into the charge that the trustee had been speculating in claims against the estate, and a direction that claims for labor and materials be accorded a preference, and said (page 218 of
See, also, Norris’ Case,
It was held by the Ninth Circuit in Moore v. Scott,
55
F.(2d) 863, and in a companion ease of the same name,
In a similar situation in the ease of Silberberg v. Ray Chain Stores, Inc.,
*147
See, also, In re Neuburger, Inc.,
So far as we have been able to ascertain from an examination of the cases, the practice in this circuit, when it has been sought to have an adjudication set aside, has been to file a motion for that purpose in the bankruptcy proceedings. See Hart-Parr Co. v. Barkley (C. C. A.)
Our conclusion is that a cause of action to vacate an adjudication in bankruptcy may not be joined with a cause of action to vacate an equity decree.
It does not follow, however, that the court below was justified in dismissing the entire bill of complaint.
Equity rule 26 (28 USCA § 723) provides: “The plaintiff may join in one bill as many causes of action, cognizable in equity, as he may have against the defendant. * * * If it appear that any such causes of action cannot be conveniently disposed of together, the court may order separate trials.”
Thus, rule 26 itself impliedly directs a court of equity to dispose of any cause of action stated in the bill which can properly be disposed of. If a bill of complaint contains two causes of action, of each of which the court has jurisdiction, it may order separate trials if such causes of action cannot conveniently be disposed of together. It must necessarily follow that, if two causes of action are joined, of only one of which the court has jurisdiction, it may not dismiss both, but may only dismiss the one that it has no jurisdiction to try.
The rule itself does not, of course, extend, or purport to extend, the jurisdiction of a court sitting in equity to causes of action over which it would, in the absence of the rule, have no jurisdiction. See Geneva Furniture Mfg. Co. v. S. Karpen
&
Bros.,
An attempted enlargement of jurisdiction by including in one bill causes of action over which the court has no jurisdiction has frequently arisen in eases involving the infringement of a patent and unfair competition. The joinder of such causes of action has not been permitted. See Ingrassia v. A. C. W. Mfg. Corp.,
In Washington-Southern Nav. Co. v. Baltimore & Phila. Steamboat Co.,
The role itself prohibits the joining of any causes of action unless “cognizable in equity.”
That the proper course to he followed where a cause of action in equity as to which the court has jurisdiction is joined with a cause of action o-vesr which it has no jurisdiction is to dismiss only the latter cause of action is indicated, not only by the equity rule itself, but by tbe following cases: Schell v. Leander Clark College et al.,
3. While it appears that the second cause of action was properly dismissed by the court, nevertheless the plaintiffs were entitled to have the court take jurisdiction of the first cause of action, unless, as the defendants claim, the fraud alleged is not of such a character as to justify the setting aside of the equity decree.
So much has been written on the subject of the right of a court of equity to set aside or enjoin the enforcement of unconscionable judgments or decrees for what has been termed “extrinsic fraud,” and the cases upon that subject have been so often reviewed by this and other courts, that it would be useless onee more to enter into an extended discussion of that subject. See Marine Insurance Co. of Alexandria v. Hodgson,
In Toledo Scale Co. v. Computing Scale Co.,
It is our opinion that, if the plaintiffs succeed in proving what they have alleged with respect to the manner in which and the circumstances under which the decree pro eonfesso in equity case No. 312, S. D., was obtained, that decree should be vacated. The plaintiffs do not seek a review of irregularities in the formal proceedings leading up to the decree. Their charge is that the decree is the result of the assertion of false claims and liens by persons acting for the Brictsons in an effort to secure for the Brictsons the assets of the Brictson Manufacturing Company, to which they are not entitled, and that jurisdiction to enter the decree was never actually acquired by the court, although it was fraudulently made to appear that the court did have such jurisdiction.
If what the plaintiffs charge is true, the decree was not only an imposition upon those who were entitled to the assets of the Brietson Manufacturing Company, but it was an imposition upon the court as well, and the company and its representatives were clearly prevented from making a full and. fair defense.
Cases, some of which are closely analogous to this, are: Farrar v. Consolidated Apex Mining Co., 12 S. D. 237,
The ease of Firestone Tire
&
Rubber Co. v. Marlboro Cotton Mills,
4. That the court below was justified in holding that it had no jurisdiction over the Brietsons we have no doubt. They! were not necessary parties to the first cause of action. They had not been parties to equity case No. 312, S. D. Service was had upon them outside of the district. It is asserted that they conspired with other defendants in securing the decree pro eonfesso which is sought to be set aside; but they have a right to contest that assertion, and this suit, so far as the first cause of action is concerned, is as to them not an ancillary, but an¡ original, suit.
The court was right in holding that it had jurisdiction over the defendants Culhane, Weaver, and Giller. They were parties to equity case No. 312, S. D., and the first cause of action in this suit is to be considered as a eontinuation of that one, so that service of subpoena within the state upon these defendants was not necessary. Merriam Co. v. Saalfield
&
Ogilvie,
We think that the court below did not err in denying leave to file the amended bill. It added nothing except the allegation that the stockholders were authorized by the court which appointed the receiver to join with him as plaintiffs on behalf of themselves and other stockholders. If they were not proper parties, such an authorization would not make them such, and if they were proper parties they needed no authority from the court to join in the suit.
It follows from what has been heretofore said that the court should have retained jurisdiction of the first cause of action, of the plaintiffs, and of the defendants Culhane, Weaver, Giller, Bielski, the company, and Eidem, who were either necessary or proper parties to that cause of action; that, in so far as its orders constituted a dismissal of the second cause of action and the elimination of the Brietsons and Engebretson as parties, they were proper.
It is unfortunate that the court cannot deal with this entire matter in one proceeding and upon one trial. The plaintiffs, however, are entitled to move the court of bankruptcy to vacate the adjudication in bankruptcy upon the grounds asserted in their second cause of action. Stockholders situated as these stockholders are situated have been accorded that right, Zeitinger v. Hargadine-McKittrick Dry Goods Co.,
That being the case, there would seem to be no practical reason why the plaintiffs might not move the court as a court of bankruptcy to vacate the adjudication and why that motion might not be heard at the same time that the first cause of action is tried.
The orders of the court below are reversed in so far as they constitute a dismissal of the first cause of action and the elimination of the necessary and proper parties to that cause of action. In so far as these orders constitute a dismissal of the second cause of action and the elimination of the Brietsons and Engebretson as parties to the suit, they are affirmed. The case is remanded for further proceedings not inconsistent with this opinion. The costs on appeal will be divided *150 equally between tbe appellants and tbe appellees Culhane, Weaver, Giller, Bielski, and Eidem.
Notes
See, also,