Sill v. Kentucky Coal & Timber Development Co., 11 Del. Ch. 93

11 Del. Ch. 93 | New York Court of Chancery | 1916

The Chancellor.

Two defenses are made to the bill, one by the motion to dismiss the bill and the other by the allegations in the amended answer which constituted a defense of res judicata. A defense of res judicata if it be properly pleaded and established is a bar to the suit. The decision of a judicial tribunal having judisdiction of the cause and the parties is in every other court everywhere a complete and absolute defense in bar to another proceeding for the same cause of action. Capelle, et al., v. Baker’s Ex’r, 3 Houst. 344, 358. A judgment in another state for the same cause of action may be pleaded in bar. Howard v. W. & S. R. R. Co., 2 Har. 471. And a final decree in Chancery has thé same force and effect respecting another bill filed by the same complainant against the same defendant for the same subject-matter. Cochran v. Couper, Admr., 2 Del. Ch. 27; Hopkins v. Lee, 6 Wheat. 109.

This defense is more properly set up by a plea, than by an answer, though it may be used in either way. 1 Whitehouse Equity Practice, pp. 431, 451. The advantage of a plea is avoidance of discovery. If it be inserted in the answer, the defendant gets the benefit of it at the hearing, and in Cochran v. Couper, supra, it was so set up. But like every other defense it must be proved, and if it be set up by answer it cannot be proved until the hearing; while if it be set up by plea, then by the rules of this court it is taken to be true unless within thirty days a replication thereto be not filed, and it stands for argument upon the question of its sufficiency in law. See Rule 31 of Court of Chancery. So, too, the identity of the two causes must be alleged and, if not admitted, proved, and a copy of the- record of the prior cause is the most satisfactory evidence for it shows not only an opinion of the court, but a final decree or order of the other tribunal. Story’s Equity Pleading, 790; Bank v. Beverly, et al., 1 How. 134.

In this case the defense of res judicata is set up in the answer, and though called a separate defense is not in fact a plea and does not have the requiremnts of a plea according to the rules of this court. It cannot, therefore be considered at this time as a defense for reasons above stated, and if the defense is set up by the plea it should conform to the requirements of all pleas, and particularly to that kind of a plea. It may be questionable whether it is a good defense in this suit. The suit is for a receiver based on insolvency, by appealing to a discretionary power given to the court, and it does not necessarily follow that the prior refusal of another court to appoint the receiver based on certain allegations and a certain state of facts would preclude this court under other facts from granting the relief. The circumstances of the two cases must be alike in order that the former adjudication should control, or even influence, the later suit. At any rate the defense of res judicata is not now available to the defendant in this cause, because of the manner of setting it up.

The motion to dismiss the bill, which necessarily is based on the allegations thereof and assumes them to be true, raises the.question whether an allegation in substance that the defendant company is insolvent, in that it is unable to pay its debts in the usual course of business, is sufficient to entitle the Chancellor to appoint a receiver for the company to wind up its affairs. There seems to be no statutory definition of the term “insolvency,” even in the statute which enables a person imprisoned for a debt, or for nonperformance of a decree of the Chancellor, for the payment of money to obtain a discharge based on his insolvency. See Revised Code, c. 121. This question has not been definitely determined, so far as I can learn from counsel, or otherwise, by any decision in this State. There have been cases in this court in which receivers have been appointed for corporations where by the allegations of the bill insolvency consisted in substance of an inability of the corporation to pay its debts as they mature. In the absence of objection, this may have been done. Whether or not it is a good practice does not affect a determination of the motion under consideration.

While the jurisdictional allegations of a bill for a receiver of a corporation on the ground of its insolvency are few and simple," consisting of averments that the defendant is a corporation of the State of Delaware, is insolvent and is not a corporation for public improvement, still a bill which only contains such bald averments, though not perhaps demurrable, would not show grounds for the exercise of judicial discretion. The bill should show facts upon which it exercises its discretion. A bill in equity is something more than a pleading.

There are two definitions of insolvency, one based on an inability to pay debts as they become due in the usual course of business, and the other on a deficiency of assets over liabilities. Numerous decisions and text-books have been cited as sustaining each of the definitions. But neither one is to be adopted to the entire exclusion of the other, for the needs of corporations and their stockholders and creditors, based on the financial and commercial circumstances and conditions of the corporations, and the character of their business vary so widely that no rule is universally applicable. The same rule is not fairly applicable to a bank, a railroad, a retail store and a manufacturing plant; nor to a corporation which has come to a standstill and one which is active, though, financially embarrassed. No better statement has come to my attention than that of Judge Goff in the case of McGeorge, et al., v. Big Stone Gap Improvement Co., (C. C.) 57 Fed. 262, 270, as follows:

“The appointment of a receiver-—always in the discretion of the court—will not be made if it is for the best interest of those concerned that the property in controversy should remain in the hands and under the control of the owners thereof. This discretion of the court should be a reasonable one, governed to a great extent by the facts as they are presented in each particular case, as no rule generally applicable has been or can be established. Nor will this discretion be controlled by the téchnical legal rights- of the parties, but all the equities of the entire case will be considered. The power of appointment is extraordinary in its nature and 'far reaching in its effects, and will be resorted to with the utmost caution, and only under such circumstances as demand summary relief.”

Insolvency in a general sense means deficiency of assets over liabilities, but as used in bankruptcy and insolvent laws, particularly those relating to the appointment of a receiver for corporations to wind up its affairs, insolvency means an inability to pay debts as they mature. 5 Thompson on Corporations, § 6126.

It is noteworthy that insolvency under the Bankruptcy Act of 1867 (14 Stat. 517, c. 176) was defined to mean an inability to pay debts as they become due in the ordinary course of business. Dutcher v. Wright, 94 U. S. 553, 557. By the present law it is specifically defined otherwise. As applied to mercantile, strictly trading and banking corporations, this is undoubtedly the correct definiton of insolvency, for with respect to such kinds of business there is such a failure as indicates the need of judicial action to protect the interests of all concerned. See Cincinnati Equipment Co. v. Degnan, 184 Fed. 834, 840, 107 C. C. A. 158. See also Words and Phrases, 3651, and citations of thirty-seven cases as applicable to trading corporations. This includes all kinds of business, for trade includes all occupations carried on for profit “not in the liberal arts or learned professions.” Judge Story in The Nymph, 18 Fed. Cas. 506.

As indicating a general theory for the exercise of judicial discretion, the following statement in Jones on Insolvent and Failing Corporations, § 9, seems apt and useful:

“When it becomes merely ‘a nominal inert body,’ it may generally be considered an insolvent corporation. In other words, when a corporation’s assets are insufficient for the payment of its debts, and it has ceased to do business, or has taken, or is in the act of taking a step, which will practically incapacitate it for conducting the corporate enterprise with reasonable success, or its embarrassments are such that early suspension and failure must necessarily ensue, then such corporation must be pronounced insolvent.”

The following statement, though narrower than that of Judge Goff, is probably more serviceable as a test of discretionary power:

“ So long as there is a reasonable prospect of success and a corporation is able to to respond to the lawful demands of creditors, it should not be pronounced insolvent.” Banta v. Hubbell, 167 Mo. App. 38, 150 S. W. 1089.

Consideration has been given to the question of the sufficiency of this particular allegation in the bill, because for the first time it has been discussed fully by counsel and an interpretation given of the meaning of “insolvency” in the Delaware statute. The learned judge of the federal court in the other cause did not rest his decision on the insufficiency of the allegation, but on other matters affecting his discretion. In any event, however, even if bound to follow his decision, this court may disagree as to the reasons assigned therefor.

My conclusions are, therefore,- that the defense of. res judicata, being set up in the answer and not by a plea, is not available as a ground for a motion to dismiss the bill; that insolvency of the defendant company in a bill by a creditor and stockholder for the appointment of a receiver to wind up the affairs of the defendant company is sufficiently alleged if it be averred that the company was unable to meet its debts and obligations as they mature; but that bills of that character should "contain other allegations in order to move the court to exercise its discretion respecting the appointment of a receiver of the defendant company.

The other grounds of the motion to dismiss the bill may be disposed of by stating that mismanagement of its affairs is not a necessary element of a bill for the appointment of a receiver of a corporation, and that it is not necessary that the complainant be a judgment creditor.

The motion to dismiss the bill will at this time be denied. If at the final hearing, after proofs taken, it appears that the same cause has been previously decided by the other other court, then by now withholding a further expression of opinion this court will not have disregarded the decision of the court. This cotuse is not injurious to the complainant, who cannot now obtain the relief sought, and the defendant cannot complain if he has brought forward a defense which he cannot make immediately available.

Let an order be entered accordingly.