# Manhattan Rubber Mfg. Co. v. Lucey Mfg. Co.

> Court of Appeals for the Second Circuit · January 5, 1925 · 5 F.2d 39

URL: https://www.frixlaw.com/law-library/cases/9651574

## Case

- **Full name:** Manhattan Rubber Mfg. Co. v. Lucey Mfg. Co.
- **Court:** Court of Appeals for the Second Circuit
- **Decided:** January 5, 1925
- **Citations:** 5 F.2d 39; 1925 U.S. App. LEXIS 2595
- **Precedential status:** Published
- **Opinion:** Dissent by Hough
- **Judges:** Hough and Manton, Circuit Judges, and Learned Hand, District Judge
- **Cited by:** 10 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/9651574

## How later opinions describe it (automated extraction)

- finding that Odell applied an abuse of discretion standard

## Opinion text

HOUGH, Circuit Judge
(dissenting). Something might be said concerning the order complained of as an act of discretion; that is, whether it was advisable to make such an order. But I am not concerned with that, because what is here attacked is the jurisdiction of the court to make the order, for this court is declaring that the order in question was beyond the power of the District Court, and on this point I cannot agree.
The case-at bar presents a typical “umbrella receivership”; by which is meant that a court of equity has extended its protection to a defendant which admitted that it was unable to discharge its obligations as they matured, but agreed that if well managed and granted a moratorium it had enough property to pay what it owed — and indeed do better than that. When such an application is made, the proper question (not I think always asked) is whether the “hardship and impossibility of other relief justify the appointment.”
I am sure that few suits of this kind were ever begun against corporations other than carriers where the suggestion of ultimate solvency or better was not somewhat hazardous. At all events, corporations whose solvency was thus( averred in limine have so often turned out grossly insolvent that creditors’ bills of this nature have by a process of evolution become an elaborate scheme of insolvent administration or corporate reorganization according to the turn of events-after receivers appointed.
Indeed, such bills have come to afford a species of locus poenitentiee for the study of possibilities by creditors, shareholders, directors, receivers, and various self-appointed committees sitting under the chancellor’s “umbrella” and watching the weather outside.
I think it true that the origin of such bills was the willingness of equity to lend its aid by way of equitable levy to an effort equally to distribute assets whether sufficient or insufficient for solvency among those legally entitled thereto. Thus the primitive view of a bill like this one led to regarding it as no more than the reduction to the court’s possession of a certain amount of property and to confining the activities of chancery to the preservation, distribution, or restoration of that property to or among the persons entitled to the same.
But no one was ever able to know beforehand the ramifications of such a matter, or to foresee the demands that would be made upon the discretion, the boldness, or the inventive ability of the court whose aid creditors, shareholders, and directors united in. seeking. And this has been shown increasingly true in a federal Union like ours,, where each of the 48 constituent sovereigns-often seems primarily engaged in playing-for its own hand, and does this in a business world rendered more complex by the’ structure of our country and increasingly impatient with the hampering limitation of state lines and state laws. Such conditions., *44 political and commercial, are increasingly presenting new and vexatious questions loudly calling for what one of our ablest judges Aas called “the plastic remedies of equity.”
Such a situation was acutely presented to this court in Graselli, etc., Co. v. Ætna, etc., Co., 252 F. 456 , 164 C. C. A. 380 . That well-known decision was necessarily one of two things — there was no tertium quid. It was either a rather bald legal mistake, or it was an advance, ingenious and even daring, in equity jurisdiction — and I use the word ‘“jurisdiction” in its primary sense as meaning power. It was made after exhaustive argument by counsel of learning, and the result was of primary importance if equitable' proceedings for reorganizations or in insolvency are to continue and to grow, as all living things must grow. Therefore as I regard that decision as a marked advance in jurisprudence, and not as a mistake, I think that its implications should be now lived up to — as they should have been recognized when the decision was formulated.
The central thought of that judgment is that the modem creditors’ bill is much more than an equitable levy upon such property as might pass into the hands of the receivers appointed under the bill; and it was an advance because the defendant was held personally or individually subject to the jurisdiction, that is, to the power of the chancellor, and so far subject thereto that the corporation or its officers might ‘be restrained from exercising their privileges or franchises, and even the stockholders might be restrained from acting as stockholders are lawfully entitled to do whenever their intended action was in the opinion of the court not for the best interests of all concerned. There is plainly no difference in legal theory between injunctions forbidding an act and in-. junctions commanding an act, and either may be used to further the common interest of all parties in the res, i. e., the property of the defendant.
In practical administration under creditors’ bills like this, the ¿Etna decision had been for some time foreshadowed. Thus officers and directors of a defendant corporation have been ordered to execute deeds of corporate realty in order that all concerned might benefit by the price obtained therefor; and' similarly such officers have been compelled by order to convey the title of corporate realty to the receivers of the court in order to facilitate dealing with the same and inter alia preventing attachments being laid on lands situate in states to which the corporate defendant Was foreign.
To prevent corporate officials and shareholders from improperly dealing with corporate property and to compel them #properly to deal with it in ways that receivers for well-known reasons cannot do, is but one method of administering the res in the court’s possession. Any corporate act which injures that res is an interference therewith, and that this was the sense, or one sense, of the ¿Etna decision has ‘been stated by this court in Habirshaw, etc., Co. v. Habirshaw (C. C. A.) 296 F. 875, at 880 .
And in Re O’Gara Coal Co., 260 F. 742, at 744 , 171 C. C. A. 480 , the iEtna decision has been cited as not interfering in any way with.the corporate existence.of the defendant or as denying the right of the stockholders to act “in eases where the court fails or refuses to exercise its supervisory power.”
The ease last cited was in bankruptcy, and it emphasizes the truth that in bankruptcy no more than in equity is the corporate existence interfered with or the legal relations of directors and shareholders impaired. This is elementary, but the novelty of the ¿Etna Case is that it recognized and approved the supervisory power of the equity court as something that could coerce corporate action for the benefit of all concerned. But it is now asserted to be beyond the power of the equity court to compel the defendant herein to go into bankruptcy.
In a strict sense, the order requires nothing of the kind; it only directed the defendant to tell the truth as to its financial condition, and to add thereunto the statement that it was willing to be adjudged a bankrupt. A majority in value of the shareholders were not willing so to have the corpora-tion adjudicated, and their unwillingness on this record was due to another willingness, viz.: They preferred to have a few creditors absorb all the California assets of the estate rather than to expose themselves to possible personal liability under the corporation laws of the same state. The motive or reason was most unworthy, it was plainly not for the benefit of all concerned, and a plainer case for the exercise of supervisory power could hardly be presented — if the situation was worth saving at all — but this last hypothesis eannot be considered on the question of power, for it goes only to the matter of discretion. But it is further argued that there is some difference between forbidding shareholders to vote and telling directors to go into bankruptcy, because no one can be compelled to seek the bankruptcy court; every debtor has his right of choice until involuntary proceedings have been perfected *45 against iim. Ancl it is said that to coerce or forbid this right of choice is the deprivation of a lawful right.
No more lawful right could be imagined than the right of the ¿Etna stockholders to vote; it was an inherent part of the charter of the corporation, and if the chancery court could deprive them of that right it was a far more drastic exercise of power than to compel a body of directors to tell the truth about their corporate condition.
Further, bankruptcy is not legal suicide, and there is much to be said in favor of a properly conducted bankruptcy as a scheme of reorganization, and only in bankruptcy can the still surviving and unimpaired corporation obtain a discharge from its debts. Viewed as an alleged violation of legal right the order here complained of seems to me far less drastic than that in the ¿Etna Case.
But it is further argued (if I understand it) that there is something radically wrong in issuing an order in equity the effect of which will probably be to terminate or render idle the very suit in which the order is entered. Suits are not virtuous in themselves; the object of any suit of this kind is to secure equitable equality for all and if that result can be reached by inviting or by ordering the suitors to seek another jurisdiction, it seems to me a rather archaic view to make a sort of fetish out of the suit first brought. There is nothing sacred about this equity suit. If it can attain its object of equitable equality by any other method than a final judgment, it is for the good of all concerned that it should be done.
It follows that I must dissent, because I feel very strongly that the court is refusing to follow the ¿Etna Case, while not in terms overruling it.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/9651574. Public record. Not legal advice.