Record and brief — Hatch v. Madsen
Supreme Court brief1982
Ask Donna
What actually matters in this document.
Text
1704
No.
IN THE
SUPREME COURT OF THE
UNITED STATES
October Term, 1981
Office - FD Court, U.S.
FILED
MAR 12 1982
ALEXANDER L. STEVAS.
CLERK
ROBERT C. HATCH and CLAUDIA R. HATCH
Petitioners
vs.
WALTER C. MADSEN, Superintendent of Banks
for the State of Arizona, as Receiver for
Heritage Trust Company, a corporation
and
RELIANCE INSURANCE COMPANY, a corporation
Respondents
PETITION FOR WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS FOR THE
NINTH CIRCUIT
Robert B. Cumming
383 N. Roberts Way
Camano Island, WA 98292
(206) 387-9603
Attorney for Petitioners,
Robert C. and Claudia R. Hatch
QUESTIONS PRESENTED FOR REVIEW
1. Must a garnishment lien in Texas attach only to specific
personalty, or does it attach to the debt itself, impound
all funds or effects from which the debt may be paid, and
make it unlawful for the garnishee to pay the debt to the
principal defendant?
2. Did the mere appointment of a receiver for Heritage
Trust Company, an Arizona corporation, by an Arizona
court ipso facto give the receiver title to the proceeds
alleged owing, in contract and tort, from a fidelity bond
insurance contract issued to Heritage by Reliance Insurance
Company, so as to exempt the debt from garnishment in
Texas?
3. Does the appointment of a receiver in Arizona give
the Arizona court extraterritorial jurisdiction beyond the
boundaries of Arizona?
4. Did the federal courts below give full faith and credit
to the acts, records and judicial proceedings of the state
of Texas?
DESIGNATION OF PARTIES
The parties to this Petition are as designated in the
caption.
TABLE OF CONTENTS
QUESTIONS PRESENTED FOR REVIEW.
DESIGNATION OF PARTIES. .......-
TABLE OF CONTENTS ..
TABLE OF AUTHORITIES. .
REFERENCE TO REPORTS OF OPINIONS s
BELOW
STATEMENT OF JURISDICTIONAL GROUNDS. .
CONSTITUTIONAL AND STATUTORY... .-
PROVISIONS
STATEMENT OF THE CASERRʒ²EZig .
MATERIAL FACTS .....+ +2 e es
JURISDICTION OF FEDERAL
COURT OF FIRST INSTANCE
ARGUMENT. ..-+ 2. ceeeeeeeceeces
CONSIDERATIONS GOVERNING REVIEW:
INTRODUCTION
1. Garnishment Impounds All Funds and.
Effects Available To Pay Debt and is
Not Limited to the Attachment of
Specific Personalty
2. The Mere Appointment of a Receiver
by an Arizona court did not give the
Receiver Title to the Proceeds of a
Fidelity Bond Insurance Contract,
Alleged Owing in Contract and Tort,
so as to Exempt the Debt From
Garnishment in Texas
o o UT
o o 13
3. The Arizona Court Through Its Appoint-. .
ed Receiver Has NO Extraterritorial
Jurisdiction Beyond the State of Arizona
4. The Courts Below Did Not Give Full.
Faith and Credit to the Laws and
Judicial Proceedings of the State of Texas
APPENDIX A
Memorandum of the United States
Court of Appeals for the Ninth
Circuit
APPENDIX B
ORDER dated December 23, 1981,. .
denying Petition for Rehearing
APPENDIX C
OPINION AND ORDER dated
February 6, 1980, in the United
States District Court for the District
of Arizona
ORDER dated March 20, 1980,
amending Opinion of February 6,
1980, and denying Motion for New
Trial
APPENDIX g....
ORDER dated October 6, 1981, nunc
pro tune, declaring judgment of
February 6, 1980, .o be a final
judgment
APPENDIX F--+++++# eee © © © @ @
28 U.S.C. Sec. 1335 (Interpleader)
Page
-17
23
29
31
32
iv
Page
APPENDIXG........ „ 38
28 U.S.C. Sec. 2201 (Declaratory
Judgments)
APPENDIX H * * * rere e S!hUmDlUGl SS 39
Rule 57, Federal Rules of Civil
Procedure (Declaratory Judgments)
28 U.S.C. Sec. 1652 (State Laws As
Rules of Decision)
TABLE OF AUTHORITIES
a. United States Constitution
Article IV. Section 1. (Full Faith &. 3, 23
Credit)
b. Federal Statutes and Rules
28 USC Sec. 1738 (Full Faith & Credit). .3, 24
28 USC Sec. 1254 (1) (Jurisdiction). - --.- - 3
28 USC Sec. 1652 (State Laws As Rules 5, 19
of Decision)
28 USC Sec. 1335 (Interpleader) --.-.- - 5, 10
28 USC Sec. 2201 (Declaratory Judgments).5, 9
Rule 57, Fed. Rules of Civ. Proc. (Dec. . 5, 9
Jdmt.)
Local Rule 21., 9th C oh... 2
e. State Statutes and Rules
68 VATS*Art. 4076 (Garnishment) ...-.-.- .- 4
68 VATS Art. 4084 (Garnishment). . . . 4, 11
*(Vernon's Annotated Texas Statutes)
Texas Rules of Civil Procedure: 4
Rule 657. Judgment Final For Garnish- . . .4
ment
Rule 663. Writ of Garnishment (Execution). .5
d. Treatises and Texts
75 Corpus Juris Secundum Sec. 135 . 11, 14, 17,20
75 Corpus Juris Secundum Sec. 3944 20
vi
Page(s)
75 Corpus Juris Secundum Sec. 3960 21
75 Corpus Juris Secundum Sec. 3992 21
75 Corpus Juris Secundum Sec. 399. 21
r 22
Restatement 2d Conflicts, Sec. 6688. 12
Comment d.
Texas Jur. 179 - Attachment - Sec. 15. 13
Cases
Bashear v. Intermountain Bldg. & Loan. . 19
Assn., CCA Cal. 9th Circuit, 109 F857
Cert den. 61 S. Ct. 9, 311 U.S. 655, 85
L. Ed. 419 (1940)
Banco Nacional of Cuba v. Chase Man- . 16
hattan Bank, 505 F. Supp. 412 (1980)
Central National Bank v. Stevens, N.Y.,. . 24
18 S. Ct. 403, 169 U.S. 432, 42 L. Ed.
807
Chicago R. I. & P. R. Co. v. Sturm, 19. 17
8. Ct. 798, 74 U.S. 710, 43 L. Ed. 1144
Focke v. Blum, 82 Tex. 436, 17 SW 770. . 13
Harris v. Balk, 24 S. Ct. 625, 198 U.S.. . .16
215, 47 L. Ed. 1023 (1905)
Kanaman v. Hubbard, 110 Tex. 560, 222. . 13
SW 151
Martin v. Dryden, 6 III. 17 12
Muller v. American Co-op Assoc., 110
Nebr. 773, 195 N. W. 167
N. C. Benk & Trust Co. v. Williams, 160
8. E. 484
vii
Page(s)
Sanders v. Armour Fertilizer Works, 54 - 12,16,25
S. Ct. 345, 290 U.S. 623, 78 L. Ed.
543, Affirmed 24 S. Ct. 677, 292 U.S.
190, 78 L. Ed. 1206, (1934)
S. E. C. v. Heritage, et al, 402 F. Sup 6
744 (1975)
Shaffner v. Heitner 433 U.S. 186, 97777 16
8. Ct. 2569, 53 L. Ed.2 683 (1977)
Sterrett v. Stoddard Lumber Co., 150 . 20
Or. 491, 46 521023
U.S. v. Liverpool & London & Globe... . . 12
Insurance Co., 348 U.S. 215, 77 S. Ct.
247, 99 L. Ed. 268 (1955)
U.S. v. Standard Brass & Mfg. Co. 13
266 S.W.9 407
U.S. v. Yetes, 204 S. W.2 399. ee
Williams v. Murdock, C.A. Pa., 330 .....- 24
Fo 745 (1964)
No.
IN THE SUPREME COURT OF THE UNITED STATES
October Term 1981
ROBERT C. HATCH and CLAUDIA R. HATCH
Petitioners
vs.
WALTER C. MADSEN, Superintendent of Banks
for the State of Arizona, as Receiver for
Heritage Trust Company, a corporation
and
RELIANCE INSURANCE COMPANY, a corporation
Respondents
PETITION FOR WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS FOR
THE NINTH CIRCUIT
Petitioners earnestly pray that a Writ of Certiorari
issue to review the judgment of the United States District
Court for the District of Arizona entered on February 6,
1980, as amended on March 20, 1980; and the judgment of
the United States Court of appeals for the Ninth Circuit,
affirming the U.S. District Court, entered on November 5,
1981; and the Order of Court denying rehearing entered
on December 23, 1981.
REFERENCE TO REPORTS OF OPINIONS
IN COURTS BELOW
The opinions and orders in question are reproduced
in the Appendix. .
The errors in the opinions below cry out for review.
They overturn or ignore United States Supreme Court
decisions dating back to the nineteenth century and firmly
standing as stare decisis today.
The lower court errors will not be published in
the Federal Reporting System. The Opinion of the Ninth
Circuit Court of Appeals is designated "Memorandum."
Local Rule 21. of the 9th CCA provides that a
"Memorandum" is not intended for publication, shall not
reveal its author, shall not be designated "per Curiam,"
shall not be regarded as precedent, and shall not be cited
to or by Ninth Circuit courts except as law of the case,
res judicata or collateral estoppel. This means, unless
exposed by the light of judicial review, the errors of law
in the lower courts' opinions will lurk in anonymity depriving
present and future petitioners of rights well-established jn
published precedents on which they have relied.
We respectfully suggest that the appearance of ad
hominem whimsy or improprieties made possible by the
device of covert "Memorandum" decisions should itself
warrant censure by this highest Court, and at least justifies
turning over the Rule 21. rock to see what's underneath,
*
STATEMENT OF JURISDICTIONAL GROUNDS
(1) The jurisdiction of the United States Supreme
Court is invoked pursuant to 28 U.S.C. Sec. 1254 (1).
(2) This Petition is brought to review a
"Memorandum" decision of the United States Court of
Appeals for the Ninth Circuit which affirmed a judgment
of the United States District Court for the District of
Arizona. The "Memorandum" was entered on November 5,
1981, and, along with the U.S. District Court opinion of
February 6, 1980, as amended on March 20, 1980, is
reproduced in the Appendix. A petition to the Court of
Appeals for rehearing was denied by order entered
December 23, 1981, (also in Appendix).
CONSTITUTIONAL AND STATUTORY PROVISIONS
United States Constitution: Article IV. Section 1.
Full Faith and Credit shail be given in each state to the
Public Acts, Records and Judicial Proceedings of every
other State. And the Congress may by general laws
prescribe the manner in which such Acts, Records and
Proceedings shall be proved and the effect thereof.
Title 28 U.S.C. Sec. 1738. State and territorial
statutes and judicial proceedings; full faith and credit.
(Par. 3) Such Acts, records and judicial
proceedings or copies thereof, so authenticated, shall have
the same full faith and credit in every court within the
United States and its Territories and Possessions as they
have by law or usage in the courts of such State, Territory
or Possession from which they are taken.
Vernon's Annotated Texas Statutes, Title 68,
Article 4076-Garnishment. The clerks of the district and
county courts and justices of the peace may issue writs of
garnishment returnable to their respective courts in the
following cases:
3 +++
2. eek
3. Where the plaintiff has a valid subsisting
judgment and makes affidavit that the defendant has not
within his knowledge property in his possession within the
state, subject to execution, sufficient to satisfy such
judgment.
Vernon's Annotated Texas Statutes, Title 68,
Article 4084: From and after service of such writ of
garnishment it shall not be lawful for the garnishee to pay
to the defendant any debt or to deliver to him any effects.
Texas Rules of Civil Procedure:
Rule 657. Judgment Final for Garnishment.
In the case mentioned in subdivision 3. of Article
4076 of the Revised Civil Statutes of Texas, 1925, the
judgment, whether based on a liquidated demand or an
unliquidated demand, shall be deemed final and subsisting
for the purpose of garnishment from and after its rendition,
unless a supersedeas bond shall have been approved and
filed in accordance with Rule 364.
Rule 663. Execution and Return of Writ.
The sheriff or constable receiving the writ of
garnishment shall immediately proceed to execute the same
by delivering a copy thereof to the garnishee, and shall
make return thereof as of other citations.
Three additional federal statutes are involved and
are reproduced in full in the Appendix. These are:
Title 28 USC Sec. 1335 - Interpleader
Title 28 USC Sec. 2201 - Declaratory Judgment
(also, Rule 57, Declaratory Judgment, Fed. Kules
of Civil Procedure)
Title 28 USC Sec. 1652 - State Laws As Rules of
Decision
STATEMENT OF THE CASE
Material Facts
On March 5, 1976, Petitioners, Robert and Claudia
Hatch, husband and wife, citizens of Texas and residents
of Galveston County, were awarded a judgment by the
District Court of Galveston County. The judgment included
actual and exemplary damages to be paid by Heritage Trust
Company, an Arizona corporation, and several other
defendants—co-conspirators with Heritage in a fraudulent
scheme involving the sale of questionable interests in
property such as encumbered pieces of the Arizona desert.
The scheme had been exposed by the Securities and
Exchange Commission which filed suit against Heritage and
other defendants in 1974 in the United States District Court
for the District of Arizona. The Court made findings of
fraud and, in July 1975, ordered copies of such findings to
be sent to trustors who had entrusted their savings to
Heritage, including Mr. and Mrs. Hatch, so that they could
consider legal remedies. (S.E.C. v. Heritage et al, 402 F.
Supp 744).
After arduous efforts to recover their savings from
Heritage, the Hatches filed suit. Service of process was
made on the Secretary of State of Texas, statutory agent
for the out-of-state defendants. Copies of process were
properly forwarded by the Secretary of State, but none of
the defendants chose to appear in the Texas action. The
aforesaid judgment was entered by default, after careful
consideration of all factual and legal questions by the
Honorable Donald M. Markle, Judge of the District Court
of Galveston County.
The Hatches registered their March 5, 1976, Texas
judgment as a foreign judgment in the Superior Court of
Maricopa County, Arizona, on April 1, 1976.
On April 16, 1976, the Superior Court of Maricopa
County appointed the Superintendent of Banks for the State
of Arizona as Receiver for Heritage Trust Company and
issued an injunction forbidding all trustors, including the
Hatches, from initiating any further proceedings against
Heritage, the receivership defendant. (Walter C. Madsen
later succeeded Richard W. Koeb as Superintendentof Banks
and receiver.)
Toward the end of August, 1976, the Hatches received
from Heritage a "Receiver's First Accounting and Report"
containing the statement, "The Receiver, under the
company's present circumstances, is required to defend and
initiate numerous legal actions in several states because
of the inability of this Court's Order to stay actions pending
in other states or the federal courts." Thus, it was clear
that although the Order prevented the Hatches from
enforcing their judgment in Arizona, they were not enjoined
from executing their judgment in Texas.
The Hatches attempted to locate Heritage assets,
principally in Texas. They served executions on other
defendants, which were returned unsatisfied. On or about
March 30, 1977, they caused to be served a Writ of
Garnishment on Reliance Insurance Company, a
Pennsylvania Corporation, authorized to do business in many
states, including Texas and Arizona.
In 1972, Reliance had sold to Heritage (then called
Federal Trust) a three-year commercial blanket bond—a
fidelity insurance contract providing for indemnities to be
paid for losses resulting from fraudulent or dishonest acts
by Heritage employees. On July 26, 1976, the Receiver
filed suit against Reliance in the Superior Court of Maricopa
County, Arizona, to collect the alleged debt owing by
Reliar de to Heritage under the terms of the insurance
policy.
On September 28, 1977, by amendment the Receiver
filed a new complaint and prayer against Reliance in
Maricopa County alleging losses and damages owing to
Heritage due to the negligence of Reliance in issuing end
‘maintaining the bond.
The March 5, 1976, judgment for the Hatches against
Heritage in the District Court of Galveston County, Texas,
was in Case No. 114,361. The Garnishment action was
ancillary to judgment and was numbered 114,361-A.
Reliance denied liability to Heritage or to the Hatches.
The Hatches filed a motion for summary judgment which
was denied since the Court felt there were fact questions
concerning the liability of Reliance to Heritage, but it was
the Court's expressed opinion (as admitted by Reliance in
its Memorandum in support of its Complaint in interpleader)
that the Hatches were entitled by virtue of their writ of
garnishment to any funds found owing by Reliance to
Heritage (up to the amount of their judgment against
Heritage).
In the case of Hatch v. Reliance, 114, 361-A, in
Galveston the November, 1977 date set for trial of the
issues drew near. As the Hatches prepared for trial they
were assisted by the Receiver who furnished documentary
evidence to them for use in proving the liability of Reliance
to Heritage in the Texas trial.
On November 1, 1977, Reliance filed an action in the
nature of interpleader in the United States District Court
for the District of Arizona. Ex parte, the Court issued
an injunction preventing the Hatches in Texas and the
Receiver in Arizona from proceeding with their respective
state court law suits. On motion by the Hatches, the
injunction was dissolved by the Court that had issued it.
The Hatches proceeded with preparations for trial.
Reliance managed to find a single U.S. Court of Appeals
judge in San Diego who issued an Order Staying the District
Court's dissolution of its own injunction. On the morning
of their trial, Mr. and Mrs. Hatch and their attorney had
to walk away form their own Galveston County Court and
undertake the time-consuming, expensive efforts to litigate
their claim in the U.S. District Court in Phoenix.
After various discoveries and motions by all parties in
the United States District Court, petitioners moved for a
declaratory judgment to confirm the effect under Texas
law of their writ of garnishment—to render it enforceable
in the interpleader action if, as and when the debt of
Reliance to Heritage under the terms of the insurance
policy, or as a result of negligence, was established. The
Motion was filed on August 8, 1979. On February 6, 1980,
the Honorable Valdemar A. Cordova, Judge of the U.S.
District Court, denied the Motion; on March 20, 1980, Judge
Cordova amended certain facts in his Order, but denied
the Hatches' Motion for New Trial.
Robert and Claudia Hatch filed Notice of Appeal on
April 2, 1980. Oral argument was heard by the United
States Court of Appeals for the Ninth Circuit on October
15, 1981; and by "Memorandum" decision of November 5,
1981, a three-judge panel of the Court of Appeals affirmed
the judgment of the U.S. District Court for Arizona.
Appellants“ petition for rehearing was denied by the Court
of Appeals on December 23, 1981. This Petition for Writ
of Certiorari follows.
JURISDICTION OF THE FEDERAL COURT
OF FIRST INSTANCE
The United States District Court for the District of
Arizona assumed jurisdiction and pre-empted trial of the
10
issues from the state courts of Arizona and Texas, based
upon the Interpleader Statute, Title 28 U.S.C. Sec. 1335.
A copy is reproduced in the Appendix.
ARGUMENT
Considerations Governing Review
Introduction
The questions presented for review arise from the
Opinion of the U.S. District Court for the District of
Arizona, as affirmed by the "Memorandum" decision of the
U.S. Court of Appeals for the Ninth Circuit. The Opinion
and the Memorandum are reproduced in full in the Appendix.
Each has a key sentence which sums up each court's errors
of law which are in conflict with decisions of the U.S.
Supreme Court, federal district and appeals courts, and
state supreme courts.
The U.S. District Court states: "A lien on personalty
could only have been attained by the attachment of the
specific personalty and only if such attachment was made
prior to the Receiver's appointment."
In affirming the two propositions quoted above, the
three-judge panel of the Court of appeals states: "Because
all of the assets, including any rights which Heritage may
have to the proceeds of the bond were placed in the hands
of a receiver in Arizona before the Hatches served the
writ of garnishment on Reliance, the garnishment could
not have resulted in a valid attachment of any debt owed
11
by Reliance to Heritage. 75 C. J. S. Receivers Sec. 135 at
775."
The above-quoted rulings are contrary to federal and
state law in at least four seminal areas, as follows:
1. Garnishment Impounds All Funds and Effects Available
to Pay Debt and Is Not Limited to the Attachment of
Specific Personalty
The first concept recited by the U.S. District Court
for the District of Arizona—that garnishment only creates
a lien if it attaches to specific personalty—is a concept
not found in any statute, judicial decision or published
authority. The U.S. District Court did not cite any source
for such a concept, nor did any party document any grounds
for such a misreading of the law of garnishment. Even
the U.S. Court of Appeals did not expressly repeat the
erroneous concept that the remedy of garnishment is limited
to specific personalty, although by affirming the lower
court's opinion the Appeals Court has concurred in the
error.
Garnishment is a creature of statutory law. In no
state or federal jurisdiction does a statute limit the effect
of a writ of garnishment to its attachment of specific
personalty.
The particular effect of garnishment applicable to the
rights of Petitioners, Robert and Claudia Hatch, is that of
Title 68 Vernon's Annotated Texas Statutes Sec. 4084
(Supra) which makes it unlawful "for the garnishee to pay
the defendant any debt or to deliver to him any effects."
12
The simplest exposition of what garnishement is and
how it works may be found in Comment b of the
Restatement 2,4 - Conflicts, Sec. 68. To quote,
"Comment b. If A has a claim against B, and B has
a claim against C, the dasis for a garnishment action by
A exists if there is jurisdiction over C, though not over
B." (In other words, if the Hatches have a claim against
Heritage and Heritage has a claim against Reliance, the
basis for a garnishment action by the Hatches exists if
there is jurisdiction over Reliance even if not over the
Arizona Receiver for Heritage.)
The most complete exposition of case law on the nature
of garnishment and on the duty of a federal interpleader
court to follow the law of the state in which garnishment
was filed is Sanders v. Armour Fertlizer Works, (1934) 54
8. Ct. 345, 290 U.S. 623, 78 L. Ed. 543; Affirmed, 54 8.
Ct. 677, 292 U.S. 190, 78 L. Ed. 1206. As held in Sanders,
by service of the writ of garnishment the garnishee's
obligation to pay his creditor is arrested and a lien created
upon the debt itself; and, quoting from Martin v. Dryden,
6 III. 187, "By the service of garnishment upon any having
estate, property or effects of his in their hands, the law
has laid hold of a fund which it may condemn, and
appropriate to the satisfaction of whatever judgment it
may render against the defendant, and thereupon the court
proceeds to hear as to the indebtedness."
The similar effect of garnishment in the State of Texas
is confirmed by the United States Supreme Court in U.S,
v. Liverpool & London and Globe Insurance Co., 348 U.S.
215, 77 S. Ct. 247, 99 L Ed 268 (1955): "The garnishment
13
and attachment statutes of Texas . . have been uniformly
construed as creating a lien upon personal property from
the date of levy. Kanaman v. Hubbard, 110 Tex. 560, 222
SW 151; Focke v. Blum, 82 Tex. 436, 17 SW 770; U.S. v.
Yates (Tex. Civ. App.) 204 SWoq 399. See Tex. Jur. 179,
attachment Sec. 15, and see U.S. v. Standard Brass & Mfg.
Co. (Tex. Civ. Appeals) 266 Swzꝗ 407."
Following Texas law and the United States Supreine
Court opinions, the Texas court was proceeding to hear as
to the indebtedness of Reliance to Heritage when the
federal interpleader court removed the matter to the
District of Arizona.
The hearing as to the indebtedness of Reliance to
Heritage was never reached in the interpleader court. The
U.S. Court of Appeals affirmed the interpleader court's
ruling that Petitioners had no garnishment claim on
Reliance for its alleged debt to Heritage. The interpleader
court then dismissed the Hatches' claim and ordered their
participation in the interpleader action terminated!
2. The Mere Appointment of a Receiver by an
Arizona State Court Did Not Give the Receiver
Title to the Proceeds of a Fidelity Bond Insurance
Policy, Alleged Owing in Contract and Tort, so as
to Exempt the Debt From Garnishment in Texas.
The only remaining clause in the key sentence of the
U.S. District Court Opinion presents the concept that a
garnishment lien could only attach if the Texas writ of
garnishment after judgment was served prior to the Arizona
14
court's appointment of the Receiver for Heritage. Once
again, no authority is given for such a concept, although
there is an abundance of authority to the contrary.
The U.S. Court of Appeals also upheld this second
concept, but in doing so the anonymous author does cite
one authority. A reading of the authority, however, reveals
a meaning exactly the opposite of the meaning endorsed
by the three-judge Appeals Panel. Also, the citation is
under the Corpus Juris Secundum subject: Receivers, IV.
Title and Possession of Property, wherein the discussion is
limited to the powers of a receiver in the state of his
appointment. The receivership sections of C.J.S. applicable
to Petitioners' Texas judgment and garnishment are under
the Rubric: IX. Foreign anc Ancillary Receivers.
The citation relied upon by the Appeals Court as
presented by the appellee below is: "75 C.J.S. Sec. 135
at 775.“ We assume the court is relying on the excerpt
of Sec. 135 in appellee's brief. It refers first to the
exemption of a receiver as garnishee; then to exemption
of a third party garnishee (such as Reliance). The excerpt
of Section 135 presented by Appellee below is: "The
exemption attaches only where the court appointing the
receiver had jurisdiction and only to property which he
holds as receiver. Likewise, where someone else is
garnishee, the receiver's title will prevail over the claim
of the garnishing creditor—providing the receiver's title
has attached at the time of the service of the garnishee
process." (Emphasis supplied.)
15
The mere appointment of the Receiver for Heritage
by an Arizona state court did not give him title to the
indemnities promised by the Reliance insurance policy, nor
title to the debt owing as a result of the negligence of
Reliance in issuing and maintaining the policy. The
Receiver stepped into the shoes of Heritage, the
receivership defendant. He has the same rights and
obligations. He has a claim—a chose in action—against
Reliance, which is "a personal right not reduced to
possession, but recoverable by a suit at law." (N.C. Bank
& Trust Co. v. Williams, 160 S.E. 484.)
The debts alleged by the Receiver and by the Hatches
to be owed by Reliance, due to Reliance's denial of liability,
could not be possessed until found owing in a suit at law.
The rights which Heritage may have had to the proceeds
of the bond could in no way be converted to assets whose
title vested in the Receiver until the Receiver proved that
the Reliance debts were indeed owing to Heritage. (After
debts are paid, they are no longer garnishable, of course,
since they are no longer debts.)
Viewed from Texas, where the final and subsisting
judgment against Heritage, the judgment debtors, was
obtained by Petitioners, and where the ancillary writ of
garnishment was served on a Heritage debtor, Reliance, in
enforcement of said judgment, the Receiver in Arizona has
only those rights given to him within the state of Arizona,
"where the court appointing the receiver had jurisdiction."
"It is not a question of possession in the foreign state,
16
for possession cannot be taken of a debt or of the obligation
to pay it, as tangible property might be taken possession
of." (By service of the writ) "notice to the debtor of the
commencement of the suit, and notice not to pay to his
creditor is all that can be given whether the garnishee be
a mere casual and temporary comer, or a resident of the
state where the attachment is laid. His obligation to pay
his creditor is thereby arrested and a lien created upon
the debt itself...
"It is nothing but the obligatior to pay which is
garnished or attached. This obligation can be enforced by
the courts of the foreign state after personal service of
process therein just as well as by the courts of the domicil
of the debtor." (Harris v. Balk“, 198 U.S. 215, 47 L. Ed.
1023, 24 S. Ct. 625 (1905); cited in Sanders v. Armour,
supra, and most recently—1980—in Banco Nacional of Cuba
v. Chase Manhattan Bank, 505 F Supp 412, 439.
*In Harris, before getting a judgment against
his debtor, the garnisher proceeded against the
garnishee. A better procedure is recommended
by Justice Thurgood Marshall in Shaffner v.
Heitner, 433 U.S. 186, 53 L. Ed 2g 683, 97 S.
Ct. 2569 (1977). Commenting on Harris v.
Balk, in footnote #18, Justice Marshall writes,
"The problem with this reasoning is that unless
the plaintiff has obtained a judgment
establishing his claim against the principal
defendant . . . his right to 'represent' the
principal defendant in an action against the
garnishee is at issue." In accordance with
Justice Marshall's suggested procedure, Robert
and Claudia Hatch first obtained a judgment
against Heritage, then filed their action against
Reliance.
17
3. The Arizona Court Through Its Appointed
Receiver Has No Extraterritorial
Jurisdiction; Its Powers Are Limited to the
State of Arizona.
The Arizona Receiver, while Heritage is in
receivership, has a right to manage its property in
Arizona and a right to sue if necessary to obtain
possession or title to assets or to obtain payment of
debts and claims. It could be argued that such rights
were placed exclusively in the hands of the Arizona
receiver by the Arizona Court's injunction against all
trustors and creditors, forbidding them to commence
enforcement proceedings in Arizona. But such rights
do not constitute title to assets and fall far short of
75 C.J.S. section 135's requirement that the receiver's
title must attach first for such title to prevail over
the rights of a garnishing creditor—and then only where
the court appointing the receiver has jurisdiction,
"The Supreme Court has approved the doctrine
that debts accompany the debtor and may be attached
wherever he can be sued by his creditor. The Court
has disproved the notion that when debts are exempt
from execution in the state where created, this
privilege follows as an incident into other jurisdictions."
(Sanders v. Armour, supra, citing Chicago R.I. & P.R.
Co. v. Sturm, 174 U.S. 710, 19 S. Ct. 797, 43 L. Ed.
1144).
No rights or title superior to those of Heritage
Trust Company before it was placed in receivership
were vested in the Receiver by virtue of his
appointment. As stated above, the Receiver merely
acquired Heritage's chose in action against Reliance,
leaving the alleged debt subject to garnishment
wherever it could be reached by jurisdiction and service
on the garnishee and whenever it could be reached
prior to payment.
The Arizona state court by appointing a receiver
to manage the affairs of an Arizona corporation,
achieves no jurisdiction beyond the Arizona state
boundaries. It cannot bar the enforcement in Texas
by ancillary garnishment proceedings of a final
judgment rendered by a Texas court—especially since
the Texas judgment against the corporate receivership
defendant was entered several weeks before the
appointment of the receiver.
And the prior jurisdictional rights of the Texas
court cannot properly be dismissed or ignored by a
federal interpleader court in Arizona, so as to
invalidate the Texas court's garnishment execution
served on a garnishee/debtor doing business in Texas
to impound debts due to the principal defendant, the
Arizona corporation.
19
The Courts below, in effect, have allowed the
Arizona receiver to reach over into the state of Texas
and deprive Petitioners, citizens of Texas, of remedies
and privileges given them by the statutes, rules and
judicial decisions of their own state courts. In so
doing the district and circuit courts have violated Title
28 U.S.C. Sec. 1652. State laws as Rules of Decision
(Appendix I).
By allowing the Arizona receiver and Reliance
Insurance Company exemption from the garnishment
law of Texas, the Ninth Circuit Court of Appeals has
ruled directly contrary not only to established federal
and state law, but contrary to its own published
precedents, e.g., "The appointment of a receiver has
and can have no extraterritorial effect." (Bashear v.
Intermountain Bidg. and Loan Assn., C. C. A. Cal 9th
Circuit, 109 FZ 857, cert. denied, 61 8. Ct. 9, 311
U.S. 655, 85 L. Ed. 419 (1940).
There is no authority supporting the anonymous
author's reversal of precedent, no reasoning behind her
challenge and open conflict with Supreme Court
decisions in the unpublishable "Memorandum" in the
Court of Appeals below.
Two categories of debt are alleged by the Receiver
as owing by Reliance to Heritage. On July 26, 1976,
20
the Receiver filed an action in Arizona to recover the
debt due Heritage under the terms of the Reliance
fidelity bond. On September 28, 1977, the Receiver
filed his claim to recover the debt due to Heritage as
a result of negligence by Reliance in issuing and
maintaining the bond. The writ of garnishment served
on Reliance in Texas on or about March 30, 1977,
impounded both categories of debt.
All of the rules and cases referred to by the
Receiver and Reliance in the Courts below apply to
liens on property in the prior possession of the receiver
in the state of his appointment; such as 75 C.J.S,
Sec. 135 at 775, the only authority cited by either
court below. The sections that apply to judgments
and liens in states other than the state appointing the
receiver contain the rules and decisions that are
directly on point in the Court's consideration of this
Petition.
For example, (in IX. A. Foreign Receivers - Sec.
391-401, pp. 1069-1080):
75 C.J.S. 394: "... The receiver's power
extends no further than that of the court appointing
him and cannot be asserted as a matter of right beyond’
the territorial jurisdiction of such court." (Sterrett v.
Stoddard Lumber Co., 46 P2q 1023, 105 Or 491.)
21
75 C.J.S. 396 b: "A receiver appointed by
the courts of one jurisdiction does not have custody,
nor does he have an enforceable right to possession of
property in a jurisdiction other than that of his
appointment except as a matter of comity. The court
of his appointment cannot confer such extraterritorial
right upon him
75 C.J.S. 399 "a. In general, property
situated in jurisdictions other than that of the
receiver's appointment will be administered by the
state in which it is found; and in the event of conflict
between the rights of resident creditors and foreign
receivers, ordinarily the former are preferred,
n.. . In other words, the appointment of a
receiver of an insolvent debtor in the foreign state
where he resides does not affect the rights of domestic
creditors ... suing in domestic courts to proceed to
collect their debts in the domestic state. . at most,
the right of a receiver will not be recognized against
attaching creditors, or as against citizens with title
to local assets or whose claims are entitled to priority
as equitable liens
75 C.J.S. 399"b. Generally, a resident
attaching creditor is favored over a foreign receiver,
22
even as to attachments contemporaneous with, or
subsequent to, the appointment of the receiver. The
domestic creditor may institute attachment
proceedings subsequently to and not withstanding the
foreign appointment
53 C.J. 667, p. 401: "Conflicting Rights of
Receivers and Creditors. a. In General... Creditors
in another state may pursue their legal remedies under ,
the laws of such state against property there situated
notwithstanding the foreign receivership and as against
claim of right on the part of the foreign receiver.
" . . . Whilst on the principle of comity
the power and rights of a foreign receiver will be
recognized, this principle is never extended or enforced
to the embarrassment or loss to local creditors."
"The appointment of a receiver of a foreign
corporation by a court of the state of its domicil . .
does not defeat or destroy the lien of attaching
creditors in the other state acquired after the
appointment of such receiver." (Muller v. American
Co-op Association, 110 Nebr. 773, 195 N.W. 167.)
In frustrating the lawful efforts of Robert and
Claudia Hatch to collect their judgment in Texas, the
Courts below violate strictures of federalism which
confine the power of a receiver to the state of his
23
appointment, unless through application for comity or
appointment of an ancillary receiver in a sister state
he can extend his authority and rights, subject to the
laws and jurisdiction of the other state.
4. The Courts Below Did Not Give Full Faith
and Credit to the Laws and Judicial
Proceedings of the State of Texas.
At no point in their decisions do the U.S. Court
of Appeals or the U.S. District Court recognize,
mention or take notice of the garnishment statutes,
rules and cases of Texas. Nor do the other parties—the
Receiver for Heritage and Reliance—anywhere in their
various briefs and oral arguments admit even the
existence of such Texas laws.
Petitioners, Robert and Claudia Hatch, adhered
strictly to the Texas statutes, rules and cases in filing
their writ of garnishment on Reliance. (Applicable
provisions of the statutes and rules are reproduced
above under "Constitutional and Statutory Provisions.")
They were given ~» credit or recognition by the Courts
below.
The Act of Congress applying Article IV, Section
1. of the United States Constitution (Full Faith and
24
Credit—Supra) to the federal courts is 28 U.S.C. 1738,
Section 3. (Supra.) "This section makes concept of
full faith and credit clause of the federal Constitution
applicable in federal court where prior suit has been
in state court and subsequent suit is in federal court."
(Williams v. Murdock, C. A. Pa., 1964, 330 F. 2g 745.)
Nor were the judgment and judieial proceedings
of the Hatches in the Texas court of original
jurisdiction given the same credit by the Federal
interpleader court or the U.S. Court of Appeals that
they would have been given by the Texas court had
not the federal injunction prevented trial in that court.
For, as related to the failure by the courts below to
recognize the Texas court's right to enforce its
judgment by garnishment after judgment, it is well
established that "Process subsequent to judgment is as
essential to jurisdiction as process antecedent, else the
judicial power would be incomplete and entirely
inadequate to the purpose for which it was conferred,"
and "the jurisdiction of a court is not exhausted by
the rendition of judgment but continues until the
judgment shall be satisfied." "To deprive a court of
the power to execute its decrees is to essentially
impair its jurisdiction." (Central National Bank,
Stevens, N.Y., 18 S. Ct. 403, 169 U.S. 432, 42 L. Ed.
807) (1898).
25
The leading case mandating federal interpleader
courts to give full faith and credit to state proceedings
is Sanders v. Armour Fertilizer Works (supra). In
Sanders, the litigation maneuvers by the insurance
companies are revealed as identical to those of
Reliance in the Hatch case. Armour claimed a debt
owing from Sanders who had a claim against the
insurance companies. Armour filed garnishment on the
insurance companies in Illinois. The garnishee
insurance companies removed the litigation by
interpleader to the federal District Court in Texas, in
which state the insurance monies were exempt from
garnishment. The U.S. District Court went along with
Sanders, the insured, and the garnishee insurance
companies, and held that garnishment could not attach
in Texas. The U.S. Court of appeals for the 5th Circuit
reversed. The Supreme Court affirmed the holding of
the Appeals Court, saying,
"The District Court, of course, is bound on
interpleader to give full faith and credit to the
garnishment proceedings in Illinois." And,
"The applicant for interpleader often has the
choice of forum and he cannot at his will subject the
rights of the contesting claimants to one set of laws
rather than another. The purpose of the interpleader
26
statute was to give the stakeholder protection, but in
no wise to change the rights of the claimants by its
operation. Interpleader is a suit in equity, and
equitable principles and procedure are the same
throughout the Federal jurisdiction. The court is to
weigh the right or title of each claimant under the
law of the state where it arose .. ."
(The garnisher) "seeks nothing under any Texas
law. Brought into the District Court against its will,
it is held there against its protest and enjoined from
proceeding further in Illinois. It now claims priority
‘of right and asks only what it would have secured but
for this injunction. Under such circumstances to hold
that statutes of Texas control would destroy rights
duly attained in Illinois; would permit the insurance
companies by interpleader proceedings to change the
positions of the defendants; and, in effect, seriously
interfere with the impartial adjustment of existing
equities...
"In the circumstances presented, the proceedings
in Illinois gave to" (Armour, the garnisher—in the
position of the Hatches) "a paramount right or superior
equity to the proceeds of the policies. To hold that
the District Court in Texas could enjoin the Fertilizer
27
Works from proceeding further and then declare that
because the last step in the Illinois suit had not been taken,
Sanders (in the position of Heritage) in some way became
entitled to priority, plainly would be inequitable. Moreover,
it would deny to the garnishment proceedings the credit
and effect accorded them in the State where taken...
(The garnishee's) "obligation to pay his creditor is
thereby arrested and a lien created upon the debt itself..."
CONCLUSION
To sum up, full faith and credit must be given by the
federal interpleader court to the judicial proceedings and
the law of Texas. The garnishment law of Texas provides
that a writ of garnishment served on a debtor of the
principal defendant creates a lien and impounds the debt
‘owed to the principal defendant. The appointment of a
Receiver by an Arizona court does not invalidate a prior
judgment in Texas and does not make the garnishee's debt
exempt from garnishment in Texas.
By affirming the U.S. District Court's conclusions of
law which are in error on the questions of law presented
for review, the U.S. Court of Appeals for the Ninth Circuit
has decided all such state and federal questions in a way
that conflicts with applicable decisions of the United States
Supreme Court.
28
Petitioners pray that the Court will consider and
resolve this matter and respectfully suggest that summary
disposition for Petitioners on the merits may be appropriate.
Robert B. Cumming
383 N. Roberts Way
Camano Island, WA 98292
(206) 387-9603
Attorney for Petitioners
March 12, 1982.
XIpueddy
29
APPENDIX A
IN THE UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
Filed Nov. 5, 1981
No. 80-5277
D.C. #Cv 77-843 VAC
RELIANCE INSURANCE COMPANY,
a corporation,
Plaintiff-Appellee,
MEMORANDUM
V.
RICHARD W. KO EB et al,
Defendants-Appellees
and
ROBERT C. HATCH and CLAUDIA
)
)
)
)
)
)
)
)
)
)
R. HATCH, his wife, ;
)
Defendants-Appellants.
Appeal from the United States District Court
for the District of Arizona
Valdemar A. Cordova, District Judge, Presiding
Argued and Submitted October 15, 1981
Before: SCHROEDER, NELSON, and CANBY, Circuit Judges.
The Hatches appeal from the denial by the district court
of their motion for a judgment that, by virtue of a Texas
judgment against Heritage and subsequent garnishment
proceedings against Reliance, they are entitled to the proceeds
of a bond purportedly issued by Reliance in favor of Heritage.
Heritage opposed the motion. Because all of the assets,
30
including any rights which Heritage may have to the proceeds
of the bond, were placed in the hands of a receiver in Arizona
before the Hatches served the writ of garnishment on Reliance,
the garnishment could not have resulted in a valid attachment
of any debt owed by Reliance to Heritage. 75 C.J.S. Receivers
See. 135 at 775.
The failure of the district court to certify this matter
pursuant to Fed. R. Civ. P. 54(b) has been remedied and this
Court is satisfied that the judgment appealed from disposes of
the Hatches' claim against Reliance in this interpleader action.
Affirmed.
31
APPENDIX B.
IN THE UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
RELIANCE INSURANCE COMPANY, Filed Dec.
a corporation, 23, 1981
Plaintiff-Appellee, No. 80-5277
ORDER
V.
RICHARD W. KOEB, Er AL., and
ROBERT c. HATCH and CLAUDIA R.
HATCH, nis wife,
Def endants-Appellants.
Before: SCHROEDER, CANBY, and NELSON, Circuit Judges.
The panel as constituted above has voted to deny the
petition for rehearing and to reject the suggestion for rehearing
en banc.
The full court has been advised of the sugvestions for
rehearing en banc, and no judge of the court has requested a
vote on the suggestion for rehearing en banc. Fed. R. App.
P. 35(b).
The petition for rehearing is denied and the suggestion
for rehearing en banc is rejected.
32
APPENDIX C Filed
Feb. 6, 1980
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF ARIZONA
RELIANCE INSURANCE COMPANY,
a corporation
NO. CIV 77-843 PHX
VAC
OPINION AND ORDER
Plaintiff,
v.
ROBERT C. HATCH and CLAUDIA
R. HATCH, his wife, et al.,
)
)
)
)
)
)
)
Defendants.
This matter was submitted to the Court for determination
on the pleadings and memoranda of the parties respecting the
Motion for Declaratory Judgment of the defendant Robert C.
Hatch and Claudia R. Hatch, his wife. The action is one in
the nature of an interpleader filed by plaintiff Reliance
Insurance Company, a corporation (hereinafter referred to as
"Reliance") as insurer under a commercial blanket bond in the
face amount of one million dollars. The bond was written for
Federal Trust Company which later became Heritage Trust
Company (hereinafter referred to as Heritage“). The latter
was owned and controlled by John R. Bromley and his wife,
Bertha. On July 29, 1979 the Securities Exchange Commission
filed suit against Heritage, its President and others. For the
purpose of this motion it appears that Heritage suffered
substantial losses because of the acts of the Bromleys.
33
Defendant Hatch obtained a default judgment against
Heritage in Texas for actual and punitive damages and attorney's
fees. On April 16, 1976, a receiver was appointed for Heritage
by the Superior Court of Maricopa County, Arizona. An order
issued from the Arizona court enjoining all trustors from
proceeding further against Heritage in the State of Arizona.
On July 26, 1976, Walter C. Madsen, Receiver for
Heritage, commenced an action in the Arizona court against
Reliance on its bond. On March 30, 1977, defendants Hatch
commenced a gernishment action against Reliance in the State
of Texas on the same bond, and caused to be served then and
there a writ of garnishment seeking payment of $129,972.22.
Reliance filed their answer in said action denying any
indebtedness to Heritage and the case was then set for trial
in Galveston County, Texas.
On November 15, 1977 Reliance brought the present
interpleader action in this Court joining the receiver Walter C.
Madsen, Superintendent of Banks, State of Arizona, and Mr.
and Mrs. Robert C. Hatch as defendants The present motion
filed by defendants Hatch request a declaration by this Court
that they have a lien on any funds owed to the defendant
Heritage by Reliance.
Defendant Walter C. Madsen, Receiver for Heritage
contends that the defendants Hatch have no prior claim to the
debt allegedly owed by Reliance to Heritage in that the receiver
was appointed prior to the attempt by defendants Hatch to
garnish the debt.
34
Reliance responds that mere entry of judgment against
the receivership in Texas did not result in a lien or priority
claim to these receivership assets.
After due consideration, the Court finds that the denial
of indebtedness of Reliance to Heritage in the Texas
garnishment action creates a contingent question of liability.
Further, the Court finds that the defendants Hatch do not have
a priority claim to the debt, if in fact such a debt exists, in
that no lien attached thereto prior to the appointment of the
receiver in Arizona. The effect of the Texas judgment under
Texas law was to create a lien on the realty within Texas and
the judgment when filed in Arizona had a similar effect with
regard to realty located in Arizona. It did not, however, create
a lien upon personalty in Texas or Arizona.
A lien on personalty under the facts here presented could
only have been obtained by attachment of the specific personalty
and only if such attachment was made prior to the receiver's
appointment. This defendants Hatch did not do and therefore,
IT IS ORDERED denying the motion of the defendant
Robert C. Hatch and Claudia R. Hatch, his wife, for declaratory
judgment.
DATED this 6th day of February, 1980.
Valdemar A. Cordova
35
APPENDIX D
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF ARIZONA
RELIANCE INSURANCE COMPANY )
a corporation, Date March 10, 1980
Plaintiff, No. CIV 77-843 PHX
VAC
vs.
ROBERT C. HATCH and CLAUDIA
R. HATCH, his wife, et al
Defendant.
Defendants Hatch having filed a Combined Motion to
Alter or Amend Judgment and for New Trial, and the Court
having duly considered the same and the responses and opposition
thereto,
IT IS ORDERED granting the motion to alter or amend
judgment in the first paragraph of the Opinion and Order to
provide "that at the time the three-year-commercial blanket
bond was issued to Heritage, that company was wholly owned
and controlled by Mr. Royden Brown, whose shares were later
acquired by John R. Bromley and Bertha Bromley:.
In the same paragraph, the date of filing of the Securities
Exchange Commission suit against Heritage, its President and
others is amended to read: "July 29, 1974."
In the second paragraph of the Opinion and Order, the
date of the Texas judgment obtained by the defendants Hatch
was "March 5, 1976" and the final Texas judgment was registered
in Arizona "April 1, 1976."
IT IS FURTHER ORDERED denying defendants' Motion
for New Trial.
Valdemar A. Cordova
United States District Judge
ec: All counsel of record
36
APPENDIX E
IN THE UNITE. STATES DISTRICT COURT
FOR THE DISTRICT OF ARIZONA
RELIANCE INSURANCE Date _10/6/81
COMPANY, a corporation
Plaintiff,
No. CIV 77-843 PHX
vs. VAC
ROBERT C. HATCH and CLAUDIA
Defendant.
— —— —ꝛů— — —— —y-—̃ — H—
In order to clarify the previous order of this Court dated
February 6, 1980, as amended March 21, 1980,
IT IS HEREBY ORDERED, nunc pro tunc, supplementing
that order by adding the following statement:
It having been expressly determined by this Court
that there is no just reason for delay, the Court
expressly directs that this order be entered as a
final judgment.
Valdemar A. Cordova
t tates District Judge
37
Filed Nov. 5, 1981
APPENDIX F
Sec. 1335. Interpleader
(a) The district courts shall have original jurisdiction of
any civil action of interpleader or in the nature of interpleader
filed by any person, firm or corporation, association, or society
having in his or its custody or possession money or property of
the value of $500 or more, or having issued a note, bond,
certificate, policy of insurance, or other instrument of value
or amount of $500 or more, or providing for the delivery or
payment or the loan of money or property of such amount or
value, or being under any obligation written or unwritten to
the amount of $500 or more, if
(1) Two or more adverse claimants, of diverse citizenship
as defined in Section 1332 of this title, are claiming or may
claim to be entitled to such money or property, or to any one
or more of the benefits arising by virtue of any note, bond,
certificate, policy or other instrument, or arising by virtue of
any such obligation; and if
(2) the plaintiff has deposited such money or property
or has paid the amount of or the loan or other value of such
ins..ument or the amount due under such obligation into the
registry of the court, there to abide the judgment of the court,
or has given bond payable to the clerk of the court in such
amount and with such surety as the court or judge may deem
proper, conditioned upon the compliance by the plaintiff with
the future order or judgment of the court with respect to the
subject matter of the controversy.
(b) Such an action may be entertained although the titles
or claims of the conflicting claimants do not have a common
origin, or are not identical, but are adverse to and independent
of one another.
38
APPENDIX G
CHAPTER 151—DECLARATORY JUDGMENTS
Sec.
2201. Creation of remedy.
2202. Further relief.
Sec. 2201. Creation of remedy
In a case of actual controversy within its jurisdiction,
except with respect to Federal taxes other than actions brought
under section 7428 of the Internal Revenue Code of 1954, or
a proceeding under section 505 or 1146 of title 11, any court
of the United States, upon the filing of an ate pleading,
may declare the rights and other — relations of any interested
party such declaration, whether or not further relief is
or could be sought. Any such declaration shall have the force
and — of a final judgment or decree and shall be reviewable
as su
39
APPENDIX H
RULE 57. Declaratory Judgments
The procedure for obtaining a declaratory judgment
pursuant to Title 28 U.S.C. Sec. 2201, shall be in accordance
with these rules, and the right to trial by jury may be demanded
under the cirumstances and in the manner provided in Rules
38 and 39. The existence of another adequate remedy does
not preclude a judgment for declaratory relief in cases where
it is appropriate. The court may order a speedy hearing of an
action for a declaratory judgment and may advance it on the
calendar. (As amended Dec. 29, 1948, eff. Oct. 20, 1949.)
40
APPENDIX I.
SEC. 1652. STATE LAWS AS RULES OF DECISION
The laws of the several states, except where the
Constitution or treaties of the United States or Acts of Congress
otherwise require or provide, shall be regarded as rules of
decision in civil actions in the courts of the United States, in
cases where they apply.
uoysoddg,
Supreme Court, U.S,
FILLED
No. 81-1704 APR 14 B62
A ie STEVAS
CLERK
Ix THE
Supreme Court of the United States
Ocroser Txnzt, 1981
Rosert C. Hatcu and CLAUDIA R. Haren
Petitioners,
vs.
Waurter C. Mapsen, Superintendent of Banks for the
State of Arizona, as Receiver for Heritage Trust Company,
a corporation
and
Rewiance Insurance Company, a corporation
Respondents.
Respondent Reliance Insurance Company’s
Brief in Opposition to Writ of Certiorari
to the United States Court of Appeals
for the Ninth Circuit
By Wu. F. Have
Joun R. CunninGHaM
Jennines, Kepner & Have
800 Arizona Title Building
Phoenix, Arizona 85003
Attorneys for Respondent
Reliance Insurance Company
SORG PRINTING COMPANY OF CALIFORNIA, 346 FIRST STREET, SAN FRANCISCO 94105
i
QUESTIONS PRESENTED FOR REVIEW
1. Is an alleged indebtedness due an insured on a fidel-
ity bond issued in Arizona subject to a garnishment in
Texas, when prior to the garnishment the insured has been
placed in receivership in Arizona and the Arizona receiver
has brought an action in Arizona against the surety to
recover the proceeds of the bond?
2. Is a Texas creditor precluded from obtaining a gar-
nishment lien in Texas upon a debt allegedly due its debtor
after the debtor has been placed in receivership in Arizona
and the duly appointed receiver has instituted an Arizona
action to collect the alleged debt?
3. Did a Texas garnishment proceeding, instituted sub-
sequent to the appointment of an Arizona receiver, and
after the institution by that receiver of an action in Ari-
zona to recover bond proceeds, create a lien in favor of the
Texas garnishors, thus giving them a priority and prefer-
ence over all other general creditors whose claim against
the bond is being pursued by the receiver?
TABLE OF CONTENTS
Page
Questions Presented for Review i
— . ↄ——— c 08 ii
D T ͤ EE iii
Constitutional and Statutory Provision 1
e O 2
Summary of Argument 5
» 3 6
I. The Debt From Reliance to the Receiver Was
Not Subject to the Jurisdiction of the Texas
Court on March 30, 1977............................ 3 a
II. Heritage Could Not Have Maintained an Action
Against Reliance, in Texas, on March 30, 1977;
Hence, the Hatches Did Not Perfect Any Rights
Against Reliance by Reason of the Writ of Gar-
. a 12
r ↄ ↄ ää— —2—NC 15
Appendix A
Arizona Revised Statutes § 6-865 Impairment of
capital; unsafe condition; receivership ........................ A-l
Appendix B
Rules of Civil Procedure 66(¢) Powers; termina-
, A-2
iii
TABLE OF AUTHORITIES
a. Cases
Pages
Arizona Land Corp. v. Sterling, 5 Ariz.App. 4, 422
. 11
Clark v. Bacorn, 116 F. 617, (9th Cir., 1902) 200000... 10
Gilbertson v. Northern Trust Co., 207 N. W. 42 (N. D.,
— —x—x —̃— 9
Hardy v. Construction Systems, Inc., 556 8. W. 2d 843,
e ̃ . enor 11
Houston Drywall, Inc. v. Construction Systems, Ine.,
541 S.W.2d 220 (Tex.Civ.App., 197 11
Lehman v. Heberle, 9 F.Supp. 100 (W. D. N. V., 1934)... 10
O’Leary v. Sup. Ct. of Gila County, 104 Ariz. 308, 452
// 11
Sanders v. Armour Fertilizer Works, 54 S. Ct. 677, 292
, Ä Aar... .. 12, 13, 14, 15
Saper v. West, 263 F.2d 422 (2nd Cir. 1959) cert. de-
nied, 360 U.S. 916 (1959) ... = 10
Southwestern Bell Tel. Co. v. — 413 8. W. 2d 846
Z TUTUITTD <csissiscscnnenrieccenninntesetesaigtenncantittienstante 11
b. Feperat Rus
Rule 19, Rules of the Supreme Court of the United
—ẽẽ— ́É—Wꝛͤ — 15
Rule 32.2, Rules of the Supreme Court of the United
1 ͤ ͤ —Sͤ 22 2
c. Srare Srarurzs AND Rulxs
Arizona Revised Statutes Annotated § 6-865 . 4
Arizona Rules of Civil Procedure, Rule 6606) 2 6
iv
d. Treatises anp Texts
65 Am. Jur.2d Receivers § 166 (1972) 11
66 Am. Jur. 2d Receivers §§ 263, 342, 34 8
Annot. 91 A.L.R. 996 (1934) ——————— 6-7, 10
Annot. 96 A. L. R. 485 (1935) 8
Clark on Receivers (3rd ed. 1959)
r 5“. 10-11
118 11
75 C. J. S. Receivers (1952)
§ 104 8
— ̃ 2 ⁰ •ͤAA OR SO maT I 8-10
§ 135 ee e eee e 9
26 Texas Jur. 2d Garnishment § 34 (1961) 0000000. 11
No. 81-1704
In THE
Supreme Court of the United States
Octoper Term, 1981
Rosert C. Haren and CLAUDIA R. Haren
Petitioners,
vs.
Wauter C. Mapsen, Superintendent of Banks for the
State of Arizona, as Receiver for Heritage Trust Company,
a corporation
and
Reviance Lysurance Company, a corporation
Respondents.
Respondent Reliance Insurance Company’s
Brief in Opposition to Writ of Certiorari
to the United States Court of Appeals
for the Ninth Circuit
Respondent Reliance Insurance Company requests that
the Petition for Writ of Certiorari in this matter be denied.
CONSTITUTIONAL AND STATUTORY PROVISIONS
Petitioners have set forth, in this section of their petition,
various provisions from the United States Constitution and
the United States Code dealing with full faith and credit
2
and state laws as rules of decision. Pursuant to Rule 32.2,
Rules of the Supreme Court of the United States, Respond-
ent advises the Court that it disagrees with said presenta-
tion by Petitioner, and respectfully submits that the issues
herein presented have nothing to do with full faith and
credit or state laws as rules of decision,
STATEMENT OF THE CASE
The litigation underlying the instant Petition is an action
in the nature of interpleader whereby Respondent, Reliance
Insurance Company (“Reliance”), sought a determination
of the respective parties’ right and entitlement, if any, to
the proceeds of a commercial blanket bond issued by Reli-
ance to Heritage Trust Company (“Heritage”). Petitioners
filed a “Motion for Declaratory Judgment” in the inter-
pleader action whereby they sought a summary determina-
tion by the United States District Court for the District of
Arizona that they were entitled to a priority claim to any
funds found owing from Reliance to Heritage by virtue of
the bond. The District Court, the Honorable Valdemar A.
Cordova, Judge, determined that Petitioners had no prior-
ity claim to the funds and denied Petitioners’ motion by
Order of February 6, 1980, as amended on March 20, 1980.
(Petitioners’ Appendix C) Petitioners then moved the Dis-
trict Court for a new trial, which motion was denied by
Order dated March 10, 1980, (Petitioners’ Appendix D)
Petitioners appealed, and oral argument was presented to
the United States Court of Appeals for the Ninth Circuit
on October 15, 1981. On November 5, 1981, the Court of
Appeals issued its Memorandum Opinion unanimously
affirming the order below. (Petitioners’ Appendix A) Peti-
tioners then moved for rehearing en bane and on December
23, 1981, the Court of Appeals issued its Order stating,
3
inter alia, [The full court has been advised of the sug-
gestions for rehearing en banc, and no judge of the Court
has requested a vote on the suggestion for rehearing en
bane . . .” The petition for rehearing was denied and the
suggestion for rehearing en banc was rejected. ( Petitioners’
Appendix B) Petitioners now seek an intervention and
reversal by this Court, by Petition for Writ of Certiorari
dated March 12, 1982.
The facts relevant to an understanding of the matters
decided below are as follows: Respondent Reliance issued
a commercial blanket fidelity bond in the penal amount of
one million dollars to Heritage Trust Company (then known
as Federal Trust Company) in Arizona on December 15,
1972. This bond remained in force and effect until August
15, 1974, at which time it was cancelled. By this bond, Re-
liance agreed to indemnify Heritage for losses to Heritage,
which losses were occasioned by fraudulent or dishonest
acts of covered employees. (The bond was not intended to,
and does not provide coverage running to the investors or
trustors of Heritage or other third parties.)
At all times material to this litigation, Heritage was
owned and controlled by John R. Bromley and his wife,
Bertha. Heritage was, at all relevant times, an Arizona
corporation with its principal place of business in Arizona.
Subsequent to the cancellation of the bond, more than 40
lawsuits were brought in various jurisdictions against
Heritage and its principal officers, the Bromleys. These
lawsuits uniformly sought recovery of funds against Heri-
tage and the Bromleys on the basis of various allegations
sounding in fraud. Reliance was not a party to any of these
lawsuits and had no notice or knowledge of them. No claim
was asserted against the aforementioned bond in any of
these actions.
4
One such action was brought on December 16, 1975, by
the Petitioners, Robert and Claudia Hatch, in the 56th
Judicial District of Galveston County, Texas. It appears
that the Hatches had entrusted an amount of approximately
$11,000 to Heritage to invest and manage for them in high
yield, capital growth investment ventures. When the Hatches
sued in Galveston County, service upon Heritage and its
officers was made by service of a summons and complaint
on the Secretary of State of Texas, pursuant to a Texas
statutory provision. Neither Heritage nor the Bromleys
appeared to defend this action, and, in fact, have asserted
that they never had any notice of the Texas action. On
March 5, 1976, Petitioners Hatch obtained a default judg-
ment against Heritage and its officers in the Texas court
in the sum of $129,972.22. Reliance was not a party to the
Texas action and had no knowledge of it. The Texas lawsuit
made no claim against or mention of the Reliance bond.
On April 16, 1976, the Superior Court of Arizona, Mari-
copa County, pursuant to § 6-865, Arizona Revised Statutes,
as amended (Appendix A), appointed the Arizona State
Superintendent of Banks av Receiver for Heritage Trust
Company and authorized sai teceiver to obtain possession
and control of the assets of Heritage. Attendant to that Re-
ceivership, the court entered its order staying all persons
and their attorneys from commencing, prosecuting, con-
tinuing or enforcing any proceeding against Heritage or its
assets, and further enjoined such persons from cavsing to
be executed any “execution or other process for the purpose
of impounding or taking possession of or interfering with,
or creating or enforcing a lien upon any property owned by
or in the possession of... the receiver.” On July 26, 1976,
the Receiver filed an action in the Superior Court of Ari-
zona against Reliance, seeking to recover, (as Receiver of
5
Heritage), the full penal sum of the bond, based upon the
alleged fraudulent and dishonest acts of the Bromleys. This
was the first attempt by anyone to assert a claim against
the bond, and the first action involving Heritage of which
Reliance had notice or was a party.
Eight months after the Receiver filed his lawsuit against
Reliance, in March, 1977, Petitioners Hatch initiated a
garnishment action in Texas against Reliance by which they
sought payment of $129,972.22 from the bond proceeds.
As a result of the two inconsistent claims against the
prospective bond proceeds, on November 15, 1977, Re-
liance instituted the action in the nature of interpleader.
On August 8, 1979, the Hatches filed their “Motion for
Declaratory Judgment,” seeking a ruling that, by reason
of their Texas garnishment, they had priority over the
claims of all other unsecured creditors. The proceedings
following the filing of Petitioners’ motion are set forth in
the first paragraph above.
SUMMARY OF ARGUMENT
Throughout this proceeding, Petitioners Hatch have
sought a determination that they are, by virtue of a Texas
garnishment issued and served approximately one year
after the property sought to be garnished came into custodia
legis of the receivership court, entitled to impress a lien and
priority on any proceeds found due on the Reliance bond.
At the time of the attempted garnishment, the bond was not
subject to garnishment or other legal process by creditors
of Heritage. Petitioners’ garnishment, coming subsequent to
the appointment of the Receiver and after the Receiver’s
action on the bond, came too late to give Petitioners any
right or claim to the bond superior to that of the Receiver.
The decision of the District Court and Court of Appeals
6
that any indebtedness owed by Reliance to the Receiver may
not be reached by the subsequent writ of garnishment served
on Reliance in Texas, rests upon alternative analyses, either
of which fully supports the decisions below. The legal prin-
ciples may be summarized as follows:
(a) One who has no lien when a receiver is appointed
cannot, subsequent to the appointment, obtain a lien on the
property which has passed into the receiver's hands, and
thereby gain a preference over other creditors entitled to
share equitably in the distribution of the estate.
(b) Garnishment proceedings serve only to subrogate the
plaintiff therein to the rights of the debtor against the
garnishee, and the plaintiff can enforce no rights against
the garnishee that his debtor could not enforce.
ARGUMENT
I. The Debt From Reliance to the Receiver Was Not Subject to
the Jurisdiction of the Texas Court on March 30, 1977.
The Receiver, having been duly appointed by the Ari-
zona Superior Court on April 16, 1976, duly took possession
of the assets of Heritage, subject to the Court’s control, pur-
suant to Rule 66(¢), Arizona Rules of Civil Procedure which
is set forth herein as Appendix B. Once in the actual or
constructive possession of the Receiver, the assets of the
receivership debtor are not subject to dissipation or seizure
by virtue of execution by certain creditors of the receiver-
ship debtor seeking to obtain a preference in the receiver-
ship court or elsewhere. The law in this regard has been
fairly summarized by the author of the annotation begin-
ning Annot., 91 A.L.R. 996 (1934) :
“Tt is a well-settled principal of law that when a
court of competent jurisdiction acquires jurisdiction
over the subject-matter of a case, its authority therein
7
continues until the matter is finally and completely dis-
posed of, and no court of coordinate authority is at
liberty to interfere with its action. 7 R.C.L. 1067.
“As a corollary to this rule is the rule that a court
which first acquires lawful jurisdiction over a specific
property, by seizure thereof or otherwise, withdraws
that property from the jurisdiction of every other
court, so far as it is necessary to accomplish the pur-
pose of the suit, and is entitled to retain such control
over such property as is requisite to effectuate its final
judgment or decree in respect thereto, free from the
interference of every other tribunal. 7 R.C.L. 1068,
“Where, however, the suit in another tribunal is one
not against the receiver himself, but against the re-
ceivership defendant, and its object is not to subject
the property in tho hends of the receiver or in the
custody of the receivership court, but merely to estab-
lish or liquidate a claim or demand personally against
the receivership defendant, the position has been taken
that leave to sue by the court appointing the receiver
is not necessary. (Citation omitted)
In such case, of course, the judgment rendered
merely determines the existence and the amount of the
claim, and does not entitle the plaintiff to levy execu-
tion on or otherwise proceed against the property in
the hands of the receiver. It must be filed for allow-
ance in the receivership court, and, when so filed, due
recognition must be accorded to it in the distribution
of the estate. The plaintiff is not bound to re-establish
the claim in the receivership court. See Reihle v. Mar-
golies [1929] 279 U.S. 218, 73 L.ed. 669, 49 S.Ct, 310.”
(Emphasis added)
The law is equally well-settled that the mere entry of a
judgment against a receivership defendant does not create
a lien or priority claim to the receivership assets. At
8
Annot., 96 A.L.R. 485, (1935) for example, the author
recites :
“These principles of law give rise to the interesting
question as to the effect of such action [instituted in
another forum, either before or after the appointment
of the receiver, but pending at the time of such ap-
pointment, or consummated by a judgment after such
appointment] upon the right of the receiver and the
receivership court to pass upon the merits or the
amount of the claim.
“Unquestionably, a court other than the one appoint-
ing the receiver, by taking cognizance of the claim
after the appointment of the receiver, cannot by the
rendition of a judgment reach, by execution or other-
wise, property of the estate in the hands of the re-
ceivership court through its receiver; nor can this
result be accomplished in a suit commenced in such
court before the appointment of the receiver, in which
the jurisdiction of that court has not attached to the
property, actually or constructively, before the juris-
diction of the receivership court has so attached by the
appointment of a receiver. The only effect of such
judgment, therefore, is to establish and liquidate the
claim as a valid existing indebtedness of the receiver-
ship defendant, which, along with the claims of other
creditors, may be proved and allowed in the distribu-
tion of the estate.” (Emphasis added)
The Encyclopedias agree. 66 Am.Jur. 2d, Receivers,
§§ 263, 342, 343. The General Rules have also been recited
in 75 C.J.S., Receivers, as follows:
“As a general rule it may be stated that property
in the possession of a receiver is in custodia legis, and
the receiver’s possession is the possession of the court
for the benefit of those ultimately entitled. (§ 104 at
747)
“It is a general rule that one who has no lien when
a receiver is appointed cannot, after the appointment,
9
obtain a lien on the property in the receiver's hands,
and thereby gain a preference over other creditors
entitled to share equitably in the distribution of the
estate, and this is true even though the right to acquire
a lien existed before the appointment. (§ 132 at 770)
“Likewise, where someone else is garnishee, the re-
ceiver’s title will prevail over the claim of a garnishing
creditor, provided the receiver's title has attached at
the time of the service of the garnishee process.”
(8135 at 775)
The applicability of the principles espoused herein pre-
suppose that the asset sought to be garnished or attached
is within the possession of the Receiver and thus controlled
by the Arizona Court, Gilbertson v. Northern Trust Co.,
207 N.W. 42 (N.D., 1925), for example, involved an action
by a receiver against a bank’s fidelity insurer which claimed
a right of offset. The court’s decision is consistent with the
general rule that the right of offset, if any, must be fixed
at the moment of insolvency. In reaching that conclusion,
however, the court stated, at 45:
“Next, a receiver takes the estate of an insolvent for
the benefit of the creditors; he is in effect an assignee,
and stands in the shoes of the insolvent with exactly the
same rights and obligations that the latter had at the
moment of insolvency. Therefore choses of action pass
to him subject to any right of set-off existing at the
time of the appointment.”
The anaiogy, obviously, is clear. The claim of Heritage
against Reliance passed, at the moment of appointment, to
the Receiver, and no lien could be asserted from any sub-
sequent garnishment wherever it may have been served.
The appointment of the Receiver placed the chose in action
against Reliance in the constructive possession of the Re-
ceiver. The Receiver subsequently, in the same court, com-
menced the lawsuit against Reliance to obtain actual pos-
10
session. The Receiver should be permitted to pursue the
claim to its logical conclusion for the benefit of all creditors.
The above authorities set forth the well established rule
of law that one who has no lien when a receiver is appointed
cannot, after the appointment, impress a lien on property
in the receiver’s actual or constructive possession and there-
by gain a priority or preference over all other similarly
situated creditors or trustors who are entitled to share
equitably in the distribution of the estate. This is true
irrespective of the fact that the right to acquire a lien may
have existed prior to the appointment of the receiver.
Saper v. West, 263 F.2d 422 (2nd Cir. 1959), cert. denied,
360 U.S. 916 (1959); Clark v. Bacorn, 116 F. 617 (9th Cir.
1902) ; Lehman v. Heberle, 9 F.Supp. 100 (W.D.N.Y. 1934) ;
91 A.L.R, 996 (1934); 75 C. J. S. Receivers § 132 (1952).
As should be apparent from the record, the entire matter
now before the Court arises out of the attempt by Petitioners
Hatch to gain a priority or preference (in an amount of
more than ten times their actual investment) over all other
trustors who are similarly situated and who would be
entitled to share equitably in the receivership assets. It
should not be surprising that the law uniformly and clearly
rejects Petitioners’ position.
Petitioners assert that the bond and its prospective pro-
ceeds were not in the possession of the Receiver when they
instituted their garnishment. This argument simply ignores
the law relative to receivership assets :
“The effect of the appointment of a receiver is to
put the property from that time on in the eustody of
the court for the benefit of the party ultimately found
to be entitled to it. When the court has thus assumed
jurisdiction, possession and control over the property,
it is thenceforth as much in its possession as if already
in the actual possession of the receiver.
11
“Jurisdiction over the res may be acquired by acts
other than actual seizure, for instance by acts which
according to established procedure stand for dominion
and in effect subject the property to judicial control.
It may be by the mere commencement of an action, the
object, or one of the objects, of which is to control,
affect, or direct its disposition.” 2 Clark on Receivers
§ 332, p. 597-98 (3rd ed. 1959).
Ordinarily, judgment debts, unless they are valid and
subsisting liens or are based on priority claims, have no
priority over simple debts. No lien can be acquired over
property in the hands of the receiver. The court appointing
the receiver has full jurisdiction and control over the
debtor’s property and property rights and holds them free
from interference by any other court. 3 Clark on Receivers
§ 685, p. 1264 (3d ed. 1959); 65 Am.Jur. 2d Receivers
§ 166 (1972).
Funds or property in the hands of a duly appointed
receiver are in custody of the law or in custodia legis. They
are not subject to garnishment under Texas law or Arizona
law. Hardy v. Constuction Systems, Inc., 556 S.W.2d 843,
844 (Tex.Civ.App. 1977); Houston Drywall, Inc. v. Con-
struction Systems, Inc., 541 S.W.2d 220, 221 (Tex. Civ. App.
1976); Goodson v. Carr, 428 S. W. 2d 875, 879 (Tex. Civ. App.
1968); Southwestern Bell Tel. Co. v. Watson, 413 S. W. 2d
846, 848 (Tex.Civ.App. 1967); O’Leary v. Sup. Ct. of Gila
County, 104 Ariz. 308, 452 P.2d 101 (1969); Arizona Land
Corp. v. Sterling, 5 Ariz.App. 4, 422 P.2d 734 (1967).
„It is the general rule that property in custody of
the law is not subject to garnishment. This includes
funds and property held in obedience to the law in
hands of a receiver .. .” 26 Tex. Jur.2d Garnishment
§ 34, p. 705-06 (1961).
12
At the time petitioners initiated their garnishment action
in Texas, Reliance’s bond was already in custody of the
Receiver and the Arizona Superior Court. Under Texas
law, petitioners could not maintain a garnishment action
against the bond, Their garnishment came too late to per-
fect any priority interest in the proceeds of the bond or
to gain a priority over the Receiver's claim against the
bond. This obvious fact was well recognized by both the
District Court and the Court of Appeals, and was the basis
of the Court of Appeals’ holding that:
“Because all of the assets, including any rights
which Heritage may have to the proceeds of the bond,
were placed in the hands of a receiver in Arizona be-
fore the Hatches served the writ of garnishment on
Reliance, the garnishment could not have resulted in
a valid attachment of any debt owed by Reliance to
Heritage.” (Petitioners’ Appendix A)
ll. Heritage Could Not Have Maintained an Action Against
Reliance, in Texas, on March 30, 1977; Hence, the Hatches
Did Not Perfect Any Rights Against Reliance by Reason
the Writ of Garnishment Then Served.
The Hatches urge, here and below, that the Texas gar-
nishment should, under the principles of Sanders v. Ar-
mour Fertilizer Works, 54 S.Ct. 677, 292 U.S. 190 (1934),
entitle them to a prior lien (equal to their judgment against
Heritage), in any proceeds forthcoming on the bond. Anal-
ysis of the Sanders case shows it to be inapposite on hoth
the facts and the law. In Sanders, the garnishor-plaintiff,
Armour, an Illinois corporation, initiated the proceeding
by filing an Illinois garnishment against the fire insurance
companies of Sanders, a resident of Texas. This Tllinois
garnishment was the first legal proceeding of any type
involving the garnished fund. The fire insurers admitted
liability to Sanders (for a fire which had occurred 15 days
2
13
prior to the garnishment) but also gave notice of Sanders’
claim that the proceeds of such policies were exempt from
garnishment under Texas law. The Illinois court sustained
the garnishment of the proceeds, awarded recovery in the
amount sought by Armour, and directed execution on the
fund. 292 U.S. at pp. 196, 197. Prior to the execution, the
insurance companies interpleaded the funds into the Dis-
trict Court, Eastern District of Texas. Sanders and Ar-
mour were named as the adverse claimants to the fund.
The issue then, was whether the Texas statute exempting
said proceeds from garnishment could be invoked in the
interpleader action to defeat the effect of the Illinois gar-
nishment. Tn a 5-4 decision, the Court held that the gar-
nishment had created a lien on the funds, subsequently
interpleaded, and that said lien followed the fund into the
interpleader court.
The glaring difference in the instant matter is that in
the case at bar, the bond and its prospective proceeds were
in the hands of the receivership court and the Receiver
was proceeding with an action on the bond on behalf of all
creditors long before Petitioners attempted to gain a pref-
erence over the other creditors by their Texas garnishment.
The chose in action against the bond simply was not sub-
ject to execution in Texas or elsewhere. Thus the District
Court concluded:
„[The Court finds that the defendants Hatch do not
have a priority claim to the debt, if in fact such a debt
exists, in that no lien attached thereto prior to the
appointment of the receiver in Arizona.
“A lien on personalty under the facts here presented
could only have heen obtained by attachment of that
specifie personalty and only if such attachment was
made prior to the receiver’s appointment. This de-
fendants Hatch did not do. . (Petitioners’ Appen-
dix C)
14
and the Court of Appeals concurred:
“Because all of the assets, including any rights which
Heritage may have to the proceeds of the bond, were
placed in the hands of a receiver in Arizona before the
Hatches served the writ of garnishment on Reliance,
the garnishment could not have resulted in a valid
attachment of any debt owed by Reliance to Heritage.”
(Petitioners’ Appendix A)
In Sanders, the majority, through Mr. Justice McReyn-
olds, concluded that the Illinois proceedings gave Armour
a paramount right or superior equity to the proceeds of the
policies, based upon the following analysis:
“Tt is unnecessary to enter upon discussion of vexed
questions arising out of garnishment proceedings in
different jurisdictions. The different views are well
stated in Minor on Conflict of Laws, §§ 125, 126, 209.
This Court has had occasion to consider the general
subject in Cole v. Cunningham, 133 U.S. 107, 10 S.Ct.
269, 33 L.Ed. 538; (omitting citations). The latter
says—
‘Notice to the debtor (garnishee) of the commence-
ment of the suit, and notice not to pay to his credi-
tor, is all that can be given, whether the garnishee
be a mere casual and temporary comer, or a resident
of the state where the attachment is laid. His obliga-
tion to pay to his creditor is therefore arrested and a
lien created upon the debt itself, (omitting citations)
We can see no reason why the attachment could not be
thus laid, provided the creditor of the garnishee could
himself sue in that state, and its laws permitted the
attachment’.” (Emphasis added)
It is the italicized proviso which further distinguishes
Sanders from this case. The “creditor” of the garnishee, in
the context of the Sanders decision was Heritage, against
whom the Hatches had obtained judgment. Conceptually,
15
the Texas garnishment presupposed that Heritage was
owed money by Reliance. Under the reasoning in Sanders,
a prerequisite to a valid attachment of the proceeds is that
the judgment debtor, Heritage, be able to pursue a Texas
action against the garnishee, Reliance, at the time the gar-
nishment issued. Significantly, however, Heritage could
not have sued Reliance in Texas (or elsewhere) upon the
fidelity claim—that cause of action having already vested
in the Receiver who earlier commenced his lawsuit in
Arizona.
Arguably, a Texas garnishment proceeding against Re-
liance initiated prior to April 16, 1976, might have served
to elevate the judgment claim of the Hatches above the
status of general creditors, but that circumstance is not
presented. Upon the appointment of the Receiver, all rights
in and to the Reliance fidelity bond passed from Heritage
to the Receiver, as a matter of law. From and after the
date, the Texas court did not have power to “attach” or
“garnish” any indebtedness owed by Reliance to the Ari-
zona Receiver who had acquired the same free of any lien
or priority whatsoever.
CONCLUSION
The District Court properly analyzed and applied the
law to this case. The Court of Appeals affirmed. There
exists no error of fact or law. Petitioners have wholly failed
to sustain their burden of establishing, under Rule 19, that
there exist “special and important reasons” why the Writ
should be granted. Contrary to the protestations of Peti-
tioners, the decisions below were controlled by and applied
well settled legal principles, and did not involve any im-
portant question of law which has not been, but should be,
settled by this Court; nor has the Court of Appeals decided
16
a federal question in a manner in conflict with applicable
decisions of this Court or of another court of appeals on
the same matter. The Court of Appeals correctly held that
the findings and order of the District Court were proper
and affirmed. It is respectfully submitted that the Petition
for Certiorari should be denied.
Respectfully submitted,
Jenninos, Keprer & Have
By Wu F. Have
By Jonx R. Cunnincuam
111 West Monroe, Suite 800
Phoenix, Arizona 85003
Attorneys for Respondent
Reliance Insurance Co.
April 13, 1982
— XIpueddy
Appendix A
ARIZONA REVISED STATUTES
§ 6-865. Impairment of capital; unsafe condition; receiver-
ship
If it appears to the superintendent that the capital of a
trust company is either reduced or impaired below one
hundred and fifty thousand dollars or the affairs of the
company are in an unsound condition, the superintendent
shall order the company to make good any deficit or to
remedy the unsafe condition of its affairs within sixty days
of the date of such order and may restrict and regulate
the operation of the trust business until the capital is so
restored. If the deficiency in capital has not been made good
and the unsafe condition remedied within the prescribed
time the superintendent may apply to the superior court,
in the county in which the principal office of the company is
located, to be appointed receiver for the liquidation or re-
habilitation of the company. The expense of such receiver-
ship shall be paid out of the assets of the trust company.
Added Laws 1971, Ch. 160, § 5, eff. Jan. 1, 1972.
A-2 Appendix
Appendix B
RULES OF CIVIL PROCEDURE
66(c) Powers; termination; governing law
1. The receiver may, subject to control of the court,
commence and defend actions. He shall take and keep
possession of the property, receive rents, collect debts and
perform such other duties respecting the property as
authorized by the court.
2. The court may at any time suspend a receiver and
may, upon notice, remove a receiver and appoint another.
3. A receivership may be terminated upon motion served
with at least ten days notice upon all parties who have ap-
peared in the proceedings. The court in the notice of hear-
ing may require that a final account and report be filed and
served, and may require the filing of written objections
thereto. In the termination proceedings, the court shall take
such evidence as is appropriate and shall make such order
as is just concerning its termination, including all necessary
orders on the fees and costs of the receivership.
4. In all matters relating to the appointment of receiv-
ers, to their powers, duties and liabilities, and to the power
of the court, the principles of equity shall govern when
applicable.
Amended, effective Nov. 1, 1967.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.