CENTRAL APPALACHIAN CO. et al. v. BUCHANAN, 90 F. 454

LURTON, Circuit Judge, after making the foregoing statement of facts, delivered the opinion of the court. The principal question arising upon this appeal is as to the right of the Central Appalachian Company to set off- against the judgment in favor of Buchanan, as receiver of the Southern Land & Improvement Company, the claim in its favor against the Southern Land & Improvement Company arising out of the breach of the covenants of the latter company in its conveyance to E. H. Patterson, of October 13, 1892.

As the question arises upon demurrer, the facts stated in the cross bill and the proposed amendments thereof must be taken as confessed. The objections to the cross complainant’s asserted right of set-off, which have been urged by counsel for the appellee, are numerous, and will be considered separately. 1. It is said that the covenants breached ran to E. H. Patterson, and not to the Central Appalachian Company. The conveyance to Patterson included both realty and chattels. The covenants' extended to the title of the vendor to both classes of property.

There were two covenants, —one of general warranty, and one that the vendor was “seised of a good and lawful fee-simple title to said property.” That these covenants passed with the land included in the conveyance to the as-signee of Patterson, the said Central Appalachian Company, is conceded. To the extent, therefore, that the covenants applied to the land, the Central Appalachian Company was entitled to enforce them.

As the demurrer was general, and went to the whole of the equity of the cross bill, it should for this reason alone have been overruled, unless there were other fatal objections going to the whole equity of the cross bill. But we are of opinion, under the averments of the bill, that the covenants applicable to the chattel property included in lie conveyance inured also to the use and benefit of the same corporation. The purchase was made by Patterson for the Central Appalachian Company, and this the vendor knew. The purchase money paid was the money of the real purchaser, and this, too, the vendor knew.

The condition that Patterson should convey same to the Central Appalachian Company upon the happening of a condition named actually occurred, and the conveyance was so made. But this mode of taking title, it is averred, was one devised by Patterson to subserve a scheme of his own against his principal. It was one in which the vendor had no interest whatever. These circumstances make the conveyance one for the use and benefit of Patterson’s principal, — a principal known to the vendor, — and a court of equity would have regarded him as a naked trustee.

A recovery by Patterson upon these facts for a breach of these covenants would inure to his principal. Equity abhors circuity of action, and under such circumstances will permit the beneficiary to avail itself of the benefits of the warranty by way of set-off. 2. It is urged that this right of set-off cannot be asserted against a judgment in favor of a receiver of the warrantor. The record in .which Buchanan was appointed receiver is not filed. We must assume that h.e was appointed under the usual proceeding by creditors against an insolvent business corporation, and that no priority was sought or acquired.

This is in accord with the averments of the cross bill touching this appointment, which in substance are that he was appointed for the purpose of holding possession of the assets of the company, and of collecting its debts, and that his suit was for rents, which accrued to the Southern Land & Improvement Company as lessor,, under a contract with the Central Appalachian Company as lessee, and that “his recovery was alone in right of that company,” and in pursuance of an order that he should “collect all demands which were due or should become due” to said company.

Such an appointment does not change the title or impose any lien upon the property in possession of the receiver. He is a mere custodian of the court, holding and protecting the property to await its ultimate disposition by the court, according as the right might appear. No right of priority is ordinarily fixed by such appointment. It cuts off thé right to acquire liens, but imposes none by virtue of the step alone. Railroad Co. v. Humphreys, 145 U. S. 82, 12 Sup. Ct. 787; Union Bank v. Kansas City Bank, 136 U. S. 223-236, 10 Sup. Ct. 1013; New York, P. & O. R. Co. v. New York, L. E. & W. R.

Co., 58 Fed. 268-278; High, Rec. § 5. The receiver took the claim of the Southern Land & Improvement Company against the Central Appalachian Company in the plight and condition in which it then was. If it was subject to an equitable set-off in the hands of the Southern Land & Improvement Company, it was subject to the same right of set-off in his hands. This must be so from the well-settled principles in respect to the title and right of such receivers, and from analogy to seizures of choses in action under process more stringent than that of a receivership. Thus, in North Chicago Rolling-Mill Co. v. St.

Louis Ore & Steel Co., 152 U. S. 596-618, 14 Sup. Ct. 710, a garnishee, after a judgment at law in favor of ihe gamisher, was permit fed by a bill in equiry (o ml win ihe garnishing creditor from enforcing payment of the judgment until the amount due upon an unliquidated claim for damages arising from tlie breach of a contract, in existence when the garnishment proceedings were instituted, could be ascertained and be set oil against, the defendants' judgment. This was upon the ground, as stated by Mr.

Justice Jackson, that “the legal opera lion and effect of the garnishment proceedings, and of the final order made therein, was only to impound what was legally and equitably due from the garnishee after the adjustment of the claims between the latter and the principal debtor, and place it beyond the control of tbe debtor and subject to collection for the benefit of the attaching credit- or.” So, in Kentucky an assignee under a general assignment is not a purchaser for value, and can assert no equity which could not be asserted by the assignor himself. Bridgford v. Barbour, 80 Ky. 529; Bank v.

Payne, 86 Ky. 446-466, 8 S. W. 856. In Chenault v. Bush, 84 Ky. 528, 2 S. W. 160, the right of a debtor to set off a note included within a general assignment by his creditor was held not to have been cut off by the assignment, nor by the appointment of a receiver to take the assigned property, and hold and collect same for the benefit of creditors of the assignor.

In considering the effect of Hie assignment upon the debtors’ right of set-off, the Kentucky supreme court, through Judge Bennett, said: “If tlie appellant, as receiver, represented assignees of Williams & Stevenson for value, tlie rule might he different; probably it would be different. Or, if appellee bad acquired bis right to- the debt pleaded by him as a set-off, after tlie assignment for the benefit of creditors, the rule would be different. But the appellant, as receiver, does not represent assignees for value.

The assignees are merely the voluntary representatives of Williams & Stevenson for tiie benefit of their creditors. The equitable rigid, acquired by these creditors by reason of the assignment consisted in tlie right to an equal division of the assignor’s assets among themselves. These assets are the assets found to be due after deducting all just set-offs, counterclaims, discounts, etc. This balance they are entitled to, and no more. This is all the fund Williams & Stevenson would have to satisfy their creditors, in case they had made no assignment for the benefit of tlioir creditors.

Had Williams & Stevenson sued on these notes in place of the receiver, there is no. doubt that the appellee could use as a set-oil' (he amount he had paid the bank for Williams & Stevenson on said joint obligation, which would have disabled Williams & Stevenson to that extent to meet (he. demands of their other creditors.

Instead, the voluntary assignee's of Williams & Stevenson— railier, the receiver — bring suit on these notes; so, to say that tlie creditors of Williams & Stevenson, by the voluntary assignment, can compel appellee to pay said notes in full, and then receive only a. pro rata of the debt, which he was compelled to pay for Williams & Stevenson, would be to put appellee in a -worse position, and tlie other creditors in a better position, by the failure of Williams & Stevenson and the appointment of assignees.” The right oí set-off at law is oí statutory origin.

But courts of equity, independently of any statute, have from an early day granted relief beyond the terms of such statutes when the particular circumstances have been such as to raise an equity in support of tlie claim. So, courts of equity of the United States have been peculiarly alert to prevent the defeat of an equitable right of set-off by tlie interposition of assignments, receiverships, or statutory liquidations, and to extend the right whenever there appeared any substantial equity in favor of the claim. Thus, in Scammon v. Kimball, 92 U.

S. 362, a banker was allowed to set off the demand of an insurance company for money deposited, by the amount due on its fire policies issued to and held by him, although the insurance company was bankrupt and in the hands of an assignee. In Carr v. Hamilton, 129 U. S. 252, 9 Sup.

Ct. 295, a debt for money loaned and secured by mortgage was allowed to be set off by the equitable value of an endowment policy held by the mortgagor in the mortgagee insurance company, notwithstanding the latter was insolvent, and its assets in the hands of a liquidator, and although the endowment policy had not matured at date of liquidation, Justice Bradley saying: “Where á holder of a life policy borrows money of his insurer, it will he presumed, prima facie, that he does so on the faith of the insurance, and in expectation of possibly meeting his own obligation to the company by that of the company to him, and that the case is one of mutual credit, and entitled to the privilege of compensation or set-off whenever the mutual liquidation of the demands is judicially decreed on the insolvency of the company.

The ease of Scammon v. Kimball, 92 U. S. 362, is in concurrence with this view. It was there held that a banker, having insurance in a company, which was rendered utterly insolvent by the great Chicago fire of 1871, by which the banker’s insured property was consumed with the rest, had a right to set up the amount of his insurance against money of the company in his hands on deposit. The insurance was not a debt due at the time of the insolvency. It became due afterwards, when the banker had performed all the conditions required in such eases.” In Scott v. Armstrong, 146 U. S. 499, 13 Sup.

Ct. 148, it was field that tfie receiver of a national bank, closed by order of tfie examiner, took tfie assets in trust for creditors, and subject to all claims and defenses tfiat might fiave been interposed against tfie insolvent corporation. So, in North Chicago Rolling-Mill Co. v. St. Louis Ore & Steel Co., 152 U. S. 596, 14 Sup.

Ct. 710, tfie equitable right of set-off was field not to be defeated by tfie recovery of a judgment in favor of a garnishing creditor of tfie complainant, who sought to set off such judgment by an unliquidated demand for damages which accrued after the judgment, but upon a contract then in existence. The insolvency of tfie creditor against whom the right of set-off was asserted was regarded as a sufficient equity to justify relief. 3. This claim of set-off arises out of tfie same transaction as tfie judgment sought to be set off.

Tfie one demand is for rents of lands and mineral rights; tfie other is for breach of covenants in a conveyance of chattels, constituting a colliery property situated upon the leased lands. Tfie two contracts were made tfie same day, and each, was dependent on tfie other. Tfie colliery properties were needed to exercise tfie mineral rights in tfie leased lands. Stone v. Fargo, 55 Ill. 71; Railroad Co. v. Griggs, 12 Mich. 45. In Stone v.

Fargo, supra, a claim for damages arising from breach of a bond given by a vendor of land to tfie vendee, conditioned to hold him harmless, against liability upon certain purchase-money notes outstanding, which had been given by tfie vendee to a third person as purchase money of tfie same land, was set off in equity against purchase-money notés due tfie vendor. In Railroad Co. v.

Griggs, supra, a bill in equity was sustained, and complainant allowed to set off purchase-money notes by the amount of two mortgages paid by the purchaser which were a lien on the land, there being a covenant against incumbrances, and the vendor insolvent. It would seem, however, that, under the law of Kentucky, there was a statutory right of set-off existing in respect to all demands arising out of contract, regardless ol! mutuality of credit. Civ. Code Ky. § 96; Shropshire v. Conrad, 2 Metc. 143; Forbes v. Cooper, 88 Ky. 285, 11 S. W. 24.

Neither, would it seem, is the equitable right of set-off limited to credits strictly mutual, if insolvency exists. North Chicago Rolling-Mill Co. v. St. Louis Ore & Steel Co., supra. 4. That the claim of the appellant, the Central Appalachian Company, is unliquidated, is no objection in a court of equity, if insolvency exists. Under such circumstances, the court will restrain the enforcement of the demand against which the set-off is to be applied until the cross demand can be liquidated. North Chicago Rolling-Mill Co. v. St. Louis Ore & Steel Co., supra. So, in Kentucky,—Forbes v. Cooper, 88 Ky. 285, 11 S.

W. 24. 5. It is said that the claim asserted as a set-off had not arisen when the receiver was appointed, nor when he recovered his judgment. The contract under which the set-off arose was in existence when the receiver was appointed, and the warrantor in that contract was then insolvent. Under the case, so often cited, of North Chicago Rolling-Mill Co. v. St. Louis Ore & Steel Co., 152 U. S. 596, 14 Sup. Ct. 710, this fact was in if self enough. But a right of action for breach of one of the covenants had ariscar when the receiver was appointed.

The conveyance to Patterson included both real and personal property. There was a covenant of general warranty, and a covenant of seisin. Both the real and personal property was then incumbered with a prodigious mortgage, which, since the receiver’s judgment, has been enforced, and the cov-enantee has been thereby deprived of the property so conveyed. The covenant of seisin as to the real estate was therefore broken so soon as made. The covenant of general warranty has since been broken by the grantee’s ouster from the property by the mortgage foreclosure decree.

The vendor of personal property in possession impliedly war-ranis the title by the act of sale. Ills sale is an assertion of title.' This is elementary. This implied warranty of title is held in Kentucky to be broken as soon as made if the title was defective, and a right of action at once arises. Payne v. Rodden, 4 Bibb, 304, 305; Scott v. Scott’s Adm’r, 2 A. K. Marsh. 217. So it is held in Tennessee (Word v. Cavin, 1 Head, 506); and in Massachusetts (Perkins v. Whelan, 116 Mass. 542). This implied warranty the Kentucky courts assimilate to an express covenant of seisin in a conveyance of real estate. Tipton v.

Triplett, 1 Metc. 570; Chancellor v. Wiggins, 4 B. Mon. 201; Scott v. Scot t's Adm’r, supra. But if the covenant of warranty of title is express, and not implied, the same cases hold that an action will not lie until a recovery of the property can be averred and proven. In this conveyance we have both a general warranty of title and a covenant of seisin. The vendor of the chattels expressly covenanted that it was "seised of a good and lawful fee-simple title to said property.” The covenantor had no such fee-simple or other good and lawful title. This covenant was therefore-broken when made.

This is by analogy to tbe same covenant in deeds of real estate, and we see no reason why the rule in respect to such a covenant in a conveyance of realty shall not be applied to a like covenant in a conveyance of chattels. Thus, a right of action for breach of this covenant of seisin had arisen when the receiver was appointed, and when he recovered his judgment. The damage had at neither date fully accrued. The mortgage covered this and other property. The latter might discharge the burden. The event has proven that it was insufficient.

The fact remains, though, that, when the receiver recovered his judgment, the full damage had not accrued, and could not have been made to appear. These damages were unliquidated. They were therefore not the subject of set-off at law, but may be set off in equity when insolvency or some other equity exists in support of the right, as in North Chicago Rolling-Mill Co. v. St. Louis Ore & Steel Co., supra. In Kentucky, unliquidated damages were not at law the subject of set-off. Shropshire v. Conrad, 2 Metc. 143; Taylor v. Stowell, 4 Metc. 175; Williams v. Gilchrist, 3 Bibb, 49.

But it was held that, if the plaintiff be insolvent or a nonresident, any claim for unliquidated damages arising out of contract might be set off. Forbes v. Cooper, 88 Ky. 285, 11 S. W. 24. The distinction between courts of law and equity is not maintained in Kentucky, and relief is administered according to principles of law or equity, as the facts demand, and upon the same pleading. Thus, no bill in equity was needed to obtain the benefits of the equitable doctrine of set-offs; and the set-off was allowed in Forbes v.

Cooper, supra, upon equitable principles, and not because, at law, a claim for unliquidated damages was the subject of set-off. It is clear, therefore, from the foregoing considerations, that the right to apply to a. court of equity to stay the enforcement of the judgment at law against the appellant is not defeated because the damages had in part accrued by reason of the breach.of the covenant of seisin at the time the suit at law was begun. It was observed by the master of the rolls in Jeffs v. Wood, 2 P.

Wms. 129, that: “It is against conscience that A. should he demanding a debt against B., to whom he is indebted in a larger sum, and would avoid paying”; and that “in these cases equity will take hold of a very slight thing to do both parties right.” , In Carr v. Hamilton, 129 U. S. 255, 9 Sup.

Ct. 295, Justice Bradley said that: “Natural justice and equity would seem to dictate that the demands of parties mutually indebted should be set off against each other, and that the balance only should be considered as due.” This natural justice and equity may be asserted in many cases after judgment upon one of the debts; and one of these cases is where the party against whom it is asserted is insolvent, and there was no culpable negligence in failing to rely upon it as a legal set-off. Railroad Co. v. Greer, 87 Tenn. 698, 11 S. W. 931, and cases cited. 6.

The Corporation Trust Company was properly brought into court by service of the subpoena upon its assistant treasurer in its general office in New Jersey. The return of the serving marshal, together with his affidavit as to the usual mode of serving process upon its assistant treasurer by direction of the superior officers of the corporation, is satisfactory evidence that this officer was designated by the corporation as the proper officer to make service upon. The delay in making defense is not explained.

No abuse of the sound discretion of the circuit court is shown in refusing to set aside the decree pro confesso. But, inasmuch as the defense of a set-off set up by the cross bills of the other two appellants will necessarily inure to the benefit of the Corporation Trust Company, the final decree as to it, as well as the other appellants, will be set aside and reversed. The decree pro confesso as to the Corporation Trust Company will not be set aside, nor any answer allowed; but that company will, on final decree, be given the benefit of the defenses made by the Central Appalachian Company.

The case will be remanded, the demurrers overruled, and the cause proceeded with in accord with the opinion of this court.