GRAY v. GRAND TRUNK WESTERN RY. CO., 156 F. 736

SEAMAN, Circuit Judge (after stating the facts as above). .The declaration avers an injury suffered by the plaintiff in error, while engaged in the service of the receivers, under circumstances which would charge the receivers with liability, upon due proof in a suit against them, prosecuted during the term of receivership. Suit was not commenced, however, until after sale of the res under a foreclosure decree, delivery to the defendant in error through a purchase thereunder, and discharge of the receivers, as averred in the amended declaration in question.

The foreclosure proceedings referred to were in the Circuit Court of the United States for the Eastern District of Michigan, where the receivers were appointed, with ancillary proceedings and appointment in the Northern District of Illinois and elsewhere; and the plaintiff in error brought the present action, as trespass on the case, in the superior court of Cook county, Ill., against the receivers so appointed (and acting when the injury occurred), impleaded with T. C. Austin Manufacturing Company and Grand Trunk Railway Company, as defendants.

More than two years elapsed before the defendant in error, Grand Trunk Western Railway, was impleaded as defendant; and subsequently there was a discontinuance as to the other defendants, with the defendant in error retained as sole defendant. Removal to the trial court ensued, and the declaration, as finally amended to. charge liability thereupon, was challenged by demurrer. The inquiry whether it states a cause of action against the defendant in error is the only serious question for review, and its solution is not free from difficulty under the authorities.

Were the question of liability one arising in equity, in proper forum upon timely application, no difficulty would appear in framing the issues and granting the' relief which equity affords upon proof of the facts, unless barred by limitation or laches. Instead of such coqrse, with remedy sought at law, not only is the case governed by the rigid rules of that forum, but it has become complicated through mistakes in procedure and failure to bring in proper parties and charge liability within a period of limitation which may bar redress for the alleged cause of action in any forum.

Upon demurrer, however, the question of limitation, for which the defendant in error contends, cannot arise under the common-layv-rules upheld in Illinois (Gebhart v. Adams, 23 Ill. 397, 76 Am. Dec) 702; Gunton v. Hughes, 181 Ill. 132, 134, 54 N. E. 895, 1 Chitty on Plead. [16th Am. Ed.] 506, 526), and that objection must be disregarded upon review of the ruling against the sufficiency of the declaration. The matter for which recovery is sought is the injury alleged to be caused by negligence on the part of the receivers in their operation of the railroad property in custodia legis.

As the defendant in error had no part or interest in such operation, nor existing interest even in the property, it was plainly not answerable for the alleged negligence when this cause of action accrued; but liability is predicated upon the further averments of subsequent transactions in the purchase of the property, under decrees in the foreclosure proceedings, whereby it assumed obligations incurred by the receivers.

In other words, with a cause of action set up against the receivers — neither acknowledged by them nor sued upon within the terms of receivership — ■ recovery is sought against the purchaser alone, as for an obligation tlms assumed through the terms of purchase atid circumstances of succession in estate.

The general doctrine which controls the enforcement of remedies in the federal forum has frequently been declared by the Supreme Court, as preserving the distinctions between law and equity, under the constitutional grant of judicial powers, so that “the adoption of the state practice must not be understood as confounding the principles of law and equity, nor as authorizing legal and equitable claims to be blended together in one suit,” in conformity with such state practice. Bennett v. Butterworth, 11 How. 669, 674, 13 L. Ed. 859; 5 Notes U. S. Rep. 60; Lindsay v. Shreveport Bank, 156 U. S. 485, 493, 15 Sup.

Ct. 472, 39 L. Ed. 505. With no averments to charge direct or personal common-law liability against the defendant in error, these considerations set up for recovery, through purchase and succession to the railroad property- — at least aside from the express assumption of receivership obligations — are not legal obligations at the common law; and as equitable obligations alone they are barred from enforcement at law, under the above-stated doctrine. So, in reference to the alleged assumption of liability, without privity between these parlies, the general rule upheld in National Bank v.

Grand Lodge, 98 U S. 123, 125, So L. Ed. 75, and Keller v. Ashford, 133 U. S. 610, 620, 10 Sup. Ct. 494, 33 L. Ed. 667, would stand in the way of such enforcement, unless the subsequent opinions in Willard v. Wood, 135 U. S. 309, 313, 10 Sup. Ct. 831, 34 L. Ed. 210, and Union Life Insurance Co. v. Hanford, 143 U. S. 187, 190, 12 Sup. Ct. 437, 36 L. Ed. 118. are applicable to modify the rule. Under the first-mentioned doctrine, it has long been the rule of tbe federal jurisdiction — both before and since the general enactment of 187S (Act 1872, c. 355, § 5, 17 Stat._197;

section 914, Rev. St [1 U. S. Comp. St. 1901, p. 684]), adopting “the practice, pleadings, and forms and modes of proceeding” of the states respectively — in common-law civil cases, that equitable claims and defenses are not enforceable at law in the federal court, notwithstanding such authorization in the courts of the state. Lindsay v. Shreveport Bank, supra.

Without plain sanction, either for departure from that rule or for the exercise of jurisdiction at law under conditions and in precedents applicable to these averments, the present suit would not appear to be maintainable, and demurrer to the declaration was rightly sustained. On the other hand, if the later decisions of the Supreme Court establish a rule — whether by way of modification of such doctrine or otherwise — which authorizes the remedy thus sought, they are to be observed as controlling. Expressions in the opinions in the above-mentioned cases of Willard v. Wood and Union Life Insurance Co. v.

Hanford may not appear in harmony with the view that no claim purely equitable can be enforced at law under the sanction of the state practice.

In each of these cases, speaking in reference to the enforcement by a mortgagee of a covenant between his mortgagor and a grantee of the latter for payment of the mortgage indebtedness, it is stated (without qualification) that: “The question whether the remedy of the mortgagee , against the grantee is at law and in his own right, or in equity and in the1 right of the mortgagor only, is * * * to be determined by the law of the place where the suit is brought.” In neither case, however, can these remarks be accepted as decisive of the present inquiry, under our understanding of the issues there involved.

The issue in Willard v. Wood was whether such obligation was enforceable in a suit at law by the mortgagee against the grantee, without privity between the parties; and the denial rests, as stated in the opinion, on the authority of National Bank v. Grand Lodge, supra, and Keller v. Ashford, supra, upholding the common-law rule.

The remarks upon remedy, as “governed by the lex fori, the law of the District of Columbia, where the action was brought,” were made arguendo, in answer to the contention that the plaintiff was entitled to the benefit of the rule in New York (where the property and conveyance were located), which authorized such suit “either in equity or at law.” Whether there was any provision or rule in New York fixing the nature of the obligation was not there considered.

That the rule of practice referred to could not fix the form of remedy in another fortim was decided in conformity with the citations in the opinion, and the comment must be read in that view. In Union Life Insurance Co. v. Hanford, the suit was in equity for foreclosure of a mortgage, in the federal court, sitting in Illinois, and issue arose upon claim of a deficiency judgment against the mortgagor.

The defense was that his personal liability was discharged by an extension of time granted by the mortgagee to a grantee of the mortgagor who had assumed payment of the debt; and, the fact being undisputed, the sole test of liability was whether the grantee became directly and primarily obligated in favor of the mortgagee, so that his relation to the mortgagor became that of principal with the latter as mere surety for the debt. Under the law of Illinois, the opinion states that such was the well-established nature of the liability; and, thus applying the law of the contract, the defense was sustained.

By way of premise for this conclusion, the opinion refers to the “remedy of the mortgagee against the grantee” as determined by the law of the place where suit is brought (in the language above quoted), with the remark, “as was adjudged in Willard v. Wood.” But the decision, upon our understanding of its import, rests on the

interpretation of the agreement in question as creating direct (legal) liability, in conformity with the local law, for which remedy at law was proper. In tlie case at bar, however, the equitable features are far more complicated than those involved in either of the above-mentioned decisions. The special nature of the liability incurred for injuries arising through negligent operation, under a receivership, has been fruitful of much discussion in judicial opinions and text-books; but no review of the various theories is needful for the present inquiry, as Ihese propositions are well settled in the federal courts: (

a) The receiver is not chargeable with personal liability for such injuries, not due to Ids persona! negligence or conduct, but is chargeable as the representative of the property and funds in his custody within the limits of such property and of his possession or control, (b) “Actions against the receiver are in law actions against the receivership, or the funds in the Lands of the receiver, and his contracts, misfeasan-ces, negligences, and liabilities are official, and not personal, arid judgments against him as receiver are payable only from the funds in his hands.” McNulta v. Lochridge, 111 U. S. 327, 332, 12 Sup. Ct 11, 35 L. Ed. 796. (

c) Prior to the act of Congress of 1887 (Act March 3, 1887, c. 373, 24 Stat 55-1-, 1 Comp. St' 1901, p. 582), the receiver could not be sued without leave of tlie court having custody of the res, and all claims were subject to adjudication in such court. Davis v. Gray, 16 Wall. 203, 218, 21 L. Ed. 447; 7 Notes U. S. Rep. 980. In other words, no liability arises which is enforceable at law, except as authorized either under the terms of this statute or by the court administering the property, (

d) With the termination of the receivership and transfer of property and funds, as disclosed in the declaration, the suit at law was not maintainable against the receivers. McNulta v. Lochridge, supra, and 12 Notes U. S. Rep. 30; Beach on Receivers (Alderson) §§ 720, 725; Gluch & Becker on Receivers, § 82; 2 Elliott on Railroads, § 587; Archambeau v. Platt, 173 Mass. 249, 251, 53 N. E. 816. The defendant in error, as purchaser of the property and successor to the fund, having no

part in the alleged tort, if chargeable for the damages, is chargeable alone through liability assumed in the purchase and circdmstances of succession; and then only, under the facts averred, in conformity with the principles of equity, if governed by the general doctrines above referred to. In such aspect, however, the case is, as we believe, directly within and ruled by the decision of the Supreme Court in Texas & Pacific Railway v. Bloom, 164 U. S. 636, 643, 17 Sup. Ct. 216, 41 L. Ed. 580, supplementing the prior decision in Texas & Pacific Railway v. Johnson, 151 U. S. 81, 99, 14 Sup. Ct. 250, 38 L. Ed. 81.

While the earlier case of Johnson arose upon writ of error to the Supreme Court of Texas, and the personal judgment against the corporation succeeding the receivership was affirmed upon the ground that the question of liability was one “of general law and for the state court to pass upon,” the Bloom Case arose in the Circuit Court of the United States, and was brought from the Circuit Court of Appeals on error to the Supreme Court. Both cases were identical in the circumstances upon which the liability of the corporation was predicated, and the opinion (151 U. S. 99, 14 Sup. Ct. 250, 38 L.

Ed. 81) affirming tlie Johnson judgment thus summarizes the rule adopted by the state court for charging personal liability: “In the view of that court, a railway company might be held directly liable when a receiver is appointed in an amicable suit at the instigation of the company and for the company’s own purposes, and, these purposes being accomplished, the property is returned to its owner, the rights of no third persons as purchasers intervening, upon the ground that the acts of the receiver might well be regarded as the acts of its own servant, rather than those of an officer of the court, which under such circumstances he would only be sub modo.

But as the court did not feel authorized to entertain a conclusion which might carry the implication that this receivership would have been, created or continued, although its object had only been to place the property temporarily beyond the reach of creditors until it could be augmented in value by improvements made from earnings under the protection of the court, that rule was not applied in this ease.

The company was held liable upon the distinct ground that the earnings of the road were subject to the payment of claims for damages, and that as, in this instance, such earnings to an extent far greater than sufficient to pay the plaintiff had been diverted into betterments, of which the company had the benefit, it must respond directly for the claim.

This was so by reason of the statute (Laws Tex. 1887, p. 120, c. 131, § 6), and, irrespective of statute, on equitable principles applicable under the facts.” On examination of the statutory provision referred to under the title of “Receivers,” which mentions liabilities to be paid by a receiver out of moneys coming into his hands, we find no obligation imposed, either upon receiver or fund, not within the general rules of equity and well recognized as thus chargeable.

The subsequent case of Bloom, brought from the federal court, involved not only the question of liability, upheld in the prior decision' when arising in a state court, but the further question of direct enforcement at law in the federal forum. ■ Error was assigned upon the contention that the alleged cause of action was equitable and furnished no support there for a personal judgment at law; and thus presented, as in the present instance, the main question for review.

In overruling this assignment, the opinion recognizes both the equitable nature of the liability there charged and the limited scope of the Johnson decision. It recites, however, the above-quoted review in that opinion of the premises and rule of the Texas decisions, and expressly approves and adopts them, as applicable in the federal court there sitting.

In reference to the charge for betterments, the opinion is explicit in approval of direct liability, subject to the right of the company to “have the aid of a court of equity to restrict its liability to that amount,” upon showing that the claims exceeded the betterments.

We understand that the decision, although not expressly so defined, rests upon this view: That the local law establishes the obligation assumed by the successor, who takes over the°property and fund from a receivership' with assumption of liabilities, to be one of direct liability, and not merely equitable, for payment of claims chargeable against the fund; and that the direct liability so affixed determines the nature of the cause of action in the federal court, and it becomes enforceable there at law.

With the adoption of the direct liability rule of Texas, the remedy may be administered at law, within the settled principles of that jurisdiction; and' if question is open as to the bearing or effect of the rule -when arising in equity jurisprudence, it is not pertinent on this review.

These decisions are applicable, as we believe, both to the equitable state of facts averred in the present declaration — with their effect strengthened by the special admission on the part of this defendant in error, in paragraph 6 of its petition for possession of the railroad, “that it is legally liable for all the obligations imposed by said decree” — and to the lex fori, as settled by the Illinois decisions.

As before mentioned, it has long been the established law of Illinois that one person who contracts with another to assume an indebtedness of the latter to a third person becomes directly and primarily liable to such third person, who may sue at law upon the promise (Union Life Insurance Co. v. Hanford, supra, and 'cases cited) ; and such rule is general, not limited to mortgage indebtedness assumed by a grantee (Eddy v. Roberts, 17 Ill. 505, 508; Thompson v. Dearborn, 107 Ill. 87, 92). In Bartlett v. Cicero Light Co. (decided in 1898) 177 Ill. 68, 73, 52 N. E. 339, 42 L. R. A. 715, 69 Am. St.

Rep. 206, the question of the defendant’s liability, in a suit at law, arose under circumstances singularly identical with those stated in the above-cited Texas cases, and the opinion cites and adopts the rulings of the Supreme Court of Texas thereupon, with special reference to Texas & Pacific Ry. Co. v. Johnson, 76 Tex. 421, 13 S. W. 463, 18 Am. St. Rep. 60, which was subsequently affirmed by the Supreme Court of the United States, as above referred to.

Not only was direct liability upheld and rested on equitable considerations which would not support such liability under the general doctrine, and in no sense distinguishable in principle from those averred in the present case, but the decision is unmistakably brought within the rulings of the United States Supreme Court in both Texas cases. The opinion is well considered and unanimous. Its doctrine is reaffirmed in subsequent cases (see Knickerbocker v. Benes, 195 Ill. 434, 443, 63 N. E. 174, and its application in Wabash R. R. Co. v. Stewart, 41 Ill.

App. 640, to facts like those involved here), and unquestionably settles the law of Illinois, as resting direct and personal liability upon grounds purely equitable under the general rule, and thus establishes the case at bar within the distinction upon which both the Bloom Case and Union Life Insurance Co. v. Hanford, supra, are understood to authorize recovery at law, namely, enforcement of the direct liability created by the state law out of these equities, with no blending of procedure in law and equity thereby recognized. In Thompson v. Northern Pac. Ry. Co., 93 Fed. 384, 35 C. C.

A. 357, like suit at law was upheld against the purchaser alone, upon similar state of facts, with the exception that leave to sue was granted upon the equity side of the court, having ancillary jurisdiction of the foreclosure decree under which the sale was made. It was there, contended:

(1) That the complaint stated no cause of action at law; and (2) that writ of error did not lie, because in reality an equitable proceeding, “allhough in form an independent action at law.” The opinion, however, overrules both contentions, and expressly states that the proceeding was not equitable, but was an action at law, and was thus maintainable upon the obligation assumed by the purchaser. Whether jurisdiction at law rested on the leave so granted, local rule, or otherwise, is not discussed. The remaining objection of duplicity, assigned in the demurrer, is untenable.

The twofold facts averred as grounds of liability, by way of express assumption, and in succession to improvements and better-ments made by the receivers, are connected, not independent, and thus state, or tend to state, a single cause of action under the rules of pleading. 1 Chitty on Plead. (16th Am. Ed.) 249; Stephens on Pleadings (3d Am. Ed.) 248, 249.

The judgment of the Circuit Court is not in conformity with the foregoing view, and is reversed accordingly; and the case is remanded, with direction tp set aside the judgment and overrule the demurrer to the amended declaration, for further proceedings in conformity with law.