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Frary v. Vischer Products Co.

January 22, 1953


Author: Lindley

Before MAJOR, Chief Judge, and LINDLEY and SWAIM, Circuit Judges.

LINDLEY, Circuit Judge.

Defendants appeal from a judgment in a declaratory judgment action in which also supplemental coercive relief by way of injunction was prayed. The court adjudged plaintiff to be a creditor of Vischer Products Company, an Illinois corporation, in the sum of $56,250, found that a transfer of the tangible assets of the mentioned corporation to Vischer Products Company, (Inc.) a Delaware corporation, and an assignment of the intangible assets to the stockholders of the former corporation were in fraud of the corporate creditors and that the property transferred was, in equity, held in trust for the benefit of the creditors of the assignor corporation, including plaintiff. The trial court's opinion, in which are embraced its findings of fact and conclusions of law, appears in 104 F.Supp. 411.In view of the full statement of facts therein contained, we shall avoid unnecessary repetition.

The amended complaint sought a declaratory judgment that plaintiff was a creditor of the original company to which there remained owing a balance of $56,250 due on or before July 16, 1953; that all of the tangible assets had been transferred to the Delaware company and all the intangible assets to the assignor's stockholders; that these transfers violated the Bulk Sales Act of Illinois, Section 78 of Chapter 121 1/2, Ill.Rev.Stats., and were in fraud of plaintiff's rights as a creditor under Illinois law and, therefore, void. Both the Delaware company and the stockholders were joined as defendants.

The court found that it had jurisdiction of the parties and of the subject matter; that plaintiff was a creditor of the defendants as alleged; that the transfers of the assets of the original corporation were for an inadequate consideration and in fraud of plaintiff's rights as a creditor; that the property transferred and the income therefrom were impressed with an equitable lien in favor of plaintiff in the amount of $56,250 and ordered that defendants be enjoined from transferring any of the assets assigned to them until that lien should be satisfied in full.

Speaking briefly, the defendants contend here that, though they do not dispute that $56,250 is owing to plaintiff and will be due on July 16, 1953, the court had no right to entertain the suit before that date; that the amount involved does not exceed $3,000; that no actual controversy existed at the time this suit was begun; that plaintiff, not being armed with a judgment and execution thereon returned nulla bona, may not maintain the suit; that there was no violation of the Bulk Sales Act of Illinois and no transfer in fraud of creditors; that plaintiff consented and waived any objection to the transfers and that the court erroneously impounded the assets.

There is no denial that the assigning corporation owed plaintiff the sum of $56,250 due on or before July 16, 1953. The chief question presented is whether plaintiff might invoke the jurisdiction of the court to protect its undisputed debt not yet due and have a judgment declaring the transfers fraudulent and void, either on general equitable principles or because of violation of the Bulk Sales Act of Illinois. This important question was decided against the contentions of defendants, who now seek to reverse the judgment. Various incidental questions are involved.

First of all, we face the question of whether plaintiff might join in its action a prayer for declaratory judgment and a prayer for coercive relief by way of injunction. The practice in England and in American is to combine a request for a declaration wiht a request for an injunction or other coercive relief. Declaratory Judgments, Borchard, p. 170. Consequential or executory relief may be demanded either in association with or as a supplement to declaratory relief. Idem, p. 172. Federal Civil Procedure Rule 57, 28 U.S.C.A., provides that "The procedure for obtaining a declaratory judgment pursuant to Title 28, U.S.C., ยง 2201, shall be in accordance with these rules, and the right to trial by jury may be demanded under the circumstances 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, effective Oct. 20, 1949." "Written instruments, including ordinances and statutes, may be construed before or after breach at the petition of a properly interested party, * * *." Notes of Advisory Committee on Rules, p. 246, Title 28 U.S.C.A. It seems clear that declaratory judgment actions may include prayers for coercive relief.

Closely allied to the foregoing issue is the contention that no justiciable controversy existed. It appears that, after the transfers had been made, on October 3, 1947, plaintiff's attorneys addressed a letter to counsel for the Illinois corporation inquiring as to payment of the indebtedness. The lawyers replied October 3, 1947 that the indebtedness would be paid only when due. Still later, on June 28, 1950, plaintiff reopened the question and on July 19, 1950, Vischer Products Company again wrote that the matter would be discussed only when due.

Nothing transpired thereafter until the beginning of the suit, October 10, 1950. The issues were sharply joined by the complaint and the answers, presenting a clearly defined and sharply contested controversy as to whether the transfers made by Illinois corporation were fraudulent and void and whether plaintiff had consented thereto. We think there can be no question but that a justiciable controversy existed.

Defendants insist that the suit could not be maintained by plaintiff as it had not first obtained a judgment upon its indebtedness and had execution returned nulla bona. Even before promulgation of Rule 18(b), the federal courts in enforcing a cause of action created by state statute, were not confined to the practice provided for the state courts but followed their own procedure. Thus, in Braun v. American Laundry Mach. Co., D.C., 56 F.2d 197, at page 199 the court said: "* * * the Bulk Sales Act conferred on plaintiff a substantive right in kind identical with the ancient right of a creditor to attack a transfer made with intent to hinder, delay, or defraud creditors, and * * * gave a procedural remedy which dispensed with conditions precedent such as were theretofore operative in suits under the Act and traditionally in force in suits to set aside transfers in fraud of creditors. The substantive equitable right thus created may be enforced in a federal court; the procedure in that court sitting in equity will, however, be governed, not by the remedial provisions of the state statute, but solely by the general principles of equity procedure as applied in the federal courts." The court proceeded: "* * * a creditor may maintain a bill to set aside a fraudulent conveyance in a federal court only if he has previously exhausted his remedy at law, ordinarily by judgment and return of execution nulla bona or if the debtor waives the judgment and return and admits the debt."

However, by Rule 18(b) the federal procedure was changed. As the court said in Armour & Co. of Delaware v. B. F. Bailey, Inc., 5 Cir., 132 F.2d 386, 387, "Prior to the adoption of the rules of civil procedure, a creditor could not maintain an action to set aside a fraudulent conveyance in the federal court until he had reduced his claim to judgment. This rule was abrogated by Rule 18(b) of the Federal Rules of Civil Procedure, 28 U.S.C.A. following section 723c, which provides that claims previously cognizable only after another claim had been prosecuted to a conclusion may be joined together in a single action.By its express terms this rule contemplates a joinder of the action to set aside the conveyance with the action to establish the claim, the former being ancillary to and dependent upon the latter, and the debtor being an indispensable party." The Advisory Committee on the Rules commented: "This rule is inserted to make it clear that in a single action a party should be accorded all the relief to which he is entitled regardless of whether it is legal or equitable or both." It is clear from the rule, as interpreted by the courts, that one seeking to set aside a fraudulent conveyance may prosecute his claim for judgment simultaneously with his suit to set aside the conveyance and need not first reduce the claim to judgment. Thus it is clear that, under the federal rules of procedure, the action to set aside fraudulent transfers may be maintained simultaneously with the action for declaratory judgment.

Nor can we assent to the postulate that the fact that the debt owing plaintiff had not yet ripened into maturity prevented maintenance of the action. In United States v. Goldblatt Bros., 7 Cir., 128 F.2d 576, 579, an action prosecuted under the Bulk Sales Act of Illinois, we said: "The word creditor used in the statute has a broad meaning - sufficiently broad to include creditors of every class without limitations, Winthrop, etc., Co. v. Kournetas, 265 Ill.App. 535, 538, 539. It is not restricted to those creditors whose claims, at the time of the sale, were liquidated as to the amount. The statute makes this clear by providing for the listing of 'the amounts owing to each (creditor) as near as may be ascertained.' * * * Nor is the word 'creditor' limited in the statute to those whose claims are presently due and owing. If such were the case, a merchandise creditor would not be a bulk vendor's creditor, within the meaning of the Act, unless the bill was due at or before the date of sale. It is significant that the statute contains only the word 'owing.' That word was not used in the limited sense of a liability that has become due and payable; it was to cover a liability in contra-distinction to a contingent claim which depended upon the occurrence of another event before liability was established."

But, say defendants, this was not a proper case for application of the Bulk Sales Act of Illinois. That statute, Section 78, Chapter 121 1/2, Ill.Rev.Stats., applies to all kinds of businesses and declares fraudulent and void the sales, transfers or assignments of the major part of or the whole of the stock of merchandise, or merchandise and fixtures or other goods and chattels of the vendor's business, otherwise than in the regular and usual prosecution of the vendor's business. The original statute, which governed only retailers, was held unconstitutional, Charles J. Off & Co. v. Morehead, 235 Ill. 40, 85 N.E. 264, 20 L.R.A.,N.S., 167, for the reason that it constituted class legislation, inasmuch as it eliminated bulk sales other than those of retail dealers. The present act, however, is broader; it was held constitutional in G. S. Johnson Co. v. Beloosky, 263 Ill. 363, 105 N.E. 287. It is not limited to bulk sales of those engaged in selling merchandise, commodities and other wares, as was the original act. Thus in LaSalle Opera House Co. v. LaSalle Amusement Co., 289 Ill. 194, 124 N.E. 454, the Illinois Supreme Court held that the Act was violated where an opera company sold its assets without complying with the Act. The transfer there included the lease, furniture and fixtures, good will, trademark and ...

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