U.S. Supreme Court North Chicago Rolling Mill Co. v. St. Louis Steel Co., 152 U.S. 596 (1894)
North Chicago Rolling Mill Company v.
St. Louis Ore and Steel Company
Argued January 11, 1894
Decided April 9, 1894
152 U.S. 596
APPEAL FROM THE CIRCUIT COURT OF THE UNITED
STATES FOR THE NORTHERN DISTRICT OF ILLINOIS
A garnishee who occupies the double position of debtor to the principal defendant in a definite or ascertained amount and also that of a creditor of such principal debtor by way of unliquidated damages arising out of the breach of a contract in existence when the garnishment proceedings were instituted can, after an order at law subjecting the defined indebtedness to the payment of the garnishor, invoke the aid of a court of equity to restrain the garnisheeing creditor from enforcing the payment of the amount due until the unliquidated damages can be ascertained and set off against such indebtedness on the ground that the principal debtor is insolvent and a nonresident of the state in which the garnishee resides and in which the garnishment proceedings are had.
Equity will entertain jurisdiction and afford relief against the collection of
a judgment where there is a meritorious, equitable defense thereto which could not have been set up at law or which the party was, without fault or negligence, prevented from interposing.
The adjustment of demands by counterclaim or setoff, rather than by independent suit, is favored and encouraged by the law, to avoid circuity of action and injustice.
The insolvency of the party against whom a setoff is claimed is a sufficient ground for equitable interference, and in Illinois and some other states, the nonresidence of the party against whom the setoff is asserted is also held to be sufficient ground therefor.
It is settled in England, where the law differs in no material respect from that of Illinois, that a garnishee order does not effect a transfer of the debt to the garnishor or create the relation of creditor and debtor between him and the garnishee.
It is a recognized principle that the rights of the garnishor do not rise above or extend beyond those of his debtor; that the garnishee shall not, by operation of the proceedings against him, be placed in any worse condition than he would have been in had the principal debtor's claim been enforced against him directly; that the liability, legal and equitable, of the garnishee to the principal debtor is a measure of his liability to the attaching creditor, who takes the shoes of the principal debtor and can assert only the rights of the latter.
The Court stated the case as follows:
The principal question presented by the record in this case is whether a garnishee who occupies the double position of debtor to the principal defendant in a definite or ascertained amount and also that of a creditor of such principal debtor by way of unliquidated damages arising out of the breach of contract in existence when the garnishment proceedings were instituted can, after an order at law subjecting the defined indebtedness to the payment of the garnishor, invoke the aid of a court of equity to restrain the garnisheeing creditor from enforcing the payment of the amount due until the unliquidated damages can be ascertained and set off against such indebtedness, on the ground that the principal debtor is insolvent and a nonresident of the State in which the garnishee resides, and in which the garnishment proceedings are had? In other words, is the insolvency and nonresidence of the principal debtor, to whom the garnishee is indebted in a certain definite amount and against whom he has a valid
claim for unliquidated damages growing out of a breach of contract between them -- in existence at the commencement of the garnishment proceedings -- a good ground for the exercise of equitable jurisdiction, after an order or judgment at law declaring the sum due the principal debtor applicable to the payment of the garnishor, to stay the enforcement of such order or judgment until the unliquidated damages due the garnishee can be ascertained and set off against the amount certain owing by him to the principal debtor?
The material facts and proceedings out of which this question arises are as follows:
In November, 1883, the St. Louis Ore and Steel Company, of St. Louis, Mo. (hereafter styled the "St. Louis Company") and the North Chicago Rolling Mill Company, of Chicago, Illinois (hereafter called the "Chicago Company"), were each engaged in the manufacture of steel rails for railroads. The St. Louis Company was also a miner of iron ore and the maker of pig metal. On November 6, 1883, the St. Louis Company entered into a contract with the Missouri Pacific Railroad Company for the sale and delivery to the railroad company of 24,000 tons of steel rails, in quantities of 2,000 tons per month from January to December, 1884, inclusive, for which the railroad company agreed to pay for each monthly delivery of rails, on receipt of bills of landing and invoice at the rate of $18 a ton cash, and one ton of old rails for each ton delivered.
On November 19, 1883, the St. Louis Company entered into another contract with the Missouri Pacific Railroad Company by which it agreed to sell to the railroad company the further quantity of 18,000 tons of steel rails, to be delivered at the rate of about 1,500 tons per month, commencing January 1, and ending in December, 1884, for which the purchaser was to pay, for each delivery of 1,500 tons at the rate of $37.50 a ton, in cash, on the 20th day of the month succeeding the delivery.
Having these engagements on its hands, the St. Louis Company, on December 1, 1883, entered into a written contract with the Chicago Company by which the latter agreed to furnish the former company 18,000 tons of No. 1 Bessemer
steel rails, to be delivered free on board the cars at Chicago, in about equal amounts (1,500 tons), during each month of the year 1884 at the rate of $35 per gross ton (2,240 pounds), to be paid by the St. Louis Company on the tenth day of each month for all rails delivered during the previous month. The contract specified that the rails to be furnished by the Chicago Company should weigh 52, 56, 59, or 63 pounds per lineal yard, as per templet to be furnished by the St. Louis Company, and were to be drilled for bolts at certain distances from the ends of the rails, according to their weight.
The rails were to be consigned as directed by the St. Louis Company, which was to furnish the cars for the prompt shipment thereof from Chicago,
"and in the absence of the furnishing of cars upon which to load said rails, enabling the said first party [the Chicago Company] to make their deliveries as herein specified, then the said second party [the St. Louis Company] shall make their settlements and pay for said rails on the tenth day of the month, the same as though said rails had been delivered, and the nondelivery of cars shall in no way relieve the said second party from the prompt payment for the rails on the tenth day of the month, as specified herein."
The rails, so far as delivered, were manufactured in varying weights, upon orders given by the St. Louis Company.
On December 22, 1883, the Chicago Company entered into a contract with R. M. Cherrie & Company, of Chicago, for the purchase of 50,000 tons of iron ore, to be mined and shipped during the year 1884 from the Pilot Knob Mine, in the State of Missouri, owned and operated by the St. Louis Company. This ore was to be delivered at the Chicago Company's works in quantities of from one to seven thousand tons per month, as required by the Chicago Company, and payment therefor was to be made on the fifteenth day of each month for ore delivered during the previous month. This contract, if not made by Cherrie & Company as agents of the St. Louis Company, was guaranteed by the latter so far as the quality of the ore and its delivery, were concerned.
Cherrie & Company became financially involved, and on July 3, 1884, made an assignment to one Jenkins for the benefit
of their creditors, of whom the St. Louis Company was a large one. Upon the failure of Cherrie & Company, the St. Louis Company assumed the former's ore contract with the Chicago Company, and thereafter, between the 4th and 21st days of July, 1884, delivered to the Chicago Company iron ore and pig metal to the amount or value of $44,916.82, for which payment was to be made by the Chicago Company on August 15, 1884.
On July 10, 1884, the St. Louis Company, being indebted to the Chicago Company in the sum of $21,536.56 for steel rails delivered during the previous month (June), made default in paying the same, and the next day (July 11, 1884) informed the Chicago Company by letter of its inability to pay for the June delivery of rails, and asked, as a special favor, to let the matter rest for a little while, as the Chicago Company had in its possession funds arising from the sale of ore and pig metal which were being delivered during the month of July. To this request no reply appears to have been made.
On July 12, 1884, the St. Louis Company again wrote the Chicago Company, expressing a doubt as to its ability to pay its debts promptly, and suggesting an arrangement by which the receivers of the Wabash Railroad Company should take certain rails and settle directly with the Chicago Company. This arrangement was not, however, consummated.
The St. Louis Company, being embarrassed and having made default in paying the interest on its several issues of bonds secured by mortgages, was on July 21, 1884, placed in the hands of a receiver upon a bill filed against it in the United States Circuit Court for the Eastern District of Missouri by Robert M. Olyphant, as trustee, a citizen of New York, for the foreclosure of a second mortgage upon its property. The bill alleged the insolvency of the St. Louis Company, and, upon the day of its filing, E. A. Hitchock, the president of the company, was appointed provisional receiver of its property and assets, with instructions "to carry out and perform the contracts of the company for the purchase and sale of steel rails and to preserve and protect all its property." This receivership was made permanent on August 7, 1884,
and the provisional instructions were renewed. Hitchcock promptly qualified both as provisional and permanent receiver.
The receiver subsequently, on August 25, 1884, made a report to the court in which, after referring to the several contracts of the St. Louis Company with the Missouri Pacific Railroad Company for the sale of steel rails, and with the Chicago Company and others for the purchase of such rails, together with what had been done thereunder, he stated that on July 30, 1884, he had received from the railroad company an order for 2,045 tons of rails, to be delivered in August; that he thereupon had placed with the Chicago Company an order for 1,500 tons of the rails required, the price of which, under the contract between the St. Louis Company and the Chicago Company, would amount to about the sum of $52,000, and if the rails were delivered in August, that sum would have to be paid on September 10, 1884; that he had not in hand, and was not likely to have, any funds with which to meet such payment; that he had, after negotiations, failed to induce the railroad company to agree to make payment for the rails on September 10, 1884; that the railroad company had, furthermore, notified him that it was ready to carry out its contract with the St. Louis Company according to the terms thereof, but would no longer accept steel rails from other makers in the performance of that contract; that he had without success made overtures to be released from the contract of the St. Louis Company for the sale and purchase of steel rails on the basis of the difference between the then market price of such rails, estimated at $31 per ton, and the contract prices, which terms he regarded as just to all parties, but that these overtures were not accepted. The receiver further reported that the Chicago Company had notified him, by letter under date of August 6, 1884, that it was ready and willing to carry out its contract of December 1, 1883, for the manufacture and delivery of steel rails upon the terms of payment therein mentioned, and that for the failure of the St. Louis Company to carry out the said contract it would claim damages; that the Chicago Company requested an explicit statement from him,
as receiver, whether he would be prepared to pay in cash on the tenth of each month following the delivery of rails ordered by him under said contract, to which he had replied that he was not in possession of money sufficient to pay cash for such rails, but that the court under whose orders he was acting had power to make provision therefor; that to this the Chicago Company had replied that it was ready and willing to furnish the rails as ordered, upon being notified that he was prepared to pay therefor on the tenth of the month following delivery.
The correspondence fully established the facts thus reported by the receiver. It is further shown in the correspondence between the receiver and the Chicago Company that the receiver proposed to pay for the rails which might be ordered and delivered under the contract with the St. Louis Company in receiver's certificates, which the Chicago Company declined to receive. The receiver admitting that he could not pay for the 1,500 tons ordered for the next month, those rails were, for that reason, not manufactured by the Chicago Company.
The Chicago Company received no orders for rails from the St. Louis Company or its receiver for the month of July or for any subsequent month during the year 1884. Nor did the receiver ever notify the Chicago Company that he was prepared to pay for the rails according to the terms of the contract between the two companies.
On the day of the receiver's appointment, July 21, 1884, the Joliet Steel Company, an Illinois corporation, commenced two attachment suits in the Superior Court of Cook County, Illinois, against the St. Louis Company, one for $7,777.07, the other for $10,051.78, and on the same day, and in the same court, the Iron Mountain Company, a Missouri corporation, commenced an attachment suit against the St. Louis Company upon a claim for $19,782.60. No property of the St. Louis Company was attached under the writs issued in these suits, which were thereupon, and in conformity with the statutes of Illinois, served upon the Chicago Company and R. E. Jenkins, as assignee of R. M. Cherrie & Company, as garnishees, and interrogatories were filed, for each of them to answer, touching
their indebtedness to the St. Louis Company. The two suits of the Joliet Company were removed in September, 1884, to the law side of the United States circuit court for the Northern District of Illinois. The Chicago Company made answer in November, 1884, and a supplemental and amended answer on February 25, 1885, setting forth the transactions and matters of account between itself and the St. Louis Company, admitting an indebtedness to the latter for ore and pig iron amounting to $44,916.82, and setting up counterclaims to the amount of $56,807.50, which included the sum of $28,390.16 as damages for the failure of the St. Louis Company to carry out the steel rail contract, by receiving and paying for the rails in compliance with the terms of that contract.
To this answer replication was made, and upon the issues formed the cause was tried before a jury. The Chicago Company introduced proof tending to establish its claim for the $28,390.16 as damages, but upon motion of the plaintiff, this evidence was stricken out, and the claim for damages was disallowed by the court on the ground that, being unliquidated, it could not properly be set off at law. The disallowance of the claim for damages left a balance of $16,473.28 due by the Chicago Company to the St. Louis Company. A verdict was directed for the plaintiff for that amount, and judgment was rendered against the Chicago Company, January 13, 1886, for the sum of $16,473.28.
This garnishment proceeding was, under the Illinois statutes, in the name of the St. Louis Company, and judgment was rendered in its favor against the Chicago Company for the amount of the verdict for the use of the Joliet Company and others entitled to share therein.
In the garnishment proceedings under the attachment suit of the Iron Mountain Company in the Superior Court of Cook County, a similar judgment was rendered against the Chicago Company as garnishee. By the laws of Illinois, the sum adjudged against the Chicago Company as garnishee was a quasi -trust fund for the use of both attaching creditors -- the Joliet Company and the Iron Mountain Company.
Pending the garnishment proceedings, on September 26,
1884, Robert M. Olyphant, as trustee, filed what is called an "ancillary bill" in the United States circuit court for the Northern District of Illinois against the St. Louis Company for the purpose of reaching the assets of the company in that jurisdiction. This bill recited the proceedings had, and the orders made, in the original suit and asked the court to administer the assets of the company in that jurisdiction.
The Chicago Company, having secured a stay of proceedings in both of the garnishment cases, thereupon filed its bill or petition on January 18, 1886, against the St. Louis Company, the Joliet Company, and the Iron Mountain Company on the equity side of the United States Circuit Court for the Northern District of Illinois in the ancillary suit of Olyphant v. St. Louis Company. This bill or petition of the Chicago Company, after setting out the rail and ore contracts, the default of the St. Louis Company in failing to perform the rail contract, and the resulting damages to the Chicago Company, the garnishment proceedings at law in the state and federal courts, and the denial of its right therein to set off its claim for damages against the St. Louis Company, alleged that the St. Louis Company was insolvent and that, being both insolvent and a nonresident, the Chicago Company was entitled to relief in equity by having its damages liquidated and then set off against the judgments in the attachment suits. The prayer was for an injunction and relief by way of equitable setoff, and for judgment over for any balance due it by the St. Louis Company.
The Iron Mountain Company filed its answer in March, 1887, admitting that the claim on which its attachment suit was brought against the St. Louis Company had been settled and disclaimed any further interest in the proceedings.
The answer of the other defendants, while admitting most of the allegations of the bill, denied that the St. Louis Company had violated or failed to perform the rail contract or that the complainant had any valid claim for damages against it; that if there had been any breach of the rail contract, the claim for unliquidated damages could not be the subject of setoff in equity any more than in law; that if the claim were
valid, it arose out of transactions distinct from the subject matter of the suit in which such setoff was claimed; that it did not exist on July 21, 1884, when the garnishment process was served; that from that date, the garnishor acquired a lien upon and a right to the fund due from the garnishee, in the nature of an equitable assignment, which could not be disturbed or affected by any subsequent breach of the rail contract by the St. Louis Company. A general replication was filed by the Chicago Company.
While this suit of the Chicago Company for equitable relief was pending, the St. Louis Company effected a compromise with its bond creditors by issuing new mortgage securities in lieu of the old bonds, and thereupon the Olyphant suits against the St. Louis Company in the United States circuit courts for the Eastern District of Missouri and for the Northern District of Illinois were dismissed. The decree of dismissal of the Illinois suit provided, however, that the petition of the Chicago Company should stand, and be proceeded in as an original bill.
On April 9, 1887, the Joliet Steel Company assigned and transferred its two judgments for $9,101.85 and for $10,760.41, respectively, against the St. Louis Company, to David K. Ferguson, who, as such assignee, thereafter, in May, 1888, applied to be made, and was made, a party to the suit of the Chicago Company.
The cause came on for hearing in May, 1889, upon evidence as to the breach of the rail contract by the St. Louis Company, and the damages thence resulting to the Chicago Company, which was substantially the same as that introduced at law in the garnishment proceedings. The circuit court held that the equitable setoff sought by the bill could not be allowed, for the reasons that the judgment against the Chicago Company as garnishee was for money due for pig iron and ore bought from the St. Louis Company, while the claim for unliquidated damages grew out of the failure of the St. Louis Company to receive rails under the contract of December, 1883, which had no connection with the one upon which the Chicago Company was held as garnishee; that when the
Chicago Company was served as garnishee, no part of the claim urged as a setoff had accrued; that the Chicago Company then had no right of action for the recovery of that claim; that it was then uncertain whether that company would make or lose money by the further performance of the rail contract. The opinion of the court concluded by saying:
"Without ruling upon other questions discussed by counsel, it is sufficient to say that the claim for unliquidated damages growing out of the failure of the St. Louis Company to receive rails under the rail contract after the failure of that company, and after the commencement of the suit in attachment, and the service of the writ of garnishment upon the Chicago Company, was properly rejected by the court in the trial of the action at law, and cannot now be set off against the judgment rendered against the garnishee. The intervening petition is dismissed, without prejudice to the right of the Chicago Company to prosecute an action against the St. Louis Company."
39 F. 308.
MR. JUSTICE JACKSON delivered the opinion of the court.
From the decree dismissing this bill the present appeal is prosecuted, and the errors assigned by the appellant may be embraced in the general proposition that the court below erred in declining to adjudicate and determine the amount of the damages sustained by the Chicago Company from the breach of the rail contract, and set off the same against the judgment at law, and in dismissing the bill, even though such dismissal was without prejudice to the right of the Chicago Company to bring suit for the recovery of such damages.
In addition to the reasons on which the court below denied relief and dismissed the bill, it is urged by the appellees that the equitable ground for relief -- viz., the insolvency of the St. Louis Company -- ceased to exist before the final decree was rendered. It is urged that its solvency was shown by the
settlement of its debts, and the dismissal of the foreclosure suits against it, and the discharge of the receiver. There are several answers to this suggestion: First. The fact relied upon to establish such restored solvency, viz., the compromise of the company's bonded indebtedness by issuing new obligations secured by mortgage on all its tangible property, fails to show any actual improved financial condition, such as would be available to the Chicago Company in enforcing its claim for damages. Second, as appears in the record, there were other claims against the St. Louis Company, which were not settled by the compromise which terminated the foreclosure suits. Third. The alleged restored solvency of the St. Louis Company was not set up by supplemental pleading of any kind in this suit, although there were ample time and opportunity to do so between March, 1887, and May, 1889, when this cause was finally heard; as a matter of defense arising after the case was at issue, the restored solvency of the St. Louis Company must have been set up by supplemental answer, or other appropriate pleadings. Story's Equity Pleading § 393. Fourth. Equitable jurisdiction, having once rightfully attached, cannot be defeated by matter subsequently arising which does not go to the merits of the complainant's case. The state of facts existing when the bill was filed must be looked to in determining the question of equitable jurisdiction, which, in this case, is rested on the ground of insolvency and nonresidence. The latter fact is not questioned. As to the former, the Joliet Steel Company, by its petition filed May 1, 1886, in the Olyphant foreclosure suit in the Northern District of Illinois, asking that the receiver be required to give bond, as such, in the sum of $50,000, to account for the assets received in that jurisdiction, distinctly alleged that the St. Louis Company was an insolvent, nonresident corporation, and on the strength of its petition the receiver gave bond to cover the assets within the jurisdiction of the Circuit Court of the United States for the Northern District of Illinois, and the receiver thereafter, with the consent of the Joliet Company, compromised the claim of the St. Louis Company against Cherrie & Company, and obtained securities and assets thereunder, which
were allowed to be removed from the jurisdiction of the court or applied otherwise than to the debt of the Joliet Company.
It is not shown by the record that the St. Louis Company was restored to a state of solvency before the final decree; but if that fact had been properly shown, it was not set up as a defense in the present suit, and it cannot now be invoked on behalf of the Joliet Company or its assignee.
It admits of no question that the St. Louis Company made default in the performance of the rail contract. It failed in the payment of the sum of $21,536.56 on July 10, 1884, for steel rails delivered in June. This default continued throughout the year 1884. Neither the St. Louis Company nor its receiver gave any order or orders for the manufacture of rails for July delivery. On the order for 1,500 tons of rails given for August delivery, the receiver was confessedly not prepared to pay, nor was any provision made by which the Chicago Company could reasonably expect payment, therefor on September 10, 1884. The receiver had made every possible effort to raise funds by the sale of receiver's certificates, and had failed. He had nothing to pay with, except "certificates," and the Chicago Company had declined to take them. It was certainly not bound to proceed with the manufacture and delivery of rails under the August order, after being notified in advance that the receiver was not prepared, and did not expect to be in funds, to pay for the same unless certificates were accepted. For the reason that he had nothing to pay with except "certificates," the receiver considered, as he stated to the president of the Chicago Company, in a letter dated September 26, 1884, that it would have been wrong to have asked the Chicago Company to make and forward rails, without immediate or prospective means of paying for the same. So no further orders were given for rails, although the Chicago Company, repeatedly, during August, September, and October, expressed its readiness and ability to fill all orders when the receiver was prepared to pay therefor according to the terms of the contract. The Chicago Company, early in October, indicated its willingness to reduce the price of the undelivered rails to $30 per ton, upon prompt
settlement in cash according to the contract, but this proposition was not accepted.
Under these circumstances, there was a clear breach of the rail contract on the part of the St. Louis Company. The first default occurred on July 10, 1884, in failing to pay the amount then due the Chicago Company. It was further in default in not giving an order to manufacture rails for July, which was continued during the succeeding months of the year 1884. So that at the close of December, 1884, when the time for the final performance of the contract expired, there were about 10,618 tons of rails that the St. Louis Company had failed to order, receive, and pay for at the contract price of $35 per ton. Steel rails continued to decline from July, 1884, to January, 1885, the price running down to $29.50 a ton between those dates.
It is claimed for the appellee that as the Chicago Company had not rescinded and terminated the rail contract, for the July breaches thereof -- if entitled so to do -- it was not in a position to bring suit for damages when the garnishor's right became fixed. This, however, does not affect the merits of this case. The Chicago Company was not bound to treat the contract as at an end upon the first breach thereof by the St. Louis Company. It had a right to await the expiration of the time for its final performance, and then make its claim for the entire breach. In the view we take of the question, it is not material to determine at what precise date there was such a breach as would entitle the Chicago Company to damages upon the entire contract. The material thing is that the contract for the breach of which the claim for damages arises was in existence when the garnishment process was served. It had then been broken in one particular, if not in more, and, from the situation and embarrassed condition of the St. Louis Company, there was almost a certainty that it would fail to perform the contract in the future. The Chicago Company gave repeated notices to the receiver of its readiness and willingness to fulfill the contract on its part. It could only manufacture rails as they were ordered and their weights specified. It notified the receiver time and again that it
would claim damages. That it sustained damages to the extent of the difference between the contract and the market price of steel rails is clear beyond all controversy. The liability of the St. Louis Company for these damages is equally clear, but the amount thereof, being unliquidated, could not properly be set off in the attachment proceeding at law. Under these circumstances and conditions, has the Chicago Company any right to relief in equity, by way of equitable setoff? Would it be just and equitable to compel the garnishee to pay its indebtedness to the St. Louis Company for the benefit of a stranger, and then be left to either lose its valid claim for damages or follow its nonresident insolvent debtor into another jurisdiction in the effort, more or less experimental and expensive, to collect such claim? If the St. Louis Company was the beneficial plaintiff in the judgment at law, or the case stood alone between it and the Chicago Company, there could be little or no doubt that a court of equity would, under the facts stated, afford the latter relief by way of equitable setoff.
Cross-demands and counterclaims, whether arising out of the same or wholly disconnected transactions and whether liquidated or unliquidated, may be enforced by way of setoff whenever the circumstances are such as to warrant the interference of equity to prevent wrong and injustice.
Again, it is well established that equity will entertain jurisdiction and afford relief against the collection of a judgment where in justice and good conscience it ought not to be enforced, as where there is a meritorious equitable defense thereto which could not have been set up at law or which the party was, without fault or negligence, prevented from interposing. Illustrations of these general principles are found in the cases of Leeds v. Marine Ins. Co., 6 Wheat. 565; Scammon v. Kimball, 92 U. S. 362 ; Crim v. Handley, 94 U. S. 652 ; Embry v. Palmer, 107 U. S. 3 ; Knox Co. v. Harshman, 133 U. S. 154 ; Marshall v. Holmes, 141 U. S. 589 .
The adjustment of demands by counterclaim or setoff, rather than by independent suit, is favored and encouraged by
the law to avoid circuity of action and injustice. Railway Co. v. Smith, 21 Wall. 255.
By the decided weight of authority, it is settled that the insolvency of the party against whom the setoff is claimed is a sufficient ground for equitable interference. Leeds v. Marine Ins. Co., 6 Wheat. 565; Lindsay v. Jackson, 2 Paige 581; Gay v. Gay, 10 Paige 369; Pond v. Smith, 4 Conn. 302; Robbins v. Holley, 1 T. B. Mon. 194; Hinrichsen v. Reinback, 27 Ill. 295; Raleigh v. Raleigh, 35 Ill. 512; Hall v. Kimball, 77 Ill. 161; Chicago, Danville &c.; Railroad v. Field, 86 Ill. 270; Doane v. Walker, 101 Ill. 628; Davis v. Milburn, 3 Ia. 163; Tuscumbia &c.; Railroad v. Rhodes, 8 Ala. 206; Wray v. Furniss, 27 Ala. 471; Keightly v. Walls, 27 Ind. 384; Wulschner v. Sells, 87 Ind. 71; Laybourn v. Seymour (Minn.), 54 N.W. 941; Rothschild v. Mack, 115 N.Y. 1; Richards v. La Tourette, 119 N.Y. 54; Schuler v. Israel, 120 U. S. 506 .
In Schuler v. Israel, 120 U. S. 506 , it was said by Mr. Justice Miller, speaking for the Court, that:
"While it may be true that in a suit brought by Israel against the bank, it could, in an ordinary action at law, only make plea of setoff of so much of Israel's debt to the bank as was then due, it could, by filing a bill in chancery in such case -- alleging Israel's insolvency, and that, if it was compelled to pay its own debt to Israel, the debt which Israel owed it, but which was not yet due, would be lost -- be relieved, by a proper decree in equity, and as a garnishee is only compelled to be responsible for that which, both in law and equity, ought to have gone to pay the principal defendant in the main suit, he can set up all the defenses in this proceeding which he would have in either a court of law or a court of equity."
It is suggested by the appellees that this was merely "incidental to the point decided in that case," but the proposition it announces is supported by sound principle and authority, and the Illinois decisions are in full accord therewith.
In addition to insolvency, it is held by many well considered
decisions, including those of Illinois, that the nonresidence of the party against whom the setoff is asserted is good ground for equitable relief. Quick v. Lemon, 105 Ill. 578; Taylor v. Stowell, 4 Metc. (Ky.) 175; Forbes v. Cooper, 88 Ky. 285; Robbins v. Holley, 1 T. B. Mon. 18; Edminson v. Baxter, 4 Hayw. 112; Davis v. Milburn, 3 Ia. 163.
It is not deemed necessary to review these cases and make quotations from them. They fully establish the principles for which they are cited. There is nothing in the Illinois statutes on the subject of attachment and garnishment inconsistent with the doctrine of the foregoing decisions. Applying the principle they announce to the present case, it admits of no doubt that the Chicago Company is entitled to the relief it seeks as against the St. Louis Company. The question then remains whether the attachment proceedings, or the garnishment process thereunder, resulting in the order or judgment at law declaring the Chicago Company's ascertained indebtedness liable to the payment of the Joliet Company's judgment against the St. Louis Company, in any way changes or defeats the equity or right of the Chicago Company to the same relief?
The court below seems to have entertained the theory that while the St. Louis Company may have failed to perform the rail contract, the Chicago Company's right to claim damages for the entire breach thereof had not accrued on July 21, 1884, when the garnishment process was served and the garnishor's rights attached, and furthermore that such claim, however meritorious as against the St. Louis Company, could not form the subject of an equitable setoff, especially as against a demand arising out of a disconnected transaction. This proceeds upon the assumption, as appellees here contend, that the garnishor, by the service of the garnishment, acquired a lien upon or equitable right to the funds due from the garnishee, which could not be disturbed or affected by any right or equity subsequently accruing to the latter, as against the principal debtor. The service of garnishment neither changed nor interrupted the contractual relations existing between the
Chicago Company and the St. Louis Company. The rights and equities existing and to arise out of those contractual relations were in no way terminated or defeated by that service. The legal operation and the effect of the garnishment proceedings, and of the final order therein made, were 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 the debtor and subject to collection for the benefit of the attaching creditor. The claim made by the appellee that the garnishment service operated as an equitable assignment to the garnishor of the due indebtedness from the garnishee cannot be sustained either upon reason or authority. The final order in that proceeding does not have the legal effect and operation of transferring the Chicago Company's due indebtedness to the St. Louis Company and from the latter to the Joliet Company. The Illinois statutes in relation to garnishment are substantially the same as the generality of statutes on that subject, and contain no provision sustaining the proposition that either the service of the writ or the order made in the proceedings operates to transfer the debt, but only binds it, and prevents the principal debtor from receiving it.
The English law upon the subject of garnishment and its effect differs in no material respect from that of Illinois, and in Chatterton v. Watney, 17 Ch.D. 259, it was held that a garnishee order did not have the effect of transferring the debt from the garnishee.
In the case of Ex Parte Chinery, 12 Q.B.D. 342, it was held by Lord Justice Cotton that a garnishee order absolute was not a final judgment against the garnishee, and did not make the garnishor a creditor of the garnishee. In the subsequent case of In re Combined Weighing and Advertising Machine Co., 43 Ch.D. 99, the effect of a garnishee order was again under consideration, and it was held that the garnishee order did not affect any transfer, legal or equitable, of the debt owing by the garnishee or create the relation of creditor and debtor as between the garnishor and the garnishee.
Cotton, L.J., said:
"A garnishee order attaching the debt, and enabling the person who has obtained the order to give a good discharge, does not come within the principle of equitable assignment,"
so as to make the garnishor a creditor of the garnishee. Bowen, L.J. said:
"I cannot see that this statutory relation, which was created originally by the common law procedure act of 1854, and was perpetuated in the rules under the Judicature Act, is really a relation involving the creation of a fresh debt. There cannot be said to be any equitable debt. There is no assignment in equity, and I cannot see that there is any legal debt. There is an order of a court of common law that a sum equal to the original debt shall be paid by the garnishee to the judgment creditor, or, as an alternative, that execution may issue, but I think that the relation which is created by that section, and the order made under it, does not create a debt at all."
Fry, L.J. said:
"It is plain to my mind that there is no transfer of the debt. It is equally plain to my mind that the garnishee order does not make therefore the garnishor a creditor of the garnishee. What the order does is this: it gives the garnishor certain statutory rights. It enables the garnishor to say to the garnishee, 'You shall not pay to your creditor the money which you owe him.' It enables him to give a valid receipt and discharge for the money. It enables him, in the event of the money's not being paid, to obtain execution. He has all those rights, but there is no transfer of the debt and he is not created a creditor."
The proposition here laid down is in harmony with the generally recognized principle that the rights of the garnishor do not rise above or extend beyond those of his debtor; that the garnishee shall not, by operation of the proceedings against him, be placed in any worse condition than he would have been in had the principal debtor's claim been enforced against him directly; that the liability, legal and equitable, of the garnishee to the principal debtor is a measure of his liability to the attaching creditor, who takes the shoes of the principal debtor, and can assert only the rights of the latter. Towner v. George, 53 Ill. 168; Richardson v. Lester, 83 Ill. 55; Henry
v. Wilson (Iowa), 51 N.W. 1157; Huntington v. Risdon, 43 Ia. 518.
From these propositions and authorities, it follows that the Chicago Company is entitled to assert against the Joliet Company the equitable setoff it could enforce against the St. Louis Company in respect to its claim for damages.
It is hardly necessary to observe that the appellee Ferguson, having taken an assignment from the Joliet Company pendente lite, occupies the same position as his assignor, and is subject to the same equity. It is sought to defeat this right of the Chicago Company by invoking in favor of the Joliet Company and its assignee, Ferguson, the doctrine of relation, so as to antedate the claim for damages. This cannot be done, for two reasons: first, because the breach of contract, on which the claim for damages is based, had in fact commenced before the garnishment writ was served; second, if that had not been the case, the contract for the nonperformance of which the right for damages arises was in existence when the garnishment proceedings were instituted.
This unquestioned fact is very material, if not controlling of the case. The court below did not give the fact that the claim for damages arose under and by virtue of a contract in existence prior to the date of the attachment its due weight and importance, as will be seen by a brief reference to the authorities bearing upon the question. Thus, in Boston Type Co. v. Mortimer, 7 Pick. 166, the garnishee, when summoned, was indebted to the defendant, but was at the same time liable, as accommodation endorser of a note of the defendant, for a large amount, which became due after the garnishment, and was protested for nonpayment and paid by the garnishee before he made his answer. The court held that the garnishee could set off against his indebtedness to the principal defendant the amount of the note so paid, and, in giving its decision, observed:
"Under these circumstances, we think he cannot be held as trustee, for it would be against justice that he should be held to pay a creditor of his debtor the only money by which he can partially indemnify himself."
In the recent case of Lannan v. Walter,
the court said:
"The answer of the trustee, on which it was discharged, is in effect that at the time of the service of process, it had in its deposits, to the credit of the defendants, $927.10, and that at the same time it held three promissory notes, which it had discounted for the benefit of the defendants, and on which they were endorsers; that since said service, these notes have all matured; that the liability of the endorsers has been made absolute by due demand and notice. The makers and endorsers have all become insolvent, and the notes remain in its hands, wholly unpaid, except that a small sum has been received on one of them. The amount due on each note is considerably more than $927.10. The counsel for the trustee contends that it has the right to set off the sum of money due from the defendants on any one of these notes against the deposit. We regard it as settled that if, before final answer, the debtor becomes indebted to the trustee on any contract entered into before the service of the writ, the latter shall have a right of setoff, and be chargeable only with the final balance, if one should be due. Boston Type Co. v. Mortimer, 7 Pick. 166; Smith v. Stearns, 19 Pick. 20; Nickerson v. Chase, 122 Mass. 296; Eddy v. O'Hara, 132 Mass. 56, 61; Pub.St. c. 183, § 27."
So, in Farmers' & Merchants' Bank v. Franklin Bank, 31 Md. 404, the court, allowing a setoff which matured after action brought, said:
"There is nothing in the attachment laws in this state to justify the conclusion that it was designed, by allowing garnishment to be made, to place the garnishee in a worse position in reference to the rights and credits attached than if he had been sued by the defendant. The attaching creditor seeks to have himself substituted to the rights of his debtor, as against the garnishee, and by laying his attachment he acquires no superior right to that of his debtor. The right of condemnation must therefore be subject to any such right of setoff or discharge existing at the time of garnishment as would be available to the garnishee if he were sued by the defendant. Any other rule would in many cases work gross injustice, and might be subject to great abuse. . . . This right of setoff or discharge, and
as against the attaching creditor, should not, however, extend to any matter originating by the action of the garnishee subsequent to garnishment, as otherwise it would be in the power of the garnishee to defeat the right of condemnation, which should not, by any means, be allowed."
In the first of the above-cited cases, the liability of the garnishee was conditional and indeterminate at the time of the service of the garnishment process, and his right to claim against the principal debtor did not become fixed until long after the service of process, so that the garnishee had no cause of action against the principal debtor when the attachment writ was served; also, in each of the other cases, the setoff allowed matured after the service of garnishment, but arose under a contract entered into before the service of the writ. In other words, the principle established by these cases is that whatever rights the garnishee may have under existing contracts with the principal debtor, he is entitled to have the benefit thereof as against the attaching creditor.
The latter clause of the quotation from the case of Farmers' & Merchants' Bank v. Franklin Bank, supra, lays down the correct rule to be applied in cases of this character, and that rule is that while the garnishee may not, after service of the writ, by his own action acquire setoffs or counterclaims against the principal debtor to the prejudice of the attaching creditor, he may properly avail himself of all claims fairly arising out of contracts with the principal debtor which were in existence when the attachment was commenced, and under or out of which his claim against the principal debtor arises.
From the foregoing considerations, we think the court below should have ascertained the damages growing out of the failure to perform the rail contract on the part of the St. Louis Company, and, having ascertained the amount of such damages, the same should have been allowed the complainant as a setoff against the sum of $16,473.28 found to be due from it to the St. Louis Company, and for which the garnishee order or judgment was rendered, and, if that adjustment left
any balance due the complainant from the St. Louis Company, a personal decree should have been rendered therefor.
The judgment of the court below is accordingly reversed, and the cause remanded, with directions to proceed therein in conformity with this opinion.
MR. CHIEF JUSTICE FULLER, having been of counsel, and MR. JUSTICE WHITE, not having been a member of the Court when the case was argued, took no part in its consideration and decision.