North Chicago Rolling-Mill Company v. St. Louis Ore Steel Company
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 garnisher, invoke the aid of a court of equity to restrain the garnishing 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, difinite 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 garnisher, 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 & Steel Company, of St. Louis, Mo. (hereafter styled the 'St. Louis Company'), and the North Chicago Rolling-Mill Company, of Chicago, Ill. (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 10th 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 & Co., of Chicago, for the purchase of 50,000 tons of iron ore, to be mined and shipped during the year 1884 from the Pilot Knobmine, 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 15th day of each month for ore delivered during the previous month. This contract, if not made by Cherrie & Co. as agents of the St. Louis Company, was guarantied by the latter, so far as the quality of the ore, and its delivery, were concerned.

Cherrie & Co. 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 & Co. 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 alledged 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 there-of, 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 10th 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 10th 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, Ill., 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 & Co., 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 transctions 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 set-off, 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 set-off 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 set-off was claimed; that it did not exist on July 21, 1884, when the garnishment process was served; that from that date the garnisher 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 set-off sought by the bill could not be allowed, for the reasons that the judgment against the Chicago Comjany 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 set-off 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 Fed. 308.

Charles S. Holt and E. Parmalee Prentice, for appellant.

Henry Hitchcock, for appellees.

[Argument of Counsel from pages 606-611 intentionally omitted]

Mr. Justice JACKSON delivered the opinion of the court. 

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