TOWN OF THOMPSON v. NORRIS

TOWN OF THOMPSON v. NORRIS. N. Y. Supreme Court, Third Department,. Third District; Special Term, July, 1882. Action by Town for Cancellation of its Bonds and Injunction of Action in Federal Court.—Temporary Injunction and ORDER FOR DELIVERY PENDING THE ACTION. To authorize a court of equity to cause securities to be taken into its custody, pending an action for their cancellation, it must appear that the securities, at the time of the commencement of the action, were not in the hands of bona fide holders; and further, that they were of such a character that they might pass into the hands of bona fide holders, against whom a defense could not be set up, which did exist against the holders when the action was commenced. If the securities contain on their face notice of the fact which shows their invalidity, a purchaser cannot claim bona fides, and there is no necessity for equitable interference. A state court will not enjoin the prosecution of an action on municipal bonds in a federal court, having jurisdiction, on the ground that that court will probably decide the case differently from the rule prevailing in the state courts. The fact that the plaintiff in the action sought to be enjoined, changed his residence from this state to another for the purpose of bringing _ the action in the federal court, will not authorize the injunction. It is the fact of residence, not the motive, which determines the federal jurisdiction, and if.the motive be relied upon as affecting such fact, it may be considered, and should properly be determined in the federal tribunal. > • Two motions: the one by the defendant, to dissolve an injunction; the other by the plaintiff, to require the deposit in court, pending the action, of the securities which are the subject of controversy. The action is brought to restrain the transfer of a certain bond and the annexed coupons, and of certain other coupons, issued (or purporting to be issued) by the plaintiff, and now the property of the defendant; to restrain also the further prosecution of an action commenced by this defendant against this plaintiff on some of these coupons, now payable, which action is now pending in the circuit court of the United States for the southern district of New York, and to compel the surrender to this plaintiff of the bond and of the coupons. The complaint alleges that the plaintiff issued certain bonds with coupons, including the bond and the coupons in controversy; that the issue was in violation of the statute under which the bonds and coupons were pretended to be issued, in this respect, that they were exchanged for railroad stock instead of being sold for cash ; that the fact of .such exchange appears on the bond; that in January, 1878, in an action by one Horton against this plaintiff, the court of appeals decided that these bonds were void in the hands of a bona fide holder; that, notwithstanding this decision, the courts of the United States are rendering judgments in favor of non-residents of the . State upon such bonds or coupons; that in 1878 the plaintiff was a resident of the State of New York ; that in 1879 he removed to Pennsylvania and became a resident of that place, and, while a resident of Pennsylvania, purchased or claimed to purchase, of residents of New York, many of these coupons and commenced an action thereon in 1879 in the circuit court of the United States ; that the present plaintiff answered, and the action is at issue-; that afterwards the plaintiff removed his residence to Hew York ; that his removal to Pennsylvania was with the sole and only object of commencing such action, and that his purchase of the coupons was with the knowledge that they could not be enforced in the courts of New York. The defendant’s answer alleges that he purchased the bond in question in 1869 in open market, in good faith, paying full value ; alleges the act of the legislature passed April 28, 1871, chap. 809, validating these bonds; alleges that the action of Horton against this plaintiff {supra) was collusive, and was decided without a hearing of the bona fide holders of the bonds ; that the circuit court of the United States has adjudged the bonds valid, and has rendered judgments on unpaid coupons, one of which judgments has been affirmed by the supreme court of the United States. The defendant alleges that he became a resident of Pennsylvania May 1, 1878, and afterwards purchased the coupons mentioned in the complaint, while such resident, in good faith, and for a valuable consideration, and commenced an action on these coupons and on those unpaid of the bond owned by him. He denies all other allegations not specifically answered or admitted. He further alleges the jurisdiction of the circuit court of the United States over the action commenced by him. The papers served by the plaintiff also set up the fact of an action commenced in 1869 by the People on the relation of Kilbourne, et al., tax-payers of the town of Thompson, against Benedict and others, commissioners of the town of Thompson, Crowley, Colt and Colt, The Monticello & Port Jervis it. R. Co. and the Town of Thompson, alleging the invalidity of the bonds. In that action the bonds were declared invalid by reason of defective consents, and the defendants therein were adjudged to deliver up the bonds. This judgment was entered November 21, 1872. The affidavits of the defendant aver that he had no knowledge of that action until the service of these papers; that the town of Thompson has had the full benefit of all the bonds, inasmuch as the railroad for which they were issued has been constructed and has been used for ten years; that the town paid the coupons for three years ; that in 1874 an action was commenced in the circuit court of the United States by one Cooper against the town of Thompson, which was defended on substantially the same grounds, and in which a judgment was recovered in favor of the plaintiff, July, 1876 ; that another action was commenced by one Perrine in July, 1875, in that court, with like result; and the judgment was affirmed by the supreme court of the United States in May, 1881 ; that two other actions by Perrine against the town of Thompson were subsequently commenced in said court, and judgments recovered in favor of the plaintiff therein, which are now pending on writ of error in the supreme court of the United States. The affidavits of the defendant further allege that the case of Horton v. Town of Thompson (supra), in which the decision below was reversed by the court of appeals, has never been re-tried ; that the action was brought at the request of the attorney for the town, and was collusive, and that every person connected with the action, on both sides, was interested in securing the result obtained. As to this alleged collusion the affidavit of the plaintiff’s attorney states that all the legal questions touching the validity of the bonds were presented to the court of appeals in the case of Horton, and were thoroughly and fairly discussed and examined, without any collusion. Mr. Bush, for plaintiff. Mr. Shoudy, for defendant. 71 N. Y. 513, reversing 7 Hun, 452. 103 U. S. [13 Otto] 806. [MAJORITY — Learned, J.] Learned, J. The first question is whether any ground is presented why the court should require these securities to be surrendered to its custody pending this action. This motion is very possibly based upon a suggestion in Thompson v. Perrine, 103 U. S. (13 Otlo) 806. There the court, speaking of the case of People ex rel. Kilbourne v. Benedict, above-mentioned, and showing that the decision in that case had no effect on Perrine’s rights, remarked that, if the court had caused the bonds to be surrendered to its custody, pending the action, it might have caused them to be canceled, in pursuance of the final decree, but that, as the temporary injunction was not continued, the bonds passed to bona fide holders, not bound by the decision. It may be within the power of a court of equity thus to cause securities to be taken into its custody, pending an action. But it is a power which should seldom be exercised. The first requisite for its exercise would be to show that the securities, at the time of the commencement of the action, were not in the hands of bona fide holders, and further that the securities were of such a character that they might pass into the hands of bona fide holders, against whom a defense could not be set up which did exist against the holders, when the action was commenced. Even in' that case the ordinary remedy of an injunction, pending the action, would be generally sufficient. But, in the present case, the plaintiff avers that the bonds in question contain on their face a notice of the fact, or of one fact, which shows their invalidity. Hence, as the plaintiff claims, no person to whom these bonds may be transferred can be such a bona fide holder that the town of Thompson cannot set up this defense against him. Therefore, if the plaintiff's view is correct, there is no occasion for the taking of these bonds into the custody of the court; inasmuch as no person can acquire, by transfer, any rights to which the alleged defect in the bond is not a complete answer. The case of People ex rel. Kilbourne v. Benedict was very different. There the bonds, at the commencement of the action, were alleged to be in the possession of Crowley and others, contractors to build the road. And it was alleged that they were offering them for sale, and that there was danger that the bonds would be sold to bona fide purchasers, “ and so become in the hands of such purchasers good and valid claims.” If this were correct, there would have been reason for restraining the transfer, and, if an injunction were deemed insufficient, there might have been some ground to ask the court to take the custody of the securities until the final decision. But no such case exists here ; and there is no reason why the court should interfere with the lawful possession of the defendant. If there was any fraud or misconduct in the original issue, he was no party thereto. It is sufficiently hard on him that such alleged fraud or misconduct should be made a defense, to securities purchased by him in actual good faith and for fall value. It is worthy of notice, in passing, that, when the action above-mentioned was commenced, the parties who prosecuted it, did not think, as this plaintiff now claims, that the bonds on their face would give notice of their invalidity. For the complaint alleges that, if the bonds should be sold to bona fide purchasers, they would become good and valid claims. While this plaintiff now claims that the bonds are invalid in the hands of every one. To require the surrender of the bonds to the custody of the court, pending the action, could only be needed as a preliminary to a final judgment for their cancellation. And the true reason which is urged why this relief should be eventually had, is that an action is pending in the circuit court of the United States for the southern district of New York, where it is anticipated that a judgment will be rendered against the plaintiff. The examination of this reason involves the question presented by the defendant’s motion to dissolve the injunction. Second. The plaintiff has obtained an injunction forbidding a transfer of the bonds and coupons and a further prosecution of the pending action. This the defendant moves to dissolve. As to the transfer of the bonds and coupons, it has already been shown that the plaintiff claims to have the same defense against a transferee as against this defendant, on any facts connected with the bonds. The injunction, then, is really aimed at the prosecution of the action in the federal court. And the ground of the objection to that action is not that that court has no jurisdiction, or that this plaintiff cannot prove, in., that court, the same facts which he can prove here; but that he fears that that court will, on those facts, decide against him, and he expects the State courts to decide in his favor. Thus the question is, if the State courts will probably decide a point in one way, or even have already so decided, ought a State court to enjoin a Federal court, having jurisdiction, on the ground that that court will probably decide the other way % Under our peculiar form of government there are two separate and co-ordinate systems of courts—the State and the Federal; in either of which a person may, in some instances, bring his action. There is no common appellate tribunal. Hence it naturally follows that the decisions in the highest courts of these two systems are sometimes adverse to each other. Notably on three subjects, viz.: the consideration necessary to make a tona fide holder of a negotiable instrument; the. limitation of liability of common carriers ; and the liability of towns for bonds issued for railroad companies, the supreme court of the United States and the court of appeals of New York are in conflict. On all of these subjects the supreme court of the United States has taken the broad view, required by commercial dealings and interests. This conflict is unfortunate ; but still it cannot take away the privilege of litigants to sue in whatever court the laws permit. How far the highest appellate court in each jurisdiction shall consider itself to be controlled by the decisions in the other system must be left to it to decide.' And it may be hoped that the influence of discussion and criticism may gradually bring the decisions of these courts into harmony—a result of which there are now some slight indications. But however this may be, it does not become any court in either system to attempt to prevent a litigant from prosecuting an action wherever he may lawfully do so. It was long ago pointed out that comity forbids the courts of one State to enjoin the prosecution of actions pending in another. And it .was well said that, if this were done, the court of the latter State might retaliate by enjoining the prosecution of the injunction suit (Mead v. Merritt, 2 Paige, 404). To apply that idea to the present ease, Norris would only have to become a resident of Pennsylvania and to obtain an injunction from the circuit court of the United States for the southern district of New York, enjoining the further prosecution of this present action. This court will not be the first to begin such an unseemly contest. The cautious manner in which, in some few cases, exceptions have been admitted to this general rule of comity may be seen in Vail v. Knapp (49 Barb. 399). But certainly no such exception could be based on the fact that the court of another State might be expected to decide differently from that of the State where an injunction was sought (see McLaren v. Stanton, 35 Eng. L. & Eq. 384). The same view applies with as much force, if not with more, to an injunction preventing the prosecution of a suit in a Federal court in this State. The circuit court of the United States for the southern district of New York is not a foreign court; but it is a court within this State. The present plaintiff has been sued within its own State and its own district; and is not called on to defend itself in a distant jurisdiction. And, as has been already said, no difficulty exists in proving in that court the very facts, on which the present plaintiff relies in this action. The only thing which the plaintiff fears is, that on those facts, there will be a decision against it (Town of Venice v. Woodruff, 62 N. Y. 462). There is, therefore, as the plaintiff alleges, a defense at law to the action brought by Norris. The defense is purely legal. In such a case it has been often held that a court of equity will not enjoin an action (Minturn v. Farmers’ Loan & Trust Co., 3 N. Y. 498). As to the question, what maybe the law of the courts of this State in regard to these bonds, it is to be remarked that the case of the People ex rel. Kilbourne v. Benedict in no way passes upon the z'ights of those who have brought and paid for the bonds, in actual ignorance of the alleged facts making them invalid. The defendant,' in this present action, alleges that the case of Horton v. Town of Thompson (71 N. Y. 513, reversing 7 Hun, 452) was collusive, and the plaintiff does not deny that it was commenced at the request of the attorney for the town, and that all parties thereto were interested in procuring the decision which was obtained. Nor has there been a final decision in' that case. It may be that a second trial would result in a judgment for the defendant therein, or else that the former decision would be distinguished (Marston v. Swett, 66 N. Y. 206 ; 82 Id. 526). It is not shown therefore that there has been a final adjudication in the court of this State, on facts similar to those of this case, unfavorable to the views of the present defendant. And it is plain that none of these litigations are binding on the defendant. Even then, if the action in favor of Norris waspending in one of the courts of this state, there would be no reason for preventing him from litigating, in his own behalf, the question of the validity of his bond and coupons. On the contrary, the case of Thompson v. Perrine, 103 U. S. (13 Otto) 806, is a direct decision in a case like that of the defendant’s, in his favor ; as are also the cases mentioned in the defendant’s affidavits, decided in the. circuit court of the United States for the southern district of New York. It is, however, urged by the plaintiff that the decision in Horton v. Thompson should be conclusive of the rights of the parties here. And it is urged that the Federal court may not so regard that case. Now, it is well-known that the supreme court of the United States, to a certain extent, acknowledges the decisions of the courts of a State as binding upon parties in suits pending in the federal courts. If, therefore, under all the circumstances, the decision in Horton v. Town of Thompson ought to control the decision of the suit now pending in the circuit court of the United States, as establishing the rights of the parties, then we may be confident that that decision will have the force to which the plaintiff insists it is entitled. In the case above cited, of Thompson v. Perrine (103 U. S. [13 Otto] 806), the question was examined whether the court was bound to accept the decision in Horton v. Town of Thompson. So that it may be seen that, so far as decisions of the State courts have affected the rights of parties, they are accepted by the supreme court of the United States as statements of existing law; even though the reasoning may not be deemed satisfactory. Therefore, the suit which the plaintiff seeks to enjoin is not-in a court where the decisions of this State are utterly ignored, but in a court which' takes those decisions as part of the facts on which its judgment is to be rendered. Still, even if this were not so, as long as the laws of the country give a party the right to bring his action in a federal court, it might almost be called a violation of those laws to enjoin such an action, solely on the ground that the federal court would probably decide in a manner contrary to the opinion of the State court. The right to bring the action in the Federal court means a right to have the decision of that court, whether that decision be, in the opinion of this court, just or unjust. To say that a party may litigate in a Federal court, unless some State court thinks that the Federal court will decide incorrectly, would be absurd. It is said by the plaintiff that it is contrary to sound policy that the political divisions of the State should be perplexed by repeated litigations, and subject to a construction of a statute, contrary to that of the State court. It can hardly be urged, at this day, that towns are not, in ptoper cases, liable to be sued in the Federal courts. If the town has contracted numerous liabilities, it is liable to repeated actions. And the decisions of State courts are entitled to no more weight in favor of a town, than they are in favor of a natural person. In both cases, they are entitled to that weight in the Federal court which has been above referred to, and which has been often explained by the supreme court of the United States. Again, the plaintiff urges that the decision of the supreme court of the United States in the case of Thompson v. Perrine is in flagrant violation of the fundamental principles of the government, and is the result of a gross misunderstanding and pervérsion of the decisions of the court of appeals. This is hard language ; but if it be true, then the supreme court of the United States (which did not hesitate to reverse, with alarming promptness, its own decision in the legal tender cases, 12 Wall. 457), will doubtless, on the proposed motion for a re-argument, correct its.alleged blunder. It is alleged in the complaint that the motive of the defendant in changing his residence to Pennsylvania was that he might bring his action in the Federal court. This is denied by the general denial of the answer. But the question must be one of fact, not of motive. Motive may perhaps be considered in determining the question of fact; but the jurisdiction of the Federal court must depend on residence. If the Federal court should decide that the removal of the defendant to Pennsylvania gave that court no jurisdiction, it will give judgment against him. And that is the proper tribunal to decide the question. It would seem not to be censurable, for one to remove from a State owing to his fear that (in his opinion) its courts would not award him his just debts. It maybe that the plaintiff has a legal defense to the bond and to the coupons. But such defense is exceedingly inequitable. The defect alleged in the complaint is that the bonds, which the defendant was authorized to issue, were to be sold for cash and at par, and the cash expended in building the railroad; and that, in fact, they were exchanged for stock of the railroad. This bond was sold and was bought by the defendant. It appears by the suit of the People ex rel. Kilbourne against Benedict that the bonds were delivered to the railroad company in exchange for stock, and by the company were delivered to the contractors. So that the avails of the bonds went practically, as the law intended, viz., to the building of the railroad. And to the improper issue of the bonds, this .defendant is not alleged to have been a party. Such a defense may be legal. It is nothing more. The motion to compel the defendant to deposit securities with the court is denied, with $10 costs. The injunction heretofore granted is dissolved, with $10 costs. Another question on which the result of the cause may depend on whether the action is brought in our own courts or the court of the United States, is that of the liability of a guarantor, without notice of acceptance, &c., by the guarantee, which is affirmed by our courts (Smith v. Dann, 6 Hill, 543; Atlantic, &c. Teleg. Co. v. Barnes, 39 Super. Ct. [J. & S.] 47, and cases cited), and denied by the supreme court of the United States (Louisville Manuf’g Co. v. Welch, 10 How. U. S. 461, and cases cited. See also Henderson v. Reilly, 1 MacAr. 25; Wilcox v. Draper, Nebraska, Nov., 1881, 10 Northwestern Reporter, 579).