Irwin v. Missouri Valley Bridge & Iron Co. (19 F.2d 300, 1927)

EVAN A. EVANS, Circuit Judge.

This appeal is from a decree continuing a receiver of “Subscribers at Associated Employers’ Reciprocal,” and directing him to “liquidate their affairs and assets under the name of Associated Employers’ Reciprocal, Subscribers at Associated Employers’ Reciprocal, or any similar or other name, whether or not such assets have heretofore been held or controlled by an attorney in fact or receiver,” and directing the receiver “to collect from subscribers all unpaid premiums, etc., including the assessment herein levied,” directing the receiver to “maintain offices” and employ help to carry out the task of liquidating the affairs of said reciprocal,” ascertaining the amount of the claims, and collecting the assessments in order that such claims may be paid.

The complaint is unusually long, and sets forth in detail the history of the Associated Employers’ Reciprocal, hereinafter called the Reciprocal, organized under the laws of Illinois, the business of which was conducted through an Illinois corporation, Sherman & Ellis, Inc., as attorney in fact for its members. This Reciprocal, when this suit was instituted, had some 10,000 members. Its business was similar to that of an insurance company that wrote casualty insurance covering employers’ and automobile risks. Each member appointed Sherman & Ellis, Inc., its or his attorney in fact, who, in the name of the Reciprocal, issued to the member a policy of insurance of the class sought. In the course of time, as the business grew, the problem of settling losses and making assessments became more complicated and involved. The difficulties increased when either the Reciprocal or the attorney in fact began suits. The decisions are numerous that deal with the entity character of the Reciprocal, how it might sue or be sued, etc.

The confused and unsettled state of the law is illustrated by the following decisions: Sergeant v. Goldsmith Dry Goods Co., 110 Tex. 482, 221 S. W. 259, 10 A. L. R. 742; Warfield-Pratt-Howell Co., 233 Ill. 487, 84 N. E. 706; Blanchard v. Hamblin, 162 Mo. App. 242, 144 S. W. 880; Wallace & Co. v. Ferguson, 70 Or. 307,140 P. 742,141 P. 542; Elliott v. Belt Automobile Indemnity Association, 87 Pla. 545,100 So. 797; U. S. Shipping Board v. Sherman & Ellis, Inc., 208 Ala. 83, 93 So. 834; Sherman & Ellis, Inc., v. Indianapolis Castings Co., 195 Ind. 370,144 N. E. 17; John L. Walker v. National Underwriter Co. (C. C. A.) 3 F.(2d) 102; Thomas Canning Co. v. Canners’ Exchange Subscribers at Warner Insurance Bureau, 219 Mich. 214, 189 N. W. 214; Lewelling v. Manufacturing Wood Workers’ Underwriters, 140 Ark. 124, 215 S. W. 258; Lee Blakemore, Inc., v. Lewelling (C. C. A.) 281 F. 952; Mountain Timber Co. v. Manufacturing Wood Workers Underwriters, 98 Wash. 167, 167 P. 93; State v. Alley, 96 Miss. 720, 51 So. 467; Standard Auto Insurance Association v. Henson, 201 Ky. 230, 256 S. W. 414; Mazeika v. Automobile Underwriters of America, 226 Ill. App. 239; Devenny v. Automobile Owners’ Inter Insurance Association, 124 Wash. 453, 214 P. 833; Indiana Manufacturers’ Reciprocal Association v. Holmes, 79 Ind. App. 85, 137 N. E. 337; Artificial Ice Co. v. Reciprocal Exchange, 192 Iowa, 1133, 184 N. W. 756; Nolan v. Illinois Auto. Insurance Exchange, 219 Ill. App. 531; Turner v. Henshaw (Ind. App.) 155 N. E. 223. Numerous other decisions, not reported, have been called to our attention, and they too only serve to stress the difficulties incident to the operation of a Reciprocal by the attorney in fact.

In 1924 these difficulties had so multiplied, and the Reciprocal’s affairs become so seriously involved, that the insurance commissioners of the states of Hlinois, Missouri, Kansas, Kentucky, Michigan, Texas, and Oklahoma investigated its affairs and the conduct of its business by Sherman & Ellis, Inc. The result was the withdrawal of Sherman & Ellis, Inc., as attorney in fact, and the substitution of Irwin. The situation was not cleared much. An effort was made to have the Reciprocal adjudged a bankrupt, but the District Court held that it was not subject to adjudication as a bankrupt. After working on the problem for some months, Irwin concluded that a court of equity was the best, and probably the only, place where the funds of the members could be lawfully distributed and the claims of- claimants judicially fixed and determined. He therefore caused the present suit to be instituted, or at least encouraged its bringing.

When the bill was filed, he appeared1 and consented to the appointment of the receiver, and also filed an answer specifically admitting nearly all of the allegations of the bill. Among other things he said in this answer:

“And this defendant further admits that in the absence of funds in the hands of said attorney in fact with which to liquidate claims arising under said respective insurance contracts, the complainant, as well as all other claimants, should or are compelled to ask the relief of a court of equity to determine the respective rights and liabilities of the members of said class and the rights to the said funds in the hands of said attorney in fact and to come to the hands of said attorney in fact or otherwise collected.

“And this defendant, further answering, admits that it is impracticable, if not impossible, in suits at law for it to recover from the obligees upon its contracts of insurance the sum due and to become due thereon, and that there is no practical remedy other than in a court of equity to ascertain who the persons obligated by their respective insurance contract to the complainant and others and to ascertain the amount for which each may be liable or to determine the proportion and amount for which the complainant is liable to others, as alleged in paragraph 11 of said bill of complaint, and further admits that for the complainant to enforce its rights for contribution against all the members of said class would result in a multiplicity of suits and subject the complainant to be sued or involved in litigation by numerous other subscribers having like or similar claims of the defendant, as alleged in said bill of complaint.”

Some months later when the receivers had partially completed their task, defendants Irwin and Sherman & Ellis, Inc., appeared, the latter through an attempted intervention and Irwin through an amended answer, and both sought to avoid the consequences of the action previously taken and to question the court’s jurisdiction as well as the fact justification for the appointment.

The errors assigned may be considered under two, heads: (A) The federal court has no jurisdiction of the cause. (B) The facts do not justify the appointment of a receiver. None of the other named defendants answered, save Wittenmeirer Machinery Company, which company defaulted on the hearing. No appellant herein made objection to the proceeding in the District Court, or saved any exception to any rulings, save appellants Irwin, and Sherman & Ellis, Inc.

(A) Respecting the federal court’s jurisdiction, it appears that plaintiff, a Kansas corporation, sued for itself and all others similarly situated. It alleged that it was a member of the Reciprocal and had a valid unpaid claim past due in excess of $3,000. It described the defendant’s class character and citizen status as follows:

“The Missouri Valley Bridge & Iron Company, a corporation, brings this bill against W. T. Irwin, Sherman & Ellis, Inc., a corporation, Frank H. Ellis, and against the following persons individually and as representatives of a class of persons who have exchanged contracts of indemnity and insurance with each other and one another upon the plan of reciprocal insurance at the office of Sherman & Ellis, Inc., by individual, several commitments effected by agreement and through an attorney in fact, Hudrox Company, a corporation, Roberts & Schaefer Company, a corporation, D. M. Goodwillie Company, James B. Clow & Sons, a corporation, Polonia Coal Company, a corporation, Heeo Envelope Company, a corporation, Kennedy Furniture Company, a corporation, Lake Zurich Dairy Company, a corporation, and Henry Landgraf.

“Complainant respectfully shows:

“(1) That the Missouri Valley Bridge & Iron Company is a corporation organized and existing under the laws of the state of Kansas and is a citizen of the state of Kansas and of no other state; the Hydrox Company, Roberts & Schaefer Company, D. M. Goodwillie Company, James B. Clow & Sons, Witten-meirer Machinery Company, Polonia Coal Company, Heeo Envelope Company, Kennedy Furniture Company, Lake Zurich Dairy Company, and each of them, are corporations organized and existing under the laws of the state of Illinois, and each of said companies is a citizen of the state of Illinois and of no other state, and each said company has its principal office and place of business in the city of Chicago in said state; W. T. Irwin is a citizen of the state of Illinois, and resides in the city of Peoria in said state; Sherman & Ellis, Inc., is a corporation organized and existing under the laws of the state of Delaware, and has its principal office and place of business in the city of Chicago and state of Illinois ; Frank H. Ellis is a citizen of the state of Illinois and resides in the city of Chicago in said state; Henry Landgraf is a citizen of the state of Illinois and resides in the city of Chicago in said state.”

The facts bring the case squarely within the holding of Supreme Tribe of Ben Hur v. Cauble, 255 U. S. 356, 41 S. Ct. 338, 65 L. Ed. 673. The language of the court in that case is particularly applicable;

' “Owing to the number of interested parties and the impossibility of bringing them all before the court, the original suit was peculiarly one which could only be prosecuted by a part of those interested suing for all in a representative suit. Diversity of citizenship gave the District Court jurisdiction. Indiana citizens were of the class represented, their rights were duly represented by those before the court. The intervention of the Indiana citizens in the suit would not have defeated the jurisdiction already acquired. Stewart v. Dunham, supra [115 U. S. 61, 5 S. Ct. 1163, 29 L. Ed. 329], Being thus represented,, we think it must necessarily follow that their rights were concluded by the original decree. * • * •

“If the federal courts are to have the jurisdiction in class suits to which they are obviously entitled, the decree when rendered must bind all of the class properly represented. The parties and the subject-matter are within the court’s jurisdiction. It is impossible to name all of the class as parties, where, as here, its membership is too numerous to bring into court. The subject-matter included the control and disposition of the funds of a beneficial organization, and was properly cognizable in a court of equity. The parties bringing the suit truly represented the interested class. If the decree is to be effective, and conflicting judgments are to be avoided, all of the class must be concluded by the decree.”

Here the plaintiff sued fordtself and on behalf of all others similarly situated. It could not make all of the members of the Associated Employers’ Reciprocal parties defendant, because they were too numerous. It therefore selected a fairly representative number as representatives of all the members. Under these circumstances the issue of diversity of citizenship of the parties must be determined by the citizen status of the parties before the court. The jurisdiction of the federal court is determined as of the date when the suit is begun. Stewart v. Dunham, 115 U. S. 61, 5 S. Ct. 1163, 29 L. Ed. 329. Subsequent changes in the citizenship status of either plaintiffs or defendants did not affect the jurisdiction of the court. Gilbert v. David, 235 U. S. 561, 35 S. Ct. 164, 59 L. Ed. 360.

True, the court must align the parties according to the similarity of their interests. Sutton v. English, 246 U. S. 199, 38 S. Ct. 254, 62 L. Ed. 664. Diversity of citizenship will be determined only after the alignment is made. We are of the opinion, however, that the alignment as made by the pleader was the proper one, because part of the relief sought is an assessment against each member to pay the $2,000,000 of losses. The exact amount of each assessment depends upon the class to which the member belongs, as well as the date of his entry into the ágreement. While there is much similarity in the position of all members, there is such a conflict of interest as to .justify the alignment made by the pleader.

(B) Should a court of equity have appointed the receiver ? Under the management of Sherman & Ellis, Inc., the affairs of the Reciprocal became badly involved. Payment of claims was in arrears; the number of unliquidated claims was increasing; assessments on members were not fully or promptly paid. Legal difficulty aróse in collecting the assessments through court action. With $400,000 cash in the possession of Irwin, the attorney in fact, with liabilities exceeding $2,000,000, with 10,000 members, some of whom had paid assessments, and others had not, some of •whom had unliquidated casualty claims that ealled for settlement, and others had none, the facts fell squarely within the language of the Ben Hur Case: “The subject-matter included the control and disposition of the funds of the beneficial organization and was properly cognizable in a court of equity.”

It may be true that Irwin had no authority to bind the Reciprocal by the consent he gave or the answer he filed. The question of his authority so to act is not free from doubt. But surely Irwin, as attorney in fact, effectually waived any objection he, as an individual or as attorney in fact, might have had to the appointment of the receiver. Pusey & Jones Co. v. Hanssen, 261 U. S. 500, 43 S. Ct. 454, 67 L. Ed. 763; Brown v. Lake Superior Iron Co., 134 U. S. 530, 535, 10 S. Ct. 604, 33 L. Ed. 1021; Southern Pacific Railroad Co. v. U. S., 200 U. S. 341, 349, 26 S. Ct. 296, 50 L. Ed. 507. In fact no defendant, and this includes Sherman & Ellis, Inc., objected to any proceeding taken in the District Court until the former attorneys in fact were removed from any and all participation in the conduct of the Reciprocal’s affairs by the receiver.

As pointed out in Pusey & Jones v. Hans-sen, supra, the objection that the evidence does not make a case cognizable in equity does not go to the jurisdiction of the federal court. Such an objection may be waived. Metropolitan Railway Receivership, 208 U. S. 90, 28 S. Ct. 219, 52 L. Ed. 403. “Unlike lack of jurisdiction as a federal court (Mansfield, Coldwater & Lake Michigan Ry. Co. v. Swan, 111 U. S. 379, 382 [4 S. Ct. 510, 28 L. Ed. 462]) lack of equity jurisdiction (if not objected to by a defendant) may be ignored by the court, in eases where the subject-matter of the suit is of a class of which a court, of equity has jurisdiction. And where the defendant has expressly consented to action by the court or has failed to object seasonably, the objection will be treated as waived.” Pusey & Jones Co. v. Hanssen, supra.

But if we pass, for the moment, from defendants’ embarrassing position, due to their having participated in the institution of this suit an