Kelley v. Gill

Background

A California corporation was declared bankrupt after owing about $150,000 while its main assets were nearly $481,000 in unpaid stock subscriptions. The bankruptcy court ordered payment and the trustee brought a single equity suit against about 3,000 resident stockholders to collect those unpaid promises. The defendants moved to dismiss for lack of jurisdiction, and the dismissal was affirmed, producing this appeal.

Reasoning

The central question was whether the trustee could use one federal equity suit in bankruptcy court to collect many separate promises to pay on stock. The Court explained that each stock subscription was a separate contract and that each stockholder’s liability was an individual claim. Because there was no common issue that would justify equity jurisdiction to avoid many separate law actions, the trustee could not combine the claims into one federal suit. The Court also rejected the trustee’s argument that a 1910 amendment or the trustee’s custody of disputed claims made the federal court the right place for the suit.

Real world impact

The decision means bankruptcy trustees cannot centralize thousands of ordinary subscription claims in one federal equity case when the bankrupt corporation could have sued only in state court. Trustees must pursue separate state-court actions for these kinds of individualized promises, and the Court left open different rules for cases where liability depends on a later formal call or on pro rata limits among shareholders.