159 F.2d 67 | 2d Cir. | 1946
Plaintiffs brought this action for the recovery of corporate assets in the Southern District of New York in their capacity of trustees of Central States Electric Corporation, a Virginia corporation now in reorganization in the District Court of the United States for the Eastern District of Virginia. To that court they owe their appointment, as well as authority to proceed against these former stockholders, officers, directors, and others accused of conspiring to defraud the debtor corporation. Except for certain defendants not served and others who have raised the issue of venue, the defendants all appear to be residents of the Southern District of New
Section 2, sub. a, of the Bankruptcy Act, 11 U.S.C.A. § 11, sub. a, gives the district courts jurisdiction at law and in equity in “proceedings” under the Act to “cause the estates of bankrupts to be collected, reduced to money and distributed," and determine controversies in relation thereto,” except where otherwise provided in the Act.
Defendants contend, however, that the word “proceedings” as used throughout the Act denotes only the summary proceedings whereby the court having charge of the debtor’s estate administers the property under its control. “Proceedings” does not under this view, include ordinary civil actions, such as the one at bar, to recover assets held adversely under a claim of right. Because the grant of jurisdiction in § 2, sub. a, is limited to “proceedings” it would result that all of the numbered subdivisions following thereafter apply only to summary proceedings, and do not govern the case at bar. Under this view, the in personam jurisdiction of the bankruptcy courts springs from § 23, 11 U.S.C.A. § 46, which gives the district courts “jurisdiction of all controversies at law and in equity, as distinguished from proceedings under this Act,” between trustees and claimants of property.
The two cases apparently derived that conclusion from an interpretation of Lathrop v. Drake, supra, a decision which construed the Act of 1867 and which, it seems now clear, should not be so interpreted. It was there held that the jurisdiction of the district courts over civil suits came from § 1 of that Act, which is now substantially embodied in § 2 of the present Act; and that § 2 of the 1867 Act, now repealed, which the two former cases regarded as the source of jurisdiction over civil suits, merely conferred a concurrent jurisdiction upon the circuit courts. The former cases, moreover, were decided not under the Act of 1867, but under the Act of 1898; and they were concerned not with a construction of § 2, but with the applicability of § 23. The statements in them from which defendants claim support are therefore merely dicta, and do not sap the vitality of the jurisdictional holding in the early case. But, going beyond the historical analogies, however construed, we think it clear that on a true reading of the Act the word “proceedings” cannot be thus limited. For it is used elsewhere to describe ordinary civil actions or “plenary” suits, as they are sometimes called. This is true under § 11, sub. e, 11 U.S.C.A. § 29, sub. e, which authorizes trustees to “institute proceedings in behalf of the estate upon any claim,” and contains also a reference to “any proceeding, judicial or otherwise,” Herget v. Central Nat. Bank & Trust Co., 324 U.S. 4, 65 S.Ct. 505, 89 L.Ed. 656, and under §§ 60, sub. b, 67, sub. e, and 70, sub. e(3) of the Act, 11 U.S.C.A. §§ 96, sub. b, 107, sub. e, and 110, sub. e(3), each of which confers upon the district courts and upon state courts concurrent jurisdiction over certain “plenary proceedings.” Herget v. Central Nat. Bank & Trust Co., supra; Schoenthal v. Irving Trust Co., 287 U.S. 92, 53 S.Ct. 50, 77 L.Ed. 185; Taubel-Scott-Kitzmiller Co. v. Fox, 264 U.S. 426, 44 S.Ct. 396, 68 L.Ed. 770; Bardes v. Hawarden First Nat. Bank, supra; Morrison v. Bay Parkway Nat. Bank, 2 Cir., 60 F.2d 41, certiorari dismissed Lafayette Nat. Bank v. Morrison, 296 U.S. 669, 57 S.Ct. 756; Milkman v. Arthe, 2 Cir., 223 F. 507; Lowenstein v. Reikes, 2 Cir., 54 F.2d 481, certiorari denied 285 U.S. 539, 52 S.Ct. 311, 76 L.Ed. 932: Coffey v. Managed Properties, 2 Cir., 85 F.2d 88. Moreover, the “except” clause in § 2, sub. a(7), refers to § 23, Bardes v. Hawarden First Nat. Bank, supra; Bryan v. Bernheimer, 181 U.S. 188, 191, 21 S.Ct. 557, 45 L.Ed. 814, a section in which the word “proceedings” is used, and which deals solely with the jurisdiction of the federal courts to entertain ordinary civil actions. Thompson v. Terminal Shares, 8 Cir., 104 F.2d 1, 9, certiorari denied 308 U.S. 559, 60 S.Ct. 100, 84 L.Ed. 470. Obviously a section which deals with juris
We turn now to a consideration of § 23, from which both parties assert they derive support. As construed together with § 2, sub. a(7), this section determines the jurisdiction of the district courts over civil actions brought by bankruptcy trustees appointed to liquidate estates under Chapters I to VII. In such ordinary bankruptcy proceedings a trustee can bring suit against an adverse claimant in a district court only if the defendant consents to the suit or if the bankrupt himself could have brought the suit had the bankruptcy petition not been filed. Bardes v. Hawarden First Nat. Bank, supra; Schumacher v. Beeler, supra; Gins v. Mauser Plumbing Supply Co., 2 Cir., 148 F.2d 974. If jurisdiction is claimed on the ground of diversity of citizenship, for example, the citizenship of the bankrupt, and not the citizenship of the trustee, •is decisive. Stiefel v. 14th St. & Broadway Realty Corp., 2 Cir., 48 F.2d 1041. The same result obtained in reorganizations conducted under the old § 77B, 11 U.S.C.A. § 207, to which the section remained applicable. In re Standard Gas & Electric Co., 3 Cir., 119 F.2d 658; 2 Gerdes on Corporate Reorganizations, 1936, § 906, p. 1470. In some cases to which both § 2, sub. a (7), and § 23 were applicable, courts have characterized one or the other of them as a grant of jurisdiction or as a limitation on jurisdiction. In Whitney v. Wenman, 198 U.S. 539, 25 S.Ct. 778, 49 L.Ed. 1157, the latter section was characterized as a limitation; in Schumacher v. Beeler, supra, a later case, it was characterized as a grant. Such characterizations of § 23 alone did not control these decisions, since they were based on a construction of the two sections standing together. Here, where that section is not involved, the characterizations of it are not in point; unless Congress has indicated an intention to the contrary, § 2, sub. a (7), standing alone, must be construed in accordance with its plain wording.
Chapter X was enacted largely because of the many abuses which developed in reorganizations under § 77B. One of these was the retention of control over the debtor corporation during reorganization by “insiders” who frequently sought to conceal and to prevent vigorous prosecution of possible causes of action. against the debtor’s former management. Report on Protective and Reorganization Committees, Pt. 1, S.E.C., 1937, 865; N.Y.Leg.Doc. No. 66, 159th Sess., 1936, 22; Note, 50 Yale L.J. 1492, 1496. To combat this and other abuses the draftsmen of Chapter X strengthened the hand of the reorganization trustee by giving him access to lists of the debtor’s security holders, in whosever hands they may be, § 165, 11 U.S.C.A. § 565, by placing upon him the duty of. formulating the plan of reorganization, § 169, 11 U.S.C.A. § 569, and perhaps most important, by giving him broad powers of scrutiny of the conduct of the debtor’s business by the debtor’s former management, § 167, 11 U.S.C.A. § 567. In view of the Congressional purpose demonstrated by these provisions, it seems clear that in eliminating § 23 from corporate reorganizations under Chapter X, Congress intended to enlarge, rather than restrict, the trustee’s choice of forum in prosecuting causes of action against former controllers of the debtor. This is the view of Professor Moore and of Mr. Gerdes.
Since jurisdiction results from the provisions of the Bankruptcy Act, we need not discuss the claim of jurisdiction based on the Judicial Code.
Reversed and remanded.
While not all defendants joined in the motion to dismiss, the court did dismiss the entire action, thus avoiding any question of appealability of the order, as in Porter v. American Distilling Co., 2 Cir., 157 F.2d 1012.
“§ 11 [§ 2], Creation of courts of bankruptcy and their jurisdiction
“a. The courts of the United States hereinbefore defined as courts of bankruptcy are hereby created courts of bankruptcy and are hereby invested, within their respective territorial limits as now established or as they may be hereafter changed, with such jurisdiction at law and in equity as will enable them to exercise original jurisdiction in proceedings under this title, in vacation, in chambers, and during their respective terms, as they are now or may be hereafter held, to—
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“(6) Bring in and substitute additional persons or parties in proceedings under this title when necessary for the complete determination of a matter in controversy;
“(7) Cause the estates of bankrupts to be collected, reduced to money and distributed, and determine controversies in relation thereto, except as herein otherwise provided, and determine and liquidate all inchoate or vested interests of the bankrupt’s spouse in the property of any estate, whenever under the applicable laws of the State, creditors are empowered to compel such spouse to accept a money satisfaction for such interest.”
“§ 46 [§ 23]. Jurisdiction of controversies between receivers and trustees and adverse claimants
“a. The United States district courts shall have jurisdiction of all controversies at law and in equity, as distinguished from proceedings under this title, between receivers and trustees as such and adverse claimants, concerning the property acquired or claimed by the receivers or trustees, in the same manner and*69 to tile same extent as though such proceedings had not been instituted and such controversies had been between the bankrupts and such adverse claimants.”
By § 23, sub. b, suits can be prosecuted only in courts where the bankrupt could have brought them, unless by consent, and except for actions under §§ 60, 67, 70, 11 U.S.C.A. §§ 96, 107, 110, as discussed below.
Similarly, defendants’ contention that Chapter X embraces only administrative proceedings in rem is not well taken. Under such a view, § 102 would he rendered meaningless, as purporting to prevent a section dealing solely with jurisdiction in personam from affecting proceedings in rem.
Mr. Gerdes seems to have been influential in urging the amendment elimi-
