282 F.2d 508 (2nd Cir. 1960), 346, Jaftex Corp. v. Randolph Mills, Inc.

Docket Nº:346, 26201.
Citation:282 F.2d 508
Party Name:JAFTEX CORPORATION, Third-Party Plaintiff-Appellant, v. RANDOLPH MILLS, INC., Third-Party Defendant-Appellee. Gail SHAWE, an infant, by Annette Shawe and Earle K. Shawe, and Early K. Shawe, Plaintiffs, v. WENDY WILSON, INC., a Division of Lewis Frimel Co., and Jaftex Corporation, Defendants.
Case Date:August 22, 1960
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

Page 508

282 F.2d 508 (2nd Cir. 1960)

JAFTEX CORPORATION, Third-Party Plaintiff-Appellant,


RANDOLPH MILLS, INC., Third-Party Defendant-Appellee.

Gail SHAWE, an infant, by Annette Shawe and Earle K. Shawe, and Early K. Shawe, Plaintiffs,


WENDY WILSON, INC., a Division of Lewis Frimel Co., and Jaftex Corporation, Defendants.

Nos. 346, 26201.

United States Court of Appeals, Second Circuit.

August 22, 1960

Argued June 8, 1960.

Page 509

Philip J. O'Brien, Jr., New York City (Philip J. O'Brien, Sr., Richard Formidoni, and John G. Coleman, New York City, on the brief), for Jaftex Corp., third-party plaintiff-appellant.

Norman C. Mendes, of Mendes & Mount, New York City, for Randolph Mills, Inc., third-party defendant-appellee.

Before LUMBARD, Chief Judge, and CLARK and FRIENDLY, Circuit Judges.

CLARK, Circuit Judge.

The question presented on this appeal is the validity of service of process of a third-party complaint upon the New York agent of the third-party defendant, Randolph Mills, Inc., a North Carolina corporation. The original diversity action brought by plaintiffs, citizens of Maryland, against defendant New York corporations sought damages for personal injuries claimed to have been sustained by the infant plaintiff when a portion of a pajama outfit she was wearing 'went up in flames.' It is alleged that defendant Wendy Wilson, Inc., manufactured the pajamas out of fabrics converted and manufactured by defendant Jaftex Corporation. Thereafter Jaftex sought to implead the ultimate manufacturer, Randolph Mills, claiming that by reason of the latter's negligence and on its sale of the cloth to Jaftex it became liable over for any amounts which Jaftex might be required to pay plaintiffs. Service was made upon an officer of Iselin-Jefferson Co.-- also named a third-party defendant--for itself and as 'selling agent' for Randolph Mills. Randolph Mills moved to vacate the service and dismiss the third-party complaint for lack of valid service, and the district court, per Dimock, J., granted the motion in a detailed opinion, Shawe v. Wendy Wilson, Inc., D.C.S.D.N.Y., 171 F.Supp. 117. After an attempted appeal was dismissed by us, the district court reframed its order to include the finding required for an interlocutory appeal under 28 U.S.C. 1292(b), and thereafter we granted the necessary appeal. Hence the matter is now before us on the issue framed below. 1

The activities of Iselin-Jefferson Co. on behalf of Randolph Mills in New York were set forth in affidavits of corporate officers presented by the parties. From these Judge Dimock concluded that Randolph Mills was doing business in New York through this agent sufficient so that there could be no doubt of the validity of the service under federal law, but that the result must be otherwise under New York law. Then he ruled that under the

Page 510

doctrine of Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188, 114 A.L.R. 1487, the state law must be applied. Acknowledging a conflict in the cases, with the views of his colleagues being generally opposed, he yet thought the precedents following state law the weightier; additionally, applying Guaranty Trust Co. of New York v. York, 326 U.S. 99, 65 S.Ct. 1464, 89 L.Ed. 2079, 160 A.L.R. 1231, he held that if as a result of even procedural law, so-called, a plaintiff is barred from recovery in the state courts, application of the Erie principle bars recovery in the federal courts on the same claim. And he held that the situation here, with Jaftex unable to recover in the state courts on its claim against Randolph Mills, 'makes the law for the federal courts.'

It is our conclusion that the service was valid under either New York or federal law. Neither in our decisions nor in those of the New York Court of Appeals is there an admitted or defined distinction; this has to be found in the nuances of meaning read between the lines of judicial opinions. In fact the learned judge below found that in an earlier day the state rule tended to be more liberal in permitting service upon foreign corporations than was the federal rule. It seems to have been agreed that the appointment of a mere agent to solicit orders for the foreign corporation did not constitute doing business in the state; but New York early ruled that a settled and continuous relation of this kind might be adequate. Tauza v. Susquehanna Coal Co., 220 N.Y. 259, 115 N.E. 915. The test appeared then to be a quantitative one depending upon the number of contracts had within the state; but L. Hand, J., led a revolt, bringing in the concept of reasonableness into holding a foreign corporation to local service. Hutchinson v. Chase & Gilbert, 2 Cir., 45 F.2d 139. This was followed by the presently leading case of International Shoe Co. v. State of Washington, Office of Unemployment Compensation and Placement, 326 U.S. 310, 66 S.Ct. 154, 90 L.Ed. 95, 161 A.L.R. 1057, applying substantially a balancing of interests, referred to as the interest test. The furthest reach of the doctrine is apparently McGee v. International Life Ins. Co., 355 U.S. 220, 78 S.Ct. 199, 2 L.Ed.2d 223, applying to insurance companies, while Hanson v. Denckla, 357 U.S. 235, 78 S.Ct. 1228, 2 L.Ed.2d 1283, by a divided court shows a moderate retreat. All this has been often discussed by text writers, as, e.g., Comment, Developments in the Law--State-Court Jurisdiction, 73 Harv.L.Rev. 909-933 (1960); Kurland, The Supreme Court, the Due Process Clause and the In Personam Jurisdiction of State Courts, 25 U. of Chi.L.Rev. 569 (1958); Reese, Judicial Jurisdiction over Non-Residents; The Impact of McGee v. International Life Insurance Company, 13 The Record 139 (1958); and other articles cited below.

This background of law on the territorial reach of service has bearing upon both federal and state rules which have developed along parallel lines, although the former is subject only to Congressional policy, while the latter has to satisfy constitutional requirements of due process. It seems to be agreed that solicitation of business alone is not enough to constitute presence in the state. Miller v. Surf Properties, 4 N.Y.2d 475, 176 N.Y.S.2d 318, 151 N.E.2d 874; MacInnes v. Fontainebleau Hotel Corp., 2 Cir., 257 F.2d 832. Yet comparatively little more is required where the business is substantial and continuous. Elish v. St. Louis Southwestern Ry. Co., 305 N.Y. 267, 112 N.E.2d 842, reargument denied 305 N.Y. 824, 113 N.E.2d 561; Sterling Novelty Corp. v. Frank & Hirsch Distributing Co., 299 N.Y. 208, 86 N.E.2d 564, 12 A.L.R.2d 1435; Melvin Pine & Co. v. McConnell, 298 N.Y. 27, 80 N.E.2d 137, affirming 273 A.D. 218, 76 N.Y.S.2d 279, 10 A.L.R.2d 194; Jacobowitz v. Thomson, 2 Cir., 141 F.2d 72, 75; Bomze v. Nardis Sportswear, Inc., 2 Cir., 165 F.2d 33, 37; Schutt v. Commercial Travelers Mut. Acc. Ass'n of America, 2 Cir., 229 F.2d 158, certiorari denied Commercial Travelers Mut. Acc. Ass'n of America v. Schutt, 351 U.S. 940, 76 S.Ct. 836, 100 L.Ed. 1466.

Page 511

If conceivably there are small differences between state and federal law because New York may not yet have exhausted its entire constitutional power, as presently defined, yet these become of little moment, since Randolph Mills' contracts in the present case go far beyond the minimum as defined under either rule.

It is true that Iselin-Jefferson Co. was an agent soliciting business for Randolph Mills (as for others also) on a commission basis and that Randolph Mills had a formal right to decline contracts of purchase submitted to it. But against this was the extent of activity Iselin-Jefferson had carried on in New York for Randolph Mills regularly and continuously for more than six years. It took orders and processed them for Randolph Mills; it received and acted upon, by investigation, response, and otherwise, all complaints; and it provided the money at once for its principal by factorizing the contracts through its own subsidiary. Moreover, the claim against Randolph Mills arises out of these very activities conducted by Iselin-Jefferson. As the district court succinctly says, D.C.S.D. N.Y., 171 F.Supp. 117, 118-119:

'On any non-technical construction of the English language, one would have to say that Randolph was doing business in New York through its agent, Iselin-Jefferson. All of Randolph's business with New York purchasers originated with Iselin-Jefferson. Iselin-Jefferson solicited the orders, passed upon the purchasers as credit risks which it would accept, submitted the orders to Randolph and then, by communication in New York with the customer, either accepted or rejected each order. At the instant of acceptance of an order the claim for the purchase price was automatically assigned by Randolph to Iselin-Jefferson Financial Co., Inc., a subsidiary of Iselin-Jefferson, and complaints as to shortages, defects in quality, etc. were thereafter made by the purchasers to Iselin-Jefferson Financial Co., Inc.'

So the court concludes that there was adequate service on federal principles. But then it registers doubt under the New York rule, though stating: 'In view of the factoring operations undertaken for Randolph in the case at bar it might plausibly be argued that enough was added to the mere status of sales representative to qualify under the restrictive New York rule.' But it finds a determinative fact to the contrary in that 'the Iselin-Jefferson organization had a veto power over each order because of its purchase of each account receivable.' 171 F.Supp. 117, 119. This is not clear to us, nor is it made clear by the record. Presumably Iselin-Jefferson could decline to factorize an account from a poor credit risk; but this possible measure of independence does not measurably reduce Randolph Mills' New York contacts through Iselin-Jefferson and may even be thought to round out and complete them by placing Randolph Mills' control of its local...

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