In re Imperial" 400" National, Inc.

• Citation: 391 F.2d 163
• Decision Date: 07 March 1968
• Docket Number: No. 16614.,16614.
• Parties: In the Matter of IMPERIAL "400" NATIONAL, INC., a Delaware Corporation, et al., Debtors. Robert Richenberg and Ruth Richenberg, Frank McGuire and Florence McGuire, and Glen Luhman and Arlene Luhman, Appellants, Thomas J. O'Neill, Trustee-Appellee.
• Court: U.S. Court of Appeals — Third Circuit

391 F.2d 163 (1968)

In the Matter of IMPERIAL "400" NATIONAL, INC., a Delaware Corporation, et al., Debtors.

Robert Richenberg and Ruth Richenberg, Frank McGuire and Florence McGuire, and Glen Luhman and Arlene Luhman, Appellants,

Thomas J. O'Neill, Trustee-Appellee.

No. 16614.

United States Court of Appeals Third Circuit.

Argued November 6, 1967.

Decided March 7, 1968.

COPYRIGHT MATERIAL OMITTED

Lawrence B. Raff, Raff, Sherman & Scheider, Newark, N. J. (Charles B. Turner, Newark, N. J., on the brief), for appellants.

James M. Bell, Nolan & Lynes, Newark, N. J. (Joseph M. Nolan, Ernest R. Nuzzo, Newark, N. J., on the brief), for appellees.

Before STALEY, Chief Judge, and KALODNER and FORMAN, Circuit Judges.

OPINION OF THE COURT

FORMAN, Circuit Judge.

Appellants, Robert and Ruth Richenberg, Frank and Florence McGuire, and Glen and Arlene Luhman, appeal from an order of the United States District Court for the District of New Jersey remanding to the Referee in Bankruptcy for findings of fact and conclusions of law the issue as to who had title to certain funds paid by the appellants to Imperial "400" National, Inc. (Imperial), one of the debtors in bankruptcy.

Beginning in 1961 Imperial engaged in the business of constructing motels, advancing so rapidly that by June 1965 its chain comprised 115 motels in operation and 14 in stages of construction in approximately 38 states. Except in a few instances of motels wholly owned by Imperial, the pattern followed was, upon completion of a motel, to sell a 50 percent interest in it to a third party who became co-owner with Imperial and resided at and operated the motel. On April 30, May 11, and May 15, 1965, respectively, each couple of the appellants entered into such a separate co-owner operator agreement with Imperial and paid it a deposit of $15,000. These monies were deposited by Imperial in an account at the Peoples Trust Company of Bergen County entitled "Imperial `400' National, Inc. Escrow Account." On June 3, 1965, shortly after the last deposit had been made, a Petion for Arrangement under Chapter XI of the Bankruptcy Act was filed by Imperial and its subsidiaries.

Subsequently, on December 29, 1965, a reclamation application was filed by appellants and on the same day the Referee in Bankruptcy issued an order directing the Receiver of Imperial and the Peoples Trust Company of Bergen County to show cause why the funds held in the aforementioned account should not be returned to the appellants. The order to show cause came on for hearing on January 26, 1966, whereupon the Referee granted the application and entered an order effectuating the return of the deposits.¹

Meanwhile, on December 30, 1965, the Security and Exchange Commission filed a motion for leave to intervene for the purpose of moving to dismiss the debtors' petition and to dismiss the Chapter XI proceedings unless the debtors' petition should be amended or a creditors' petition filed to comply with the requirements of Chapter X of the Bankruptcy Act.

Based on these motions an order was filed on January 3, 1966 by the District Court directing Imperial and its associated debtors to show cause on January 7, 1966 why the motions of the Security and Exchange Commission should not be granted. The order also provided that any confirmation of any arrangement under Chapter XI proceedings should be stayed pending determination of the motions.² On January 7, 1966, the District Court, pursuant to its show cause order, took evidence, heard arguments and reserved its decision. At the end of the hearing the District Court orally continued the restraint contained in the order to show cause.

In an order filed on February 2, 1966, the District Court granted the Securities and Exchange Commission leave to intervene and also dismissed the Chapter XI proceedings unless either Imperial or its creditors filed an amended petition complying with the provisions of Chapter X within ten days. On February 21 the Chapter XI Receiver was replaced by a Chapter X Trustee.

On April 25, 1966, pursuant to a petition therefor by the Trustee, the District Court filed an order directing the appellants to show cause why they should not be required to turn over the funds received by them under the Referee's order of January 26, 1966. Appellants contested the jurisdiction of the District Court to entertain the Trustee's petition which, in effect, sought review of the Referee's order long after the expiration of the ten day period of limitation provided in section 39(c) of the Bankruptcy Act, 11 U. S.C. § 67(c). After asserting that it had jurisdiction to vacate the Referee's order of January 26, 1966, the District Court entered the aforementioned order on March 3, 1967 remanding the matter to the Referee and directing him to make findings as to whether the monies had been properly refunded to the appellants. This appeal followed.

At the outset, the Trustee (appellee here) challenges the jurisdiction of this court by a motion to dismiss the appeal contending that since it is taken from an order of the District Court which merely refers the matter to the Referee for an evidentiary hearing, without determining any issue on the merits, it is premature. The motion was denied, but without prejudice, and with the right of the Trustee to renew it on the argument of the merits of the appeal, which right is now being exercised.

Section 24(a) of the Bankruptcy Act, 11 U.S.C. § 47(a), provides that the Court of Appeals is vested with jurisdiction on appeals from the Bankruptcy Court "in proceedings in bankruptcy, either interlocutory or final, and in controversies arising in proceedings in bankruptcy, to review, affirm, revise, or reverse, both in matters of law and in matters of fact." Hence, as a general rule, an appeal from either an interlocutory or final order may be entertained in proceedings in bankruptcy, while in a controversy arising in proceedings in bankruptcy an appeal may be taken only from a final order. The definition of these categories has been often restated and both parties concede that:

"A controversy arising in proceedings in bankruptcy has generally been held to embrace disputes between the trustee and adverse claimants concerning the right and title to the bankrupt estate. Proceedings in bankruptcy, on the other hand, refer to matters affecting merely the administration and distribution of the estate."³

Viewing the March 3, 1967 order of reference by the District Court to the Referee as an interlocutory order, this court, in ruling on its jurisdiction to hear this appeal must determine into which of these two categories that order falls.

Intrinsically that order did not deal with the dispute over title to the funds now claimed by the Trustee. Rather there was before the District Court the issue of whether the original order made by the Referee awarding the funds to the appellants and from which no review had been taken was nevertheless susceptible of being reopened. When the District Judge announced that his determination was to be in the affirmative, appellants, with appeal purpose in mind, pressed him to declare in his order that the Referee's order was vacated or reopened. This the District Judge declined on the ground of preventing a multiplicity of appeals.⁴

There can be no question that the District Court made a definitive determination that it had jurisdiction to vacate the Referee's order because it so stated in a letter to counsel dated December 29, 1966. Again during the hearings of January 23, and February 14, 1967 the jurisdiction to vacate the Referee's order was reiterated. Finally this holding was recorded in the recital of the March 3, 1967 order in the significant language:

"The court having ruled on December 29, 1966 that it had jurisdiction to vacate the January 26, 1966 order of the referee * * *."

The consequence of the District Court's assertion of jurisdiction to rehear the merits of the reclamation application (albeit by reference) is to require appellants to relitigate issues already decided by the Referee. This is the equivalent of directly reopening his order.

This case differs from a normal petition for a turnover or a reclamation order which involves a dispute concerning title to specific property and thus inherently raises a "controversy arising in proceedings in bankruptcy." Here the controversy has been resolved by the Referee's unreviewed order. The action of the District Court from which this appeal is taken determined the procedure whereby the order of the Referee was to be reopened for the purpose of rehearing the merits of the dispute already decided.

The distinction between a "controversy arising in proceedings in bankruptcy" and "proceedings in bankruptcy," from which it must be determined whether an interlocutory order may be the subject of appeal, has often been characterized as being hairline thin and the classification depends on an analysis of each case.⁵ The showing in this case is persuasive that the order of the District Court of March 3, 1967, was one made in "proceedings in bankruptcy" rather than in a "controversy arising in proceedings in bankruptcy." Hence, the order of the District Court overruling the objection to its jurisdiction is subject matter over which this court has appellate jurisdiction.⁶

Turning now to the merits of the appeal: Appellants question the jurisdiction asserted by the District Court to vacate the order of the Referee in Bankruptcy granting an application for the reclamation of funds in the possession of the debtor, Imperial, from which no review was sought. The application for the funds alleged that they had been deposited under the co-owner agreements whereby Imperial accepted them in trust pending the consummation of the agreements; that the Chapter XI proceedings had intervened; and that these funds had remained on deposit in a special escrow bank account. On January 26, 1966, at the hearing on the application the...