Austrian v. Williams

• Decision Date: 10 February 1947
• Docket Number: No. 81,Docket 20348.,81
• Citation: 159 F.2d 67
• Parties: AUSTRIAN et al. v. WILLIAMS et al.
• Court: U.S. Court of Appeals — Second Circuit

159 F.2d 67 (1946)

AUSTRIAN et al. v. WILLIAMS et al.

No. 81, Docket 20348.

Circuit Court of Appeals, Second Circuit.

December 10, 1946.

Writ of Certiorari Granted February 10, 1947.

Carl J. Austrian, of New York City (Austrian & Lance and Saul J. Lance, George H. Schwartz, and Isadore H. Cohen, all of New York City, on the brief), for appellants.

Milton Pollack, of New York City (Sullivan & Cromwell and Emery H. Sykes and William Piel, Jr., all of New York City, on the brief), for appellees Harrison Williams et al. and Walter E. Sachs et al.

Horace R. Lamb, of New York City (Le-Boeuf & Lamb and Craigh Leonard and James O'Malley, Jr., all of New York City, on the brief), for appellees James F. Fogarty and Herbert C. Freeman.

Hawkins, Delafield & Longfellow, of New York City (Lewis L. Delafield, Barent L. Visscher, and Thomas A. Purcell, all of New York City, of counsel), for appellees John B. Niven et al.

Roger S. Foster, Sol., Robert S. Rubin, Asst. Sol., and Arnold R. Ginsburg and Lawrence M. Greene, Attys., all of Philadelphia, Pa., for the Securities and Exchange Commission, amicus curiæ.

Before SWAN, AUGUSTUS N. HAND, and CLARK, Circuit Judges.

Writ of Certiorari Granted February 10, 1947. See 67 S.Ct. 675.

CLARK, Circuit Judge.

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 York. Jurisdiction is rested not upon diversity of citizenship, but upon the provisions of the Bankruptcy Act, hereinafter discussed, and of the Judicial Code, 28 U.S.C.A. § 41(1, 19), referring to suits by an officer of the United States or arising under the Constitution or laws of the United States. On motion of defendants raising the issue, the District Court dismissed the action for want of jurisdiction of the subject matter, writing a well-reasoned opinion, D.C.S.D.N.Y., 67 F.Supp. 223, and plaintiffs have appealed.¹ The issue is of obvious importance in the administration of Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq., and we have been aided by helpful briefs and arguments of the parties, as well as by a brief amicus curiae by the Securities and Exchange Commission urging reversal.

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.² So broad a grant of power would seem to confer extensive jurisdiction upon the United States courts for the collection of a bankrupt's assets, subject to the usual protective requirements as to service of process within the state and as to venue; and such has been the conclusion of text writers, supported by a holding under the earlier Bankruptcy Act. Lathrop v. Drake, 91 U.S. 516, 23 L.Ed. 414; 6 Collier on Bankruptcy, 14th Ed., § 3.20, p. 672; Gilbert-Collier on Bankruptcy, 4th Ed. 1937, 63; Gerdes, Corporate Reorganizations — Changes Effected by Chapter X of the Bankruptcy Act, 52 Harv.L.Rev. 1, 21.

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.³ But this section is expressly made inapplicable to a reorganization proceeding unless an order is entered that bankruptcy be proceeded with. § 102, 11 U.S.C.A. § 502. The reason for excluding it from Chapter X, say defendants, was that reorganization is concerned not with collecting assets for distribution to creditors, but with administration and continuation of the debtor's business until the plan of reorganization can be put into effect. The jurisdiction of the district courts over ordinary civil suits was irrelevant to this function and was therefore eliminated. Indeed, defendants urge, § 101, 11 U.S.C.A. § 501, which provides that "the provisions of this chapter X shall apply exclusively to proceedings under this chapter," indicates a Congressional purpose to confine the application of Chapter X entirely to the summary, administrative proceedings. Defendants find some support for this technical view of the word "proceedings" in judicial statements such as those found in Bardes v. Hawarden First Nat. Bank, 178 U.S. 524, 20 S.Ct. 1000, 44 L.Ed. 1175, and Schumacher v. Beeler, 293 U.S. 367, 55 S. Ct. 230, 79 L.Ed. 433. These statements suggest that by an analogy drawn from the language of the Bankruptcy Act of 1867, § 2 of the present Act is a grant of summary jurisdiction only.

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 jurisdiction over civil actions can be an exception to another section only if that other section also deals with jurisdiction over civil suits. The jurisdiction granted by § 2, sub. a(6,7), may be exercised by all the district courts, and not solely by the one in which the bankruptcy or reorganization petition was originally filed. Bankruptcy Act, § 2, sub. a(20); Babbitt v. Dutcher, 216 U.S. 102, 30 S.Ct. 372, 54 L.Ed. 402, 17 Ann.Cas. 969; Collett v. Adams, 249 U.S. 545, 39 S.Ct. 372, 63 L.Ed. 764; Mar-Tex Realization Corp. v. Wolfson, 2 Cir., 145 F.2d 360; Lathrop v. Drake, supra.⁴

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...