Diners Club, Inc. v. Bumb

• Decision Date: 13 January 1970
• Docket Number: No. 22911.,22911.
• Citation: 421 F.2d 396
• Parties: DINERS CLUB, INC., Appellant, v. A. J. BUMB, Trustee of Dashew Business Machines, Inc., Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

421 F.2d 396 (1970)

DINERS CLUB, INC., Appellant, v. A. J. BUMB, Trustee of Dashew Business Machines, Inc., Appellee.

No. 22911.

United States Court of Appeals Ninth Circuit.

January 13, 1970.

Martin Gendel (argued), of Gendel, Raskoff, Shapiro, & Quittner, Los Angeles, Cal., for appellant.

Ronald E. Gordon (argued), of Buchalter, Nemer, Fields & Savitch, Hubert F. Laugharn, Los Angeles, Cal., for appellee.

Before HUFSTEDLER and WRIGHT, Circuit Judges, and PLUMMER, District Judge.^*

WRIGHT, Circuit Judge.

Appellee was appointed reorganization Trustee of Dashew Business Machines, Inc., pursuant to a petition filed August 16, 1965, in the District Court for the Central District of California. From that time until January, 1968, he carried on the debtor's business, which consists of the manufacture and embossing of plastic credit cards.

On January 10, 1967, appellant Diners Club, Inc., entered into a written contract with the Trustee for the production and sale to appellant of 1,500,000 cards. The contract contained elaborate provisions designed to prevent theft of the blank credit cards and misuse of the secret name and number list of Diners Club members. On November 17, 1967, Diners brought suit against the Trustee in the Superior Court of the State of California for the County of Los Angeles. It was alleged that the Trustee had breached the contract by negligently employing an untrustworthy employee, that 3,000 false credit cards had been put in circulation, and that Diners' contracts bound it to reimburse merchants for unauthorized charges made on the false cards. Resulting damages to Diners are now said to be in excess of $600,000.

Upon learning of Diners' suit, the Trustee sought an order from the reorganization court restraining any further state proceedings, and ordering Diners to file its claims in the reorganization court. A temporary order was granted November 22, 1967, and was made permanent March 11, 1968, after hearings before the Special Master and before Judge Curtis, sitting in reorganization. The latter found that Diners' state court suit would "unduly impede and interfere with the reorganization proceeding," and that Diners' claim could be adjudicated in the reorganization court "without any inconvenience or prejudice to Diners' rights to a fair trial." From this order Diners takes an appeal here. Bankruptcy Act §§ 24, 121, 11 U.S.C. §§ 47, 521.

Diners asserts: (1) that the judge of the reorganization court below lacked jurisdiction to enter the order appealed from; and (2) that in any event the order was an abuse of discretion on the facts of this case. For the reasons which follow, we reverse.

I.

The judge below found that Diners' suit would interfere with the administration of the reorganization debtor's estate. If that finding was not clearly erroneous, we think it clear that there was jurisdiction to issue the order appealed from.

Upon the filing of the petition, all property in the possession of the debtor passed into the custody of the reorganization court, and became subject to its authority and control. In the exercise of its jurisdiction over the debtor's property, the court had power to issue injunctions and all other writs necessary to protect the estate from interference, and to ensure its orderly administration. Continental Illinois Nat'l Bank & Trust Co. v. Chicago, R. I. & P. Ry., 294 U.S. 648, 55 S.Ct. 595, 79 L.Ed. 1110 (1935); Ex parte Baldwin, 291 U.S. 610, 54 S.Ct. 551, 78 L.Ed. 1020 (1934).

This ancillary jurisdiction of the reorganization court flows not only from express provisions of statute, Bankruptcy Act §§ 2(a) (15), 114-16, 11 U.S. C. §§ 11(a) (15), 514-16; All Writs Act, 28 U.S.C. § 1651, but from the inherent power of a court of equity to protect its control of a res in its custody. Julian v. Central Trust Co., 193 U.S. 93, 112, 24 S.Ct. 399, 48 L.Ed. 629 (1904); In re Tyler, 149 U.S. 164, 13 S.Ct. 785, 37 L.Ed. 689 (1893). It extends to the stay of proceedings in other courts, Bankruptcy Act § 116(4), 11 U.S.C. § 516(4), whenever such stays are necessary to conserve the assets of the estate, Steelman v. All Continent Corp., 301 U.S. 278, 57 S.Ct. 705, 81 L.Ed. 1085 (1937); In re Lustron Corp., 184 F.2d 789 (7th Cir. 1950), or to prevent interference with the orderly rehabilitation of the debtor corporation. First Nat'l Bank in Houston v. Lake, 199 F.2d 524 (4th Cir. 1952); In re Standard Gas & Electric Co., 139 F.2d 149 (3d Cir. 1943). It is not limited by the federal anti-injunction act, 28 U.S.C. § 2283, see Toucey v. New York Life Ins. Co., 314 U.S. 118, 132-133, 62 S.Ct. 139, 86 L.Ed. 100 (1941), but may be exercised in the sound discretion of the reorganization judge. Foust v. Munson S.S. Lines, 299 U.S. 77, 57 S.Ct. 90, 81 L.Ed. 49 (1936); Mack v. Pacific S.S. Lines, 94 F.2d 95 (9th Cir. 1938).

Appellant does not contest these normal principles of reorganization jurisdiction. But he argues that they are overridden by the specific provisions of 28 U.S.C. § 959(a), which is said to give him an absolute right to bring his suit, and one which could not be interfered with by injunction. That section provides:

Trustees, receivers, or managers of any property, including debtors in possession, may be sued, without leave of the court appointing them, with respect to any of their acts or transactions in carrying on business connected with such property. Such actions shall be subject to the general equity power of such court so far as the same shall be necessary to the ends of justice, but this shall not deprive a litigant of his right to trial by jury.

If the first sentence of the statute stood alone, we might be persuaded, since appellant's suit clearly was in respect of the Trustee's transactions in carrying on the debtor's business. Reading Co. v. Brown, 391 U.S. 471, 88 S.Ct. 1759, 20 L.Ed.2d 751 (1968); Thompson v. Texas Mexican Ry., 328 U.S. 134, 138, 66 S.Ct. 937, 90 L.Ed. 1132 (1946). But the first sentence's broad grant of permission to sue is limited by the second, which makes suits subject to the general equity power of the appointing court. We are of opinion that this proviso, considered in the light of the legislative history of § 959(a), is sufficient to refute appellant's contention.

What is now § 959(a) was originally enacted in response to the Supreme Court's decision in Barton v. Barbour, 104 U.S. 126, 26 L.Ed. 672 (1881). Act of March 3, 1887, ch. 373, § 3, 24 Stat. 554. Barton, injured in a railroad accident, brought suit for damages in the District of Columbia against a receiver who was operating the company pursuant to an order of the Virginia state courts. The Supreme Court held that a plea to the jurisdiction of the court in the District of Columbia was properly sustained, since a receiver might be sued in another court only by leave of the court appointing him.

Mr. Justice Miller, in dissent, argued that the majority opinion had failed to take into account the separation of law and equity. He conceded the Chancellor's power to prevent, by injunction, a plaintiff from "improperly interfering with the functions of the receiver," but maintained that the doctrine did not require other courts to refuse to hear actions at law absent prior leave of the equity court. "Whatever courts of equity may have done to protect their receivers, or the fund in their hands, it is no part of the duty of courts of law to deny to suitors properly before them the trial of their rights, which justice requires and the Constitution and the law guarantee." 104 U.S. at 140-141, 26 L.Ed. 672.¹

Against this background, we think it clear that the purpose of § 959(a) was to enact Mr. Justice Miller's dissent into law. McGreavey v. Straw, 90 N.H. 130, 5 A.2d 270, 276 (1939). The first sentence of the statute overturned Barton v. Barbour by permitting suits at law without prior leave of the appointing court. But the second sentence, by making such suits subject to the "general equity power" of the appointing court, preserved for the Chancellor the jurisdiction Mr. Justice Miller had conceded was his. If a plaintiff was at liberty to sue the receiver in any competent court without prior leave, so was the appointing court at liberty to use its injunctive powers to protect the receiver, or to guard the property in its custody.

Early cases interpreting § 959(a) generally followed Mr. Justice Miller's approach. Prior consent of the receivership court was held unnecessary to suits against the receiver with respect to the carrying on of the debtor's business, McNulta v. Lochridge, 141 U.S. 327, 12 S.Ct. 11, 35 L.Ed. 796 (1891); Texas & P. Ry. v. Cox, 145 U.S. 593, 12 S.Ct. 905, 36 L.Ed. 829 (1892), and judgments entered in such suits were made conclusive against the receiver as to the amount and validity of the claim. St. Louis S.W. Ry. v. Holbrook, 73 F. 112, 19 CCA 385 (5th Cir. 1896); Willcox v. Jones, 177 F. 870, 101 CCA 84 (4th Cir. 1910). But in accordance with the express proviso of the statute, the general equity power of the appointing court remained unimpaired, and it might exercise its jurisdiction as needed, whether to manage the property in its custody, In re Tyler, 149 U.S. 164, 182, 13 S.Ct. 785, 37 L.Ed. 689 (1893); Dillingham v. Hawk, 60 F. 494, 9 CCA 101 (5th Cir. 1894), or to protect the receiver, Stateler v. California Nat'l Bank, 77 F. 43, 54 (C.C.N.D. Cal.1896); cf. 34 Cyc. 416-417 (1910).

It is true that later cases have put less emphasis on the second sentence of § 959(a). But the statute has repeatedly been held to present no obstacle to a court of equity in the exercise of its inherent power to protect its jurisdiction in respect of property of which it has taken possession. Field v. Kansas City Ref. Co., 296 F. 800 (8th Cir. 1924); Buckhannon & N. R.R. v. Davis, 135 F. 707, 68 CCA 345 (4th Cir. 1905); Woodbury v. Pickering Lumber Co., 17 F.Supp. 575 (W.D.Mo.1936); Republic Supply Co. v. Del Rey Oil & Ref. Co., 50 F.2d 639 (S.D.Ca...