NYTCO Services, Inc. v. Hurley's Grain Elevator Co.

• Decision Date: 28 July 1976
• Docket Number: No. C-75-110.,C-75-110.
• Citation: 422 F. Supp. 114
• Parties: NYTCO SERVICES, INC., Plaintiff, v. HURLEY'S GRAIN ELEVATOR CO. et al., Defendants.
• Court: U.S. District Court — Western District of Tennessee

422 F. Supp. 114

NYTCO SERVICES, INC., Plaintiff, v. HURLEY'S GRAIN ELEVATOR CO. et al., Defendants.

No. C-75-110.

United States District Court, W. D. Tennessee, W. D.

July 28, 1976.

Everett B. Gibson, Memphis, Tenn., for plaintiff.

Daniel R. Elkins, Richard A. Peebles, Baytown, Tex., Ben Arnold, Little Rock, Ark., William Walsh, Memphis, Tenn., Gerald W. Carlyle, Newport, Ark., John T. Williams, Little Rock, Ark., Pleasants & Adams, Lee L. Piovarcy, Memphis, Tenn., Herbert C. Rule, III, Little Rock, Ark., T. B. Fitzhugh, Augusta, Ark., David A. Hodges, B. Richard Allen, Max O. Bowie, Newport, Ark., Stanley R. Langley, Jonesboro, Ark., Paul Benham, John Haley, Little Rock, Ark., Harkey & Warmsley, Batesville, Ark., Isaac Scott, Little Rock, Ark., Pickens, Boyce, McLarty & Watson, Newport, Ark., for defendants.

MEMORANDUM OPINION AND ORDER

WELLFORD, District Judge.

The question before the Court pertains to jurisdiction in light of the commencement and continuation of bankruptcy proceedings involving the defendant, Hurley's Grain Elevator Co., and numerous Hurley-related enterprises in the Bankruptcy Court in the Eastern District of Arkansas.

A prior challenge by some of the defendants to this Court's jurisdiction over this cause of action prompted an Order, entered June 2, 1975, sustaining the action as properly brought under the interpleader statute, 28 U.S.C. § 1335. Specific reference to that prior Order is hereby made for a statement of the factual background leading up to that action.

The present jurisdictional dispute originated with the filing of Chapter XI bankruptcy petitions by debtors, W. F. Hurley, Inc., Denton Brothers, Inc. and Hurley Grain Elevator Co., in the United States District Court for the Eastern District of Arkansas, on May 28, 1975.¹ Subsequently, on or about August 22, 1975, the Bankruptcy Judge granted the debtors' motion to convert to Chapter X bankruptcy.

The debtors' trustee in bankruptcy, the defendant farmer-producers, and the defendant, White River Production Credit Association, take the position that the bankruptcy proceeding preempts this action, under the automatic stay provided in Rule 11-44(a), Chapter XI Rules, the stay issued by the Bankruptcy Judge, and either § 111 (11 U.S.C. § 511 — Chapter X) or § 311 (11 U.S.C. § 711 — Chapter XI) of the Bankruptcy Act.

Rule 10-102, Chapter X Rules (effective August 1, 1975) provides: "When a case commenced under another chapter of the Act proceeds under Chapter X, the Chapter X case shall be deemed to have been originally commenced as of the date of the filing of the first petition initiating a case under the Act." It is not significant therefore that the bankruptcy proceeding was originally commenced under Chapter XI reorganizational standards. The "exclusive jurisdiction" sections of both Chapters X and XI are, however, virtually identical. The Chapter X provision, 11 U.S.C. § 511, provides (with the applications of the Chapter XI section, 11 U.S.C. § 711, set out in parentheses):

Where not inconsistent with the provisions of this chapter, the court in which a (the) petition is filed shall, for the purposes of this chapter, have exclusive jurisdiction of the debtor and its (his) property, wherever located.

Plaintiff, NYTCO, and defendant, First National Bank of Memphis (hereinafter "Bank"), have taken the position that the bankruptcy court lacks summary jurisdiction over the property in question,² because the debtors cannot meet either the possession or ownership tests for determining when "exclusive" summary jurisdiction attaches.

The following questions have been presented for this court's determination:

(1) Does this Court have authority to proceed to a determination of the jurisdictional questions raised, after commencement of the bankruptcy proceeding and the Bankruptcy Judge's stay order?

(2) Is the appropriate test of the bankruptcy court's summary jurisdiction in a Chapter X proceeding "possession" or "title"?

(2)(a) If "possession" is the test, does NYTCO and/or the Bank have a "substantial adverse claim" of right to possession so as to deprive the bankruptcy court of summary jurisdiction?

(2)(b) If "title" is the test, does a secured creditor of the debtor (here, Bank) holding warehouse receipts have a "substantial adverse claim" of title to the commodities represented by the receipts, so as to deprive the bankruptcy court of summary jurisdiction?

(3) Is the national bank venue provision (12 U.S.C. § 94) rendered inoperative here by (a) a waiver on Bank's part, (b) preemption by the broad jurisdiction granted bankruptcy courts in reorganizations and arrangements, or (c) bankruptcy being a proceeding in rem for the benefit of, and not "against", creditors (specifically, Bank)?

(1) AUTHORITY TO DETERMINE JURISDICTION

The Court must first determine whether it does have jurisdiction and authority to decide jurisdiction and thereby resolve the question of whether the bankruptcy proceeding has stayed or preempted further action in this case. Amoco Pipeline Co. v. Admiral Crude Oil Corp., 490 F.2d 114 (CA 10, 1974); Standard Oil Co. of N. J. v. Defense Plant Corp., 57 F.Supp. 13 (S.D.N. Y.1944). This cause of action, of course, preceded the Bankruptcy filing.

In "straight" bankruptcy proceedings (Chapters I-VII of the Bankruptcy Act), the bankruptcy court's summary jurisdiction over controversies arising in the course of the proceedings is conditional upon the bankrupt having actual or constructive possession of the disputed property (or claimant's consent to jurisdiction of the bankruptcy court). Where a third-party is in actual or constructive possession asserting a substantial adverse claim of right, that claim must be determined in a plenary suit, not a summary proceeding in an ordinary bankruptcy case. 2 Collier on Bankruptcy ¶¶ 23.04-23.06 (14th ed. 1971).

The test of whether a claim is substantial has been stated to be:

. . . a claim is to be deemed of a substantial character when the claimant's contention `discloses a contested matter of right, involving some fair doubt and reasonable room for controversy,' (citation omitted), in matters either of fact or law; and is not to be held merely colorable unless the preliminary inquiry shows that it is so insubstantial and obviously insufficient, either in fact or law, as to be plainly without color of merit and a mere pretense.

Harrison v. Chamberlin, 271 U.S. 191, 195, 46 S.Ct. 467, 469, 70 L.Ed. 897 (1926).

(2) POSSESSION AS TEST

In Bradley v. St. Louis Terminal Whse. Co., 189 F.2d 818 (CA 8, 1951), it was held that a field warehouseman, claiming a right to possession of goods under an "Agreement of Bailment" with the "bailor" (who went into bankruptcy) and asserting a storage lien, was not subject to the summary jurisdiction of the bankruptcy court and was entitled to proceeds from sale of the goods ordered by the bankruptcy court. The warehousing arrangement there was found to be made in good faith and not a mere sham nor a device to defraud creditors of the bailor bankrupt. The warehouseman was found to have been in "open, visible and exclusive possession" of the goods. Id. at 823. The Court further impliedly found that constructive possession of the goods had rested with the Bank which loaned money to the bailor and held non-negotiable warehouse receipts to the goods. Bradley v. St. Louis Terminal Whse. Co., supra.

Here, NYTCO asserts that it has been acting under contract as a field warehouseman, and has maintained possession of the commodities at the time Hurley went into bankruptcy. The Bank asserts that it, as holder of non-negotiable warehouse receipts to the commodities, was in constructive possession. The other creditors concerned take the position that the warehousing arrangement was a mere sham.

The question of whether the warehousing arrangement was valid or merely colorable, a sham, bears on whether substantial adverse claims of possession are presented. A warehouseman having "actual, open and exclusive possession" would assert such a substantial claim. Bradley v. St. Louis Terminal Whse. Co., supra; Pittman v. Union Planters Nat'l. Bank & Trust Co., 118 F.2d 211, 214 (CA6, 1941), cert. den., 314 U.S. 632, 62 S.Ct. 65, 86 L.Ed. 507 (1941); see generally, White and Summers, Uniform Commercial Code, § 20-5, pp. 708-709 (1972).

The Court has considered literally thousands of pages of discovery and/or evidentiary depositions and the record before it — testimony before this Court and before the Bankruptcy Judge, the voluminous deposition testimony (particularly as specifically designated by counsel subsequent to the hearing on February 19, 1976), the documents and other numerous exhibits, the arguments and thorough briefs submitted throughout the pendency of this cause. The Court finds that NYTCO and the Bank have carried the burden of establishing substantial, adverse claims by way of actual and/or constructive possession, respectively, of the commodities in question. It is argued that possession by NYTCO was not in every respect exclusive of Hurley interests, but the record would indicate a valid and adequate warehousing arrangement giving rise to a claim for possession that certainly was not merely colorable and not frivolous or a sham or fraud. See Bostian v. Park National Bank, 226 F.2d 753 (CA8, 1955).

Under a "possession" test, the bankruptcy court would lack summary jurisdiction over the claims of NYTCO and/or the Bank.

(3) TITLE

While possession sufficient to establish a substantially adverse claim would seem to be the proper test, the court is satisfied that even if "title" were rather the test for exercise of summary jurisdiction under Ch. X bankruptcy, the result would be the same. The Bank, as prima facie holder of non-negotiable warehouse receipts, has presented a substantial adverse claim to title that denies summary jurisdiction in this matter to the bankruptcy court. As a secured creditor under the Uniform...