Pocono Racing Management Ass'n, Inc. v. Banks

Decision Date08 July 1977
Docket NumberCiv. A. No. 76-798.
Citation434 F. Supp. 507
PartiesIn re POCONO RACING MANAGEMENT ASSOCIATION, INC., Debtor, Plaintiff, v. Joseph B. BANKS, Eugene Bartoli and John J. Passan, Defendants.
CourtU.S. District Court — Middle District of Pennsylvania

Arnold Weiss, Buffalo, N. Y., Albert H. Aston, Aston, Fine, McHugh, Caverly, Wetzel & Geist, P. C., Wilkes-Barre, Pa., for plaintiff.

Morey M. Myers, Robert J. Nolan, Gelb & Myers, Scranton, Pa., for defendants.


HERMAN, District Judge.

On February 25, 1975 plaintiff, Pocono Racing Management Association, Inc., filed a petition for an arrangement under Chapter XI of the Bankruptcy Act, which matter is currently pending before the bankruptcy court. In a related action, plaintiff instituted this suit on June 22, 1976 pursuant to § 67(d) of the Bankruptcy Act, 11 U.S.C. § 107, seeking to recover funds allegedly improperly withdrawn by defendants from a bank account maintained by plaintiff. The 19 transfers described in plaintiff's complaint and which are the subject of this action are sought to be declared null and void under § 67(d) so that the funds may be returned to plaintiff and an appropriate plan of arrangement formulated in connection with the Chapter XI proceeding. With respect to the § 67(d) action, however, defendants have filed a motion to dismiss, to strike and for a more definite statement on several grounds, which are presently before the court. The various contentions raised by defendants in their motions will be discussed seriatim.

On April 16, 1976 and prior to the institution of this suit plaintiff filed an action in the bankruptcy court designated as an "Application for Turn Over Order" and directed against defendants. The "Application" ostensibly sought recovery of the same allegedly improperly withdrawn funds with which we are here concerned. Upon the filing by the defendant of a motion to strike the "Application" and dismiss the action for various enumerated grounds, plaintiff then moved for the voluntary dismissal of its "Application," which motion was granted by the bankruptcy judge on July 1, 1976. Then, as we have seen, on June 22, 1976, plaintiff initiated the instant plenary action seeking essentially the same relief.

We conclude that this plenary action is within our jurisdiction and properly entertained by this court pursuant to § 23(b) of the Bankruptcy Act, 11 U.S.C. § 46(b):1

"The statute governing plenary jurisdiction is § 23(b) of the Bankruptcy Act, 11 U.S.C. § 46(b). That section specifically authorizes the filing of a narrow group of actions arising from bankruptcies in the District Court as plenary actions in bankruptcy, even though no diversity or other independent basis of federal jurisdiction exists. This narrow group consists of cases arising under §§ 60, 67 and 70 of the Bankruptcy Act relating to preference, available liens and fraudulent transfers. Other cases, even though a receiver, trustee or debtor in possession is a party, may not be instituted in the Federal District Court in the absence of an independent basis of federal jurisdiction, such as diversity, with one exception namely, `consent'. As that term is used in § 23(b), such `consent' may be express or implied." Tamasha Town & Country Club v. McAlester Construction Finance Corp., 252 F.Supp. 80, 85-86 (S.D.Cal. 1966).

Moreover, the jurisdiction of the bankruptcy court is strictly limited to summary jurisdiction of matters in controversy which directly affect the debtor or his property, although summary jurisdiction in Chapter XI arrangement proceedings may be somewhat broader than summary jurisdiction under § 2 (11 U.S.C. § 11) concerning the ordinary adjudicated bankruptcies. See 8, Collier on Bankruptcy ¶ 3.02; Tamasha Town & Country Club v. McAlester Construction Finance Corp., supra, at 85, n. 1. Recovery upon a chose in action, or cause of action for damages for tortious conduct, does not involve property or its proceeds which is in the possession or under control of the defendants at the time of the proceeding, and accordingly summary jurisdiction is inappropriate. In In Re Welded Construction, Inc., 339 F.2d 593 (6th Cir. 1964) (per curiam), the lower district court ruled that a turnover order entered by the bankruptcy court following summary proceedings which directed the return of alleged fraudulent disbursements of the bankrupt's funds by the named defendants was improperly employed in that it sought a money judgment against the defendants for alleged fraudulent disbursement of the funds and did not, in fact, seek funds belonging to the bankrupt corporation and in the possession of a third party. Accordingly, the district court concluded that a plenary action was necessary to seek such a recovery and vacated the bankruptcy judge's order. The decision of the district court was affirmed by the sixth circuit, which reiterated the fact that an action for damages for tortious conduct in the nature of embezzlement, misappropriation or improvident dissipation of assets does not seek specific property or its proceeds which is both a part of the bankrupt's estate and in the immediate possession of the party proceeded against, and therefore is not appropriately resolved in summary proceedings. In this case as in that one a plenary proceeding, in the district court, is required.

The thrust of defendants' motion to dismiss this action appears to be that, in view of the fact that plaintiff has failed to diligently and in good faith pursue its remedy under Chapter XI by timely submitting the necessary supporting documents and statements, plaintiff is not a legitimate and proper subject for relief under Chapter XI and accordingly the court is without subject-matter jurisdiction over this related § 67(d) plenary action. Therefore, defendants maintain that plaintiff's complaint in the above-captioned matter should be dismissed in accordance with 11 U.S.C. § 776 and Bankruptcy Rule 11-42(b).2

Sitting in our capacity as a bankruptcy court, it is clear that our jurisdiction to entertain this § 67(d) action under 11 U.S.C. § 46 is dependent on the validity of the underlying Chapter XI proceeding; the provisions of the Bankruptcy Act simply are not effective and available to plaintiff unless a petition initiating proceedings under the Bankruptcy Act has been filed and a decree of adjudication entered. Cf. 11 U.S.C. § 107(a)(1). In this instance, for purposes of jurisdiction, the filing of a petition for arrangement under Chapter XI is tantamount to the filing of a voluntary petition for adjudication in bankruptcy and entry of a decree of adjudication, investing the court with jurisdiction to consider the matter and to grant the appropriate relief afforded under the provisions of the Bankruptcy Act. 11 U.S.C. § 712(2). The Chapter XI proceeding is currently pending before and under consideration by the bankruptcy judge.

Consequently it appears that the question as to whether plaintiff has been unduly dilatory in pursuing its remedy under Chapter XI is a matter which should be addressed by the bankruptcy judge, and not by this court. While the bankruptcy judge has the prerogative to dismiss the petition on the procedural grounds that plaintiff has not observed the prescribed time limits, under the provisions of Chapter XI, in filing the necessary materials, the bankruptcy judge has not to date dismissed the Chapter XI petition. Accordingly, the underlying proceeding remains valid and does not constitute a basis which will defeat jurisdiction over the § 67 action in our court. We decline to usurp the bankruptcy judge's discretionary powers in a matter which has not been properly raised before him and on which he has made no final decision.

Similarly, we cannot at this time accept defendants' argument that plaintiff is not, other than in a nominal sense, a "debtor in possession" within the meaning of 11 U.S.C. § 742 and that plaintiff has no standing to bring this action based on the fact that plaintiff has been dilatory in neglecting to fulfill its responsibilities as a debtor in possession under Chapter XI. Allegations contained in the complaint indicate that plaintiff believes he is in fact a debtor. A debtor in possession, in turn, has been construed to mean a debtor for whom no receiver or trustee has been appointed in the arrangement proceeding. In Re Hammond Standish & Co., 126 F.Supp. 353, 355 (E.D.Mich.1954). In the absence of any indication in the complaint that a receiver or trustee has been appointed, the court is constrained to conclude that plaintiff is in effect a "debtor in possession" under the terms of Chapter XI. A debtor in possession remains as such and is conferred the status of a trustee until he is effectively ousted. While defendants further argue that a receiver has not been appointed as yet only because plaintiff has failed to file documents containing preliminary information pertinent to a decision as to whether or not a receiver is necessary and should be selected, this contention is conclusory and highly speculative and does not compel a contrary conclusion. Therefore we find at this time that plaintiff has standing to institute this § 67(d) action by virtue of its capacity as a debtor in possession under Chapter XI. Cf. Mack v. Bank of Lansing, 396 F.Supp. 935, 940 (W.D.Mich.1975); 11 U.S.C. § 742.

Defendants also contend that plaintiff is not entitled to an arrangement under Chapter XI because the list of creditors attached to plaintiff's petition for an arrangement is erroneous in that many of the enumerated liabilities do not constitute actual and proper liabilities of plaintiff and were not recognized as bona fide liabilities at the time that they were allegedly accrued. Again, this is a matter which appropriately should be first raised before the bankruptcy judge in connection with the Chapter XI petition and a final decision rendered before we should review the question. Defendants point out that the issue was...

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