Williams v. Austrian

• Decision Date: 16 June 1947
• Docket Number: No. 850,850
• Citation: 331 U.S. 642,67 S.Ct. 1443,91 L.Ed. 1718
• Parties: WILLIAMS et al. v. AUSTRIAN et al
• Court: U.S. Supreme Court

331 U.S. 642

67 S.Ct. 1443

91 L.Ed. 1718

WILLIAMS et al.

v AUSTRIAN et al.

No. 850.

Argued April 10, 11, 1947.

Decided June 16, 1947.

Mr. Milton Pollack, of New York City, for petitioners.

Mr. Carl J. Austrian, of New York City, for respondents.

[Argument of Counsel from page 643 intentionally omitted] Mr. Chief Justice VINSON delivered the opinion of the Court.

Section 2, sub. a, of the Bankruptcy Act¹ confers upon all bankruptcy courts 'such jurisdiction at law and in equity as will enable them to exercise original jurisdiction in proceedings under this Act * * * to * * * (7) Cause the estates of bankrupts to be collected, reduced to money and distributed, and determine controversies in relation thereto, except as herein otherwise provided. * * *' The exception has reference to § 23, sub. b, which requires that 'Suits by the receiver and the trustee shall be brought or prosecuted only in the courts where the bankrupt might have brought or prosecuted them if proceedings under this Act had not been instituted, unless by consent of the defendant, except as provided in sections 60, 67 and 70 of this Act.'² Congress, however, in the Chandler Act of 1938 declared the inapplicability of § 23 in reorganization proceedings under Chapter X; and it is upon the signifi- cance of this action to the jurisdiction of the federal courts that this case turns.³

Respondents were appointed trustees for the Central States Electric Corporation, a Virginia Corporation in reorganization in the District Court of the United States for the Eastern District of Virginia. Following an investigation under § 167⁴ of the Act, respondents were authorized to institute suit against petitioners, who are past and present officers and directors of the debtor and others having connection therewith. This suit was then filed against petitioners in the District Court of the United States for the Southern District of New York, alleging a conspiracy to misappropriate corporate assets and asking an accounting and other relief. There was no allegation of diversity and jurisdiction was rested upon 'the Constitution of the United States (Article I, Section 8, Clause 4, and Article III, Section 2), the Act of Congress relating to Bankruptcies (U.S.Code Title 11, 11 U.S.C.A.), and * * * the provisions of Section 24(1), (19) of the Judicial Code (28 U.S.C.A. § 41 (1, 19)). * * *'

The District Court dismissed for lack of jurisdiction;⁵ but the Circuit Court of Appeals reversed, holding that since the governing provisions of § 23, to which the 'except' clause of § 2, sub. a(7) refers, were suspended in Chapter X proceedings, jurisdiction to hear this plenary suit could be rested upon the general language of § 2. Other alleged grounds for jurisdiction were not considered. 2 Cir., 1946, 159 F.2d 67.

1. Petitioners construe 'proceedings under this Act,' within which the jurisdictional grant contained in § 2 is confined, as extending only to matters proper for summary disposition,⁶ and interpret the suspension of § 23 in Chapter X cases, without providing a substitute therefor, as removing from the Act an affirmative grant to federal courts of jurisdiction to hear plenary suits, rather than as an action aimed at expanding that jurisdiction.⁷ But these views rest, in the main, upon what we think is an erroneous appraisal of the history of §§ 2 and 23.

Section 2 is substantially idenical with § 1 of the Bankruptcy Act of 1867, ⁸ Babbitt v. Dutcher, 1910, 216 U.S. 102 107, 30 S.Ct. 372, 374, 54 L.Ed. 402, 17 Ann.Cas. 969; and cases dealing with that Act, while recognizing that certain suits brought by bankruptcy assignees should proceed in plenary, rather than summary, fashion, held that § 1 gave jurisdiction to the bankruptcy courts to proceed in both ways.⁹ And although certain aspects of a bankruptcy proceeding could be handled only by the court in which the adjudication was had, § 1 conferred upon all bankruptcy courts jurisdiction to hear plenary suits brought by bankruptcy assigneees against adverse claimants or against debtors of the bankrupt.¹⁰

Lathrop v. Drake, 1875, 91 U.S. 516, 23 L.Ed. 414, viewed the jurisdiction of the district courts in this manner and, we think, contrary to the statements later made in Bardes v. Hawarden Bank, 1900, 178 U.S. 524, 20 S.Ct. 1000, 44 L.Ed. 1175, and Schumacher v. Beeler, 1934, 293 U.S. 367, 55 S.Ct. 230, 79 L.Ed. 433, upon which petitioners rely, considered the jurisdiction of the district courts over plenary suits to rest upon § 1 of the 1867 Act.¹¹

Section 2 of the Bankruptcy Act of 1898 substantially repeated the broad grant of jurisdiction contained in § 1 of the 1867 Act. The bankruptcy courts were given 'such jurisdiction at law and in equity as will enable them to exercise original jurisdiction in bankruptcy proceedings * * *.'¹² But § 2, sub. a(7), while granting to all bankruptcy courts jurisdiction to collect and to hear contro- versies relating to the estate of the bankrupt, appended the words 'except as herein otherwise provided.' The exception had reference to § 23, ¹³ which, in the clause applicable to the district courts, provided that, unless by the consent of the defendant, suits by the bankruptcy trustee should be brought only in the courts where the bankrupt might have brought them if bankruptcy proceedings had not been instituted. In sharp contrast to the broad language of § 2, sub. a(7), and to the practice under the 1867 Act,¹⁴ § 23, in the interest of litigants and witnesses, deliberately directed to the state courts most of a bankruptcy trustee's plenary suits.¹⁵

Some lower federal courts, however, immediately held that § 23 did not apply to suits brought to recover certain transfers of the bankrupt's property and, relying upon § 2, upheld the jurisdiction of federal courts.¹⁶ Bardes v. Hawarden Bank, supra, checked this trend and gave full scope to the language of § 23. Suits to recover fraudulent transfers, like other plenary suits, were to be tried in the state courts. It was in the Bardes case unnecessary to explore the scope of § 2; for whatever the grant of jurisdiction there made, the interpretation given § 23 would have required the result reached. In any event, the construction of § 2, standing alone and without regard for the influence of § 23, as being confined to summary matters rested to a great extent upon a reading of Lathrop v. Drake, supra, with which, as has been indicated, we cannot agree.

Congressional reaction to the Bardes case was almost immediate. Wishing to allow the trustee to resort to federal courts in recovering fraudulent transfers and preferences, Congress in 1903 created exceptions to § 23 in favor of suits brought under §§ 60, sub. b, and 67, sub. e;¹⁷ and, being doubly cautious, Congress also inserted in §§ 60 sub. b and 67 sub. e clauses giving any bankruptcy court jurisdiction to hear plenary suits brought under those sections.¹⁸ It was explained at the time by the House judiciary committee that § 2, sub. a (7) would probably have been ample basis for the jurisdiction of the bankruptcy courts, and that it was only to remove all doubt that §§ 60, sub. b and 67, sub. e, had also been amended.¹⁹

Where §§ 60, sub. b, 67, sub. e, and 70, sub. e were not involved, the Bardes rule continued to be applied where plenary proceedings were required, as in cases relating to property ad- versely held²⁰ and suits upon choses in action belonging to the bankrupt's estate.²¹ Left for summary disposition under § 2 were those proceedings in which the controversy related to property in the possession or constructive possession of the court or to property held by those asserting no truly adverse claim.²²

From its inception § 23 contained a clause seemingly mitigating the rigors of the jurisdictional requirements imposed. A trustee, 'unless by consent of the proposed defendant,' could bring suit only in courts where the bankrupt could have sued. Subsequent to the Bardes case some lower federal courts held that even with the consent of a defendant, some independent ground for federal jurisdiction must be present.²³ The conflict was resolved in Schumacher v. Beeler, supra. It was held that in § 23 Congress had exercised its bankruptcy powers to confer upon federal courts jurisdiction conditioned upon a defendant's consent²⁴ and that, given consent, no independ- ent ground for federal jurisdiction was required. The case turned upon the meaning of the consent clause in § 23. The remarks offered concerning § 2 were unnecessary and, in any event, were based upon the similar statements made in Bardes v. Hawarden Bank, supra.

The Beeler decision, like that in the Bardes case, does not direct a conclusion that § 2, in the absence of § 23, confers only a summary jurisdiction; for it was because of the limitations of § 23 that plenary suits had been excluded from the otherwise broad scope of § 2.²⁵ Cases construing the latter in the presence of the overriding prohibitions of s 23 are not persuasive in a situation where, for the first time, § 23 has been declared inoperative.

2. To accept petitioner's reading of § 2 would produce consequences affording peculiar explanations for the express elimination of § 23 in Chapter X cases. For one thing, there would be destroyed the consent basis for federal jurisdiction of plenary suits brought by a trustee;²⁶ and, for another, diversity jurisdiction would depend upon the citizenship of the trustee rather than upon that of the debtor. The latter is a formal change of no obvious value, and the former puts a greater limitation upon the jurisdiction of a Chapter X court than has been placed upon an equity receivership, 77B, or ordinary bankruptcy court, a result in obvious contrast to discernible trends in reorganization law.

The committee reports and Congressional debates do not elaborate upon the decision to eliminate § 23,²⁷ and the hearings reveal only that § 23 was one of several sections which the National Bankruptcy Conference...