Williams v. AustrianAnnotate this Case
331 U.S. 642 (1947)
U.S. Supreme Court
Williams v. Austrian, 331 U.S. 642 (1947)
Williams v. Austrian
Argued April 10, 11, 1947
Decided June 16, 1947
331 U.S. 642
CERTIORARI TO THE CIRCUIT COURT OF APPEALS
FOR THE SECOND CIRCUIT
Trustees in a reorganization proceeding under Chapter X of the Bankruptcy Act, as amended by the Chandler Act of 1938, 52 Stat. 840, who have been authorized by the reorganization court to sue officers and directors of the debtor corporation and affiliated interests alleging misappropriation of corporate assets (discovered in an investigation under § 167) and seeking an accounting and other relief, may bring such suit in another federal district court, even in the absence of diversity of citizenship or other usual grounds of federal jurisdiction. Pp. 331 U. S. 646-662.
(a) The phrase "proceedings under this Act," as used in § 2, does not relate solely to summary proceedings, but includes plenary
(b) Section 23 was adopted as a limitation on the plenary jurisdiction conferred upon all district courts by § 2. Pp. 331 U. S. 648-654.
(c) Section 102 of Chapter X, making § 23 inapplicable in proceedings under that Chapter, removes this limitation and gives all federal district courts jurisdiction under § 2 over plenary suits brought by a Chapter X trustee, even though diversity of citizenship or other usual ground for federal jurisdiction is lacking. Pp. 331 U. S. 654-659, 331 U. S. 661-662.
(d) Such jurisdiction is not confined to the reorganization court, but applies to all other district courts as well. Pp. 331 U. S. 659-661.
159 F.2d 67 affirmed.
A District Court in New York dismissed for want of jurisdiction a suit brought by trustees appointed by a District Court in Virginia in a reorganization proceeding under Chapter X of the Bankruptcy Act. 67 F.Supp. 223. The Circuit Court of Appeals reversed. 159 F.2d 67. This Court granted certiorari. 330 U.S. 813. Affirmed, p. 331 U. S. 662.
MR. CHIEF JUSTICE VINSON delivered the opinion of the Court.
Section 2(a) of the Bankruptcy Act [Footnote 1] 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 (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. [Footnote 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 significance
of this action to the jurisdiction of the federal courts that this case turns. [Footnote 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 § 167 [Footnote 4] 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), and . . .
the provisions of Section 24(1), (19) of the Judicial Code. . . ."
The District Court dismissed for lack of jurisdiction, [Footnote 5] but the Circuit Court of Appeals reversed, holding that, since the governing provisions of § 23, to which the "except" clause of § 2(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. 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, [Footnote 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. [Footnote 7] But these views rest, in the main, upon what we think is an erroneous appraisal of the history of §§ 2 and 23.
216 U. S. 107, 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. [Footnote 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 assignees against adverse claimants or against debtors of the bankrupt. [Footnote 10]
Lathrop v. Drake,91 U. S. 516, viewed the jurisdiction of the district courts in this manner and, we think, contrary to the statements later made in Bardes v. Hawarden Bank,178 U. S. 524, and Schumacher v. Beeler,293 U. S. 367, upon which petitioners rely, considered the jurisdiction of the district courts over plenary suits to rest upon § 1 of the 1867 Act. [Footnote 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. . . ." [Footnote 12] But § 2(a)(7), while granting to all bankruptcy courts jurisdiction to collect and to hear controversies
relating to the estate of the bankrupt, appended the words "except as herein otherwise provided." The exception had reference to § 23, [Footnote 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(a)(7), and to the practice under the 1867 Act, [Footnote 14] § 23, in the interest of litigants and witnesses, deliberately directed to the state courts most of a bankruptcy trustee's plenary suits. [Footnote 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. [Footnote 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(b), and 67(e); [Footnote 17] and, being doubly cautious, Congress also inserted in §§ 60(b) and 67(e) clauses giving any bankruptcy court jurisdiction to hear plenary suits brought under those sections. [Footnote 18] It was explained at the time by the House judiciary committee
that § 2(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(b) and 67(e) had also been amended. [Footnote 19]
Where §§ 60(b), 67(e), and 70(e) were not involved, the Bardes rule continued to be applied where plenary proceedings were required, as in cases relating to property adversely
held [Footnote 20] and suits upon choses in action belonging to the bankrupt's estate. [Footnote 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. [Footnote 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. [Footnote 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 consent, [Footnote 24] and that, given consent, no independent
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. [Footnote 25] Cases construing the latter in the presence of the overriding prohibitions of
§ 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, [Footnote 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, [Footnote 27] and the hearings reveal only that § 23 was one of several sections which the National Bankruptcy Conference desired to eliminate, and which might be held applicable if not expressly deleted. [Footnote 28] However, the action occurred in the
process of developing a workable reorganization technique and should be viewed in that context. While an equity receivership court had dependent jurisdiction, regardless of diversity or other independent grounds for federal jurisdiction, to hear plenary suits related to the estate of the
debtor, [Footnote 29] under § 77B, which made reorganization of nonrailroad corporations a part of the bankruptcy scheme, it was believed in some quarters that § 23 would have its traditional effect upon the jurisdiction of federal courts to hear plenary suits, even though the reorganization court was given the "powers" of an equity receivership court. [Footnote 30] Other commentators, thinking that § 77B should not provide a less efficient procedure than the equity receivership, considered § 23 inapplicable to 77B cases and regarded the reorganization courts as having jurisdiction to hear plenary suits. [Footnote 31] The controversy had not been settled when Congressional committees were considering the bill which became the Chandler Act of 1938, and such a background for the suspension of § 23 in Chapter X cases obviously raises no inference of a desire to restrict, rather than to expand, the jurisdiction of the federal courts.
To interpret the elimination of § 23 in Chapter X cases as restricting the access of the trustee to the federal courts would not be in harmony with other provisions contemporaneously written into Chapter X and defining anew the position and functions of the reorganization trustee. The appointment of a disinterested trustee was made mandatory in appropriate cases, [Footnote 32] his qualifications were prescribed, [Footnote 33]
and upon him were devolved functions aimed at eliminating the abuses of previous reorganization schemes. [Footnote 34] It was his duty to prepare the reorganization plan, [Footnote 35] and there were conferred upon him investigative powers and duties [Footnote 36] which not only contemplated the discovery of wrongs done the debtor by its former management, but also insured the "prosecution of all causes of action" which might "add to the assets of corporations in reorganization." [Footnote 37] These provisions were "of paramount importance in the revision of § 77B," [Footnote 38] and are hardly indicative of a Congressional desire to restrict the trustee's choice of a forum in which to litigate plenary suits. On the contrary, the conclusion more in accord with the purposes of Chapter X and with the pivotal position in which the trustee was placed [Footnote 39] is that Congress
intended by the elimination of § 23 to establish the jurisdiction of federal courts to hear plenary suits brought by a reorganization trustee, even though diversity or other usual ground for federal jurisdiction is lacking.
The decision of the Circuit Court of Appeals is in entire harmony with the foregoing considerations. The language of § 2, in its ordinary sense and no longer limited by § 23, easily comprehends the present type of suit, and so to hold directly and effectively subserves Congressional desires as revealed in the plain policy of Chapter X and in the express elimination of § 23, which has, since its enactment in 1898, been viewed as a sharp restriction upon the jurisdiction theretofore exercised by bankruptcy courts, and as a strong preference for state courts. [Footnote 40] Since all reorganization courts are the objects of the jurisdiction conferred by § 2, [Footnote 41] the District Court for the Southern District of New York has jurisdiction to hear the present suit, which is brought by reorganization trustees and which charges misappropriation of the assets of a Chapter X debtor. [Footnote 42] "This seems to be the only logical conclusion to
be derived from the fact that § 23 has no application under Chapter X." [Footnote 43]
3. Respondents, in the alternative, argue that the equity receivership powers conferred by § 115 [Footnote 44] include jurisdiction to hear plenary suits, and that all reorganization courts may exercise the jurisdiction so conferred. Petitioners would, in any event, confine the effects of § 115 to the reorganization court in which the reorganization petition has been approved. We need not pass on these contentions, for, assuming that § 115 is jurisdictional [Footnote 45]
and that it extends only to the primary court, jurisdiction in the present case may still be rested upon § 2. That section, in the absence of § 23, supports the jurisdiction of all district courts to hear plenary suits brought by a reorganization trustee, a result consistent with the aims of Chapter X and with the elimination of a section which is itself applicable to all district courts. Congress could have carved out of § 23 only a narrow exception in favor of the court in which the reorganization proceedings are pending, and thereby left unchanged the jurisdiction of other courts over a trustee's plenary suits. Limited exceptions are familiar in the history of § 23. But Congress went further, and eliminated § 23 entirely in Chapter X proceedings. Because of the country-wide ramifications of corporate debtors placed in Chapter X reorganization, it is as usual as not for the trustee to resort to foreign jurisdictions for the disposition of plenary suits. Allowing the primary court to hear these suits will not change this situation if it is true that the process of a reorganization court does not run nationwide in plenary cases. [Footnote 46]
Congressional policy would receive only limited recognition if the suspension of § 23 is interpreted as allowing the trustee access to only the appointing court and as restricting his access to all other district courts. [Footnote 47]
4. Our holding is, of course, that Congress, in 1938, extended the jurisdiction of the reorganization courts beyond that exercised by ordinary bankruptcy courts. Section 2 of the 1898 Act contained the broad language borrowed from § 1 of the Act of 1867. But the exception to § 2(a)(7) acknowledged the overriding limitations of § 23, which was the embodiment of Congressional policy to exclude from the bankruptcy courts many of the trustee's plenary suits. That same meaningful section was expressly eliminated in 1938 in the process of perfecting a chapter of the Bankruptcy Act dealing with the distinctive and special proceedings in corporate reorganization. Cf. Continental Bank v. Rock Island R. Co.,294 U. S. 648, 294 U. S. 676. This negation of longstanding policy should be given effect consistent with the aims of Chapter X, and should not be hedged by judge-made principles not in accord with those aims. Congress need not document its specific actions in elaborate fashion in order to direct this Court's attention to statutory policy and purpose.
The failure to provide appropriate fanfare for the suspension of § 23 in Chapter X cases, and for the consequent expansion of federal jurisdiction, hardly invites our opinion as to the advisability of the action which Congress has taken. Judicial drives to limit the jurisdiction of federal courts should not lead to decision falling short of complete effectuation of statutory scheme. With the limitations of § 23 suspended, § 2 confers jurisdiction upon all reorganization courts to hear plenary suits brought by a Chapter X trustee.
5. Petitioners insist that certain consequences, which they term undesirable, will flow from this decision. It is said, for example, that the state courts will automatically be deprived of jurisdiction to hear a trustee's plenary suits. But whether or not this and other suggested consequences will follow we leave for consideration in cases presenting such issues for decision.
The decision of the Circuit Court of Appeals is
The Chandler Act of 1938, 52 Stat. 840, generally revised the Bankruptcy Act of 1898, 30 Stat. 544, as amended. Section 2, in its original form, was substantially as set out in the text, except that jurisdiction was conferred "in bankruptcy proceedings," instead of "[in] proceedings under this Act." The change in language was made in 1938.
Section 23, in full, provides as follows:
"JURISDICTION OF UNITED STATES AND STATE COURTS. -- a. The United States district courts shall have jurisdiction of all controversies at law and in equity, as distinguished from proceedings under this Act, between receivers and trustees as such and adverse claimants, concerning the property acquired or claimed by the receivers or trustees, in the same manner and to the same extent as though such proceedings had not been instituted and such controversies had been between the bankrupts and such adverse claimants."
"b. 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."
Section 23(a), as originally enacted, related to the circuit courts, which were abolished in 1911 by § 289 of the Judicial Code, 36 Stat. 1167. Formal amendment to § 23(a), was made in 1926, 44 Stat. 664.
Chapter X, containing the reorganization provisions, superseded § 77B. Section 102 of Chapter X provides:
"The provisions of chapters I to VII, inclusive, of this Act shall, insofar as they are not inconsistent or in conflict with the provisions of this chapter, apply in proceedings under this chapter: Provided, however, That section 23, subdivisions h and n of section 57, section 64, and subdivision f of section 70, shall not apply in such proceedings unless an order shall be entered directing that bankruptcy be proceeded with pursuant to the provisions of chapters I to VII, inclusive. For the purposes of such application, provisions relating to 'bankrupts' shall be deemed to relate also to 'debtors,' and 'bankruptcy proceedings' or 'proceedings in bankruptcy' shall be deemed to include proceedings under this chapter."
The investigation was made pursuant to the decision in Committee for Holders v. Kent, 143 F.2d 684.
Petitioners also based their motion to dismiss on the applicable statute of limitations, but the District Court indicated that, if there had been jurisdiction to proceed, the motion to dismiss would otherwise have been denied because of factual issues which first required determination.
"Proceedings under this chapter," referred to in §§ 101 and 102 of Chapter X, is similarly construed.
According to this view, there would, in Chapter X cases, be no provisions in the Bankruptcy Act conferring jurisdiction upon federal courts to hear plenary suits other than in §§ 60, 67, and 70. A reorganization trustee would be left, where he could, to take advantage of the ordinary grounds for federal jurisdiction.
14 Stat. 517. Section 1 gave the bankruptcy courts original jurisdiction "in all matters and proceedings in bankruptcy" which extended
"to all cases and controversies arising between the bankrupt and any creditor or creditors who shall claim any debt or demand under the bankruptcy; to the collection of all the assets of the bankrupt. . . ."
Sherman v. Bingham, 21 Fed.Cas. 1270; Goodall v. Tuttle, 10 Fed.Cas. 579. The requirement of plenary proceedings, though not expressly appearing in the Act, was well recognized. Marshall v. Knox, 16 Wall. 551; Smith v. Mason, 14 Wall. 419.
Sherman v. Bingham, 21 Fed.Cas. 1270; Goodall v. Tuttle, 10 Fed.Cas. 579.
The references to the Act contained in the discussion of the jurisdiction of the district courts obviously referred to § 1, and Sherman v. Bingham, 21 Fed.Cas. 1270, which expressly based upon § 1 the jurisdiction of the district courts to hear plenary suits was cited with unreserved approval. The pertinent passage in the Lathrop case is as follows:
"The language conferring this jurisdiction of the district courts is very broad and general. It is that they shall have original jurisdiction in their respective districts in all matters and proceedings in bankruptcy. The various branches of this jurisdiction are afterwards specified, resulting, however, in the two general classes before mentioned. . . . Each court, within its own district, may exercise the powers conferred, but those powers extend to all matters of bankruptcy, without limitation. . . . But the exclusion of other district courts from jurisdiction over these proceedings does not prevent them from exercising jurisdiction in matters growing out of or connected with that identical bankruptcy, so far as it does not trench upon or conflict with the jurisdiction of the court in which the case is pending. Proceedings ancillary to and in aid of the proceedings in bankruptcy may be necessary in other districts where the principal court cannot exercise jurisdiction, and it may be necessary for the assignee to institute suits in other districts for the recovery of assets of the bankrupt. That the courts of such other districts may exercise jurisdiction in such cases would seem to be the necessary result of the general jurisdiction conferred upon them, and is in harmony with the scope and design of the Act. The State courts may undoubtedly be resorted to in cases of ordinary suits for the possession of property or the collection of debts, and it is not to be presumed that embarrassments would be encountered in those courts in the way of a prompt and fair administration of justice. But a uniform system of bankruptcy, national in its character, ought to be capable of execution in the national tribunals without dependence upon those of the States in which it is possible that embarrassments might arise. The question has been quite fully and satisfactorily discussed by a member of this court in the first circuit in the case of Shearman v. Bingham, 7 Bank Reg. 490, and we concur in the opinion there expressed, that the several district courts have jurisdiction of suits brought by assignees appointed by other district courts in cases of bankruptcy."
91 U.S. 516, 91 U. S. 517-518.
Section 2 created the courts of bankruptcy and invested them
"with such jurisdiction at law and in equity as will enable them to exercise original jurisdiction in bankruptcy proceedings . . . 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."
First Nat. Bank v. Title & Trust Co.,198 U. S. 280, 198 U. S. 289; Bryan v. Bernheimer,181 U. S. 188, 181 U. S. 189, 181 U. S. 194; Bardes v. Hawarden Bank,178 U. S. 524, 178 U. S. 535. Section 23(b), as originally enacted, provided:
"Suits by the trustee shall only be brought or prosecuted in the courts where the bankrupt, whose estate is being administered by such trustee, might have brought or prosecuted them if proceedings in bankruptcy had not been instituted, unless by consent of the proposed defendant."
"A construction of the statute of 1898 which would deprive the federal courts of jurisdiction of the suits in question [trustee's suit to recover property] would make the act of 1898 unprecedented among bankrupt acts."
In re Hammond, 98 F. 845, 853.
When S. 1035, which eventually became the Act of 1898, reached the House, the judiciary committee recommended striking out all after the enacting clause and substituting the committee's own bill. Section 23 of the House version, 31 Cong.Rec. 1781 (1898), survived both debate and conference action, and became § 23 of the Act of 1898. In reviewing the bill preliminary to debate, the chairman of the House judiciary committee explained:
"The jurisdiction of State courts to try controversies between the trustees of bankrupt estates and parties claiming adverse interest is not in any way interfered with."
"Suits by the trustee shall only be brought in the courts where the bankrupt might have brought them except for the misfortune of his bankruptcy, unless by the consent of the proposed defendant."
"Under the last bankruptcy law, the litigation incident to the settlement of estates was conducted almost wholly in United States courts. The result was great inconvenience and much expense to a majority of the people interested in such litigation as principals, witnesses, and attorneys. Such will not be the effect under this bill. It is proper that such should not be the case, speaking generally, in behalf of the administration of justice."
31 Cong.Rec.1785 (1898).
In re Woodbury, 98 F. 833; In re Hammond, 98 F. 845; Louisville Trust Co. v. Marx, 98 F. 456.
32 Stat. 798, 799.
Id. at 799, 800. Congress likewise amended § 70(e), but, by an oversight, the exceptions made to § 23 were not correspondingly extended. The omission was corrected in 1910, 36 Stat. 840. See H.Rep. No.511, 61st Cong., 2d Sess. 6 (1910).
"Section 9: Under the law of 1867, the Federal and State courts had concurrent jurisdiction of suits to recover property fraudulently or preferentially transferred. Bardes v. Bank of Hawarden (Iowa), 178 U. S. 524, has so construed section 23(b) of the law as to deny such jurisdiction to the district courts, save with the consent of the proposed defendant. In commercial centers, this amounts to a denial of justice, the calendars of the State courts being years behindhand, while, growing out of Bardes v. Bank have come decisions which have crippled the administration of the law to a marked degree. (See In re Ward (Mass.), 5 A.B.R. 215; Mueller v. Nugent (Ky.), 105 F. 581; this latter, however, recently reversed by the Supreme Court.) There is a very general demand for a return to the policy of the law of 1867. Were it not for section 23(b), section 2(a)(7) would probably confer ample jurisdiction on the district courts. The change in section 23(b) proposed by the bill simply excepts from the operation of it all suits which can, under the specific words of the law, be brought to recover property, and this merely by referring to the three sections under which alone such suits can be brought. To remove all doubt, also, sections 13 and 16 of the bill confer concurrent jurisdiction of all such suits on the State courts and the Federal district courts, by adding appropriate words to each of the three sections, section 60(b), section 67(e), and section 70(e)."
H.Rep. No.1698, 57th Cong., 1st Sess. 7 (1902). (Italics added.)
Substantially the same explanation was given on the floor of the House by Representative George W. Ray, chairman of the judiciary committee. 35 Cong.Rec. 6941, 6942 (1902).
Representative Ray, we note, was second ranking member of the judiciary committee at the time of the passage of the 1898 Act. It was that committee which drafted §§ 2 and 23 in substantially the form appearing in the 1898 Act. Seenote 15supra. Representative Ray was also a member of the House conference committee, and it was in conference that the Act of 1898 was finally drafted and the serious differences between the House and Senate were resolved.
Harris v. First Nat. Bank,216 U. S. 382.
Kelly v. Gill,245 U. S. 116; In re Roman, 23 F.2d 556; Lynch v. Bronson, 177 F. 605.
"But in no case where it lacked possession could the bankruptcy court . . . adjudicate in a summary proceeding the validity of a substantial adverse claim. In the absence of possession, there was, under the Bankruptcy Act of 1898, as originally passed, no jurisdiction, without consent, to adjudicate the controversy even by a plenary suit."
Matthew v. Coppin, 32 F.2d 100, 101; see Stiefel v. 14th Street & Broadway Realty Corp., 48 F.2d 1041, 1043; Coyle v. Duncan Spangler Coal Co., 288 F. 897, 901; Operators' Piano Co. v. First Wisconsin Trust Co., 283 F. 904, 906; De Friece v. Bryant, 232 F. 233, 236; McEldowney v. Card, 193 F. 475, 479. Contra: Beeler v. Schumacher, 71 F.2d 831; Toledo Fence & Post Co. v. Lyons, 290 F. 637, 645.
"The Congress, by virtue of its constitutional authority over bankruptcies, could confer or withhold jurisdiction to entertain such suits and could prescribe the conditions upon which the federal courts should have jurisdiction. . . . Exercising that power, the Congress prescribed in § 23b the condition of consent on the part of the defendant sued by the trustee."
The cases decided under the 1867 Act and referred to in notes 10-11supra, recognized the broad scope of language similar to that of § 2, and cases arising under the 1898 Act and decided before Bardes v. Hawarden Bank,178 U. S. 524, based upon § 2 the jurisdiction of the federal courts to entertain plenary suits to recover property adversely held. Seenote 16supra.
Later cases have recognized the overriding consequence of § 23.
"Section 2, clause 7, confers upon the court of bankruptcy jurisdiction to 'cause the estates of bankrupts to be collected, reduced to money and distributed, and determine controversies in relation thereto, except as herein otherwise provided.' But § 23(b) prohibits the trustee (with exceptions not here applicable) from prosecuting, without the consent of the proposed defendant, a suit in a court other than that in which the bankrupt might have brought it had bankruptcy not intervened."
"There is plainly a controversy in relation to the estate of a bankrupt, and subdivision 7 of section 2 would confer jurisdiction if it were not for the limiting words, 'except as herein otherwise provided.'"
Lynch v. Bronson, 160 F. 139, 140. See also Lowenstein v. Reikes, 54 F.2d 481, 485 (dissenting opinion), and the analysis of the interplay of §§ 2 and 23 in Ross, Federal Jurisdiction in Suits by Trustees in Bankruptcy, 20 Iowa L.Rev. 565 (1935), which was written after the Beeler decision.
Schumacher v. Beeler,293 U. S. 367. See p. 331 U. S. 652 and note 24supra. In Tilton v. Model Taxi Corp., 112 F.2d 86, a 77B case, the jurisdiction of the district court to entertain a plenary suit was based upon consent.
The Senate report said, in regard to the committee's suggested amendments to § 102:
"The proposed amendment amplifies the provision with reference to applicability so as to leave no doubt that the provisions of Chapters I to VII are alone to be deemed applicable, except where inconsistent or in conflict with the provisions of the chapter."
S.Rep. No.1916, 75th Cong., 3d Sess. 6 (1938).
The amendments to § 102 were agreed to without comment on the floor of the Senate, and were similarly accepted by the House. 83 Cong.Rec. 8697, 9103, 9107, 9110 (1938).
The recommendation was made by Mr. John Gerdes. See Hearings before Subcommittee of the Committee on the Judiciary, U.S. Senate, on H.R. 8046, 75th Cong., 2d Sess. 77 (1938). Mr. Gerdes did not at this time explain the reasons for the suggested suspension of § 23. He stated as follows:
"Chapter X is not intended to be self-sufficient. All provisions of the general bankruptcy act are applicable to proceedings under chapter X, except such provisions are inconsistent with express provisions in chapter X. Some provisions of the general act are clearly inconsistent with the corporate reorganization provisions, and are therefore inapplicable. Other provisions are clearly applicable. However, there are certain sections which, by their nature, permit of doubt as to whether or not they are applicable. Section 64 of the general bankruptcy act, for example, provides for a fixed priority in the payment of claims. This section deals solely with unsecured claims, only unsecured claims being affected by bankruptcy. To apply it in corporate reorganizations -- where secured as well as unsecured claims are dealt with -- would cause great confusion. To make it clear that section 64 does not apply, we propose this amendment which expressly provides that 64 shall not be applicable to chapter X. The priorities under chapter X would therefore be those used in equity receiverships. That is the present practice under 77B, which expressly provides that section 64 shall not be applicable. When we adopt the same provision here, we merely adopt the practice which is already in existence under section 77B."
"In this enumeration of sections and subsections which are not applicable, we include only those as to which there may be reasonable doubt. The sections which we enumerate are 23, 57(h), 57(n), 64, and 70(f). We propose that section 102 be amended to provide that these sections and subsections shall not be applicable to proceedings under chapter X."
A representative of the Association of the Bar of the City of New York also listed § 23 among those sections which "have no applicability to a reorganization procedure." Id. at 37. And the spokesman for the Philadelphia Court Plan Committee suggested amending § 23 to give ordinary bankruptcy courts more effective powers to deal with fraudulently transferred or concealed assets. Id. at 26.
Finletter, Principles of Corporate Reorganization 185-87 (1937).
2 Gerdes, Corporate Reorganizations 1465 (1936). The courts had not been squarely faced with the problem at the time Congress was considering the 1938 revision of the Bankruptcy Act. Matter of United Sportwear Co., 28 Am.B.R. (N.S.) 456 (1935), had suggested that § 23 was applicable, while the contrary intimation is evident in Thomas v. Winslow, 11 F.Supp. 839. See also Note, 49 Harv.L.Rev. 797 (1936).
§ 156. The requirement of a disinterested trustee was one of the major substantive additions which Chapter X made to § 77B. S.Rep. No.1916, 75th Cong., 1st Sess.19 (1938).
§§ 156 and 158.
The important defects of 77B reorganizations and the remedy provided in Chapter X are analyzed in S.Rep. No.2084, 75th Cong., 3d Sess. 1-3 (1938).
§§ 167(6) and 169.
Section 167 in part provides:
"The trustee, upon his appointment and qualification --"
"(1) shall, if the judge shall so direct, forthwith investigate the acts, conduct, property, liabilities, and financial condition of the debtor, the operation of its business, and the desirability of the continuance thereof, and any other matter relevant to the proceedings or to the formulation of a plan, and report thereon to the judge;"
"(2) may, if the judge shall so direct, examine the directors and officers of the debtor and any other witnesses concerning the foregoing matters or any of them;"
"(3) shall report to the judge any facts ascertained by him pertaining to fraud, misconduct, mismanagement and irregularities, and to any causes of action available to the estate."
S.Rep. No.1916, 75th Cong., 3d Sess. 29 (1938).
"These functions of the trustee appointed in the larger cases are difficult to overemphasize. . . . Investors must be afforded a focal point' for reorganization." H.Rep. No.1409, 75th Cong., 1st Sess. 43 (1937).
"The bankruptcy act of 1898, in respect to the matters now under consideration, was a radical departure from the act of 1867, in the evident purpose of Congress to limit the jurisdiction of the United States courts in respect to controversies which did not come simply within the jurisdiction of the Federal courts as bankruptcy courts, and to preserve, to a greater extent than the former act, the jurisdiction of the state courts over actions which were not distinctly matters and proceedings in bankruptcy."
Section 1(10) defines the courts of bankruptcy as follows:
"'Courts of bankruptcy' shall include the district courts of the United States and of the Territories and possessions to which this Act is or may hereafter be applicable, and the District Court of the United States for the District of Columbia;"
Babbitt v. Dutcher,216 U. S. 102. And see § 2(a)(20) of the Bankruptcy Act.
Our conclusion is not changed by the language of § 23(a), which as drawn in 1898, 30 Stat. 544, 552, was designed to grant a limited jurisdiction to circuit courts over "controversies at law and in equity," as distinguished from "proceedings in bankruptcy," and which seems only to have recognized the rule existing under the 1867 Act that certain bankruptcy matters were the exclusive concern of the bankruptcy court. If "proceedings," as used in § 23(a), denoted those instances in which summary jurisdiction was proper, to find that "proceedings" in § 2 has no such precise meaning simply exemplifies the variety of ways in which "proceedings" has been employed in the bankruptcy statute. Section 11(e) authorizes trustees to institute "proceedings in behalf of the estate upon any claim," and refers to "any proceeding, judicial or otherwise." And § 60(b), 67(e), and 70(e) speak of "proceedings" in connection with plenary. In Chapter X itself, §§ 101 and 102 refer to "proceedings under this chapter." This term must extend to plenary suits, for otherwise § 23, which deals only with plenary suits, would not be suspended at all. Significant too is that "bankruptcy proceedings" in § 2 was, in 1938, changed to "proceedings under this Act" in order that the jurisdiction granted by § 2 would extend to "proceedings" under the new debtor relief chapters, including Chapter X.
6 Collier on Bankruptcy § 673 (14th ed.1947).
Section 115 provides:
"Upon the approval of a petition, the court shall have, and may, in addition to the jurisdiction, powers, and duties hereinabove and elsewhere in this chapter conferred and imposed upon it, exercise all the powers, not inconsistent with the provision of this chapter, which a court of the United States would have if it had appointed a receiver in equity of the property of the debtor on the ground of insolvency or inability to meet its debts as they mature."
The similar "powers" provision in § 77B has been viewed as nonjurisdictional. In re Standard Gas & Electric Co., 119 F.2d 658, 662; see In re Prima Co., 98 F.2d 952, 958. These cases were decided after the passage of the Chandler Act, and considered § 23 fully applicable in pending 77B proceedings. In Tilton v. Model Taxi Corp., 112 F.2d 86, § 23 was considered applicable in § 77B proceedings so as to permit jurisdiction of the district court to be based upon a defendant's consent. And see Thompson v. Terminal Shares, 104 F.2d 1, for a treatment of a similar provision contained in § 77. On the other hand, § 115 has been interpreted as jurisdictional. In re Cuyahoga Finance Co., 136 F.2d 18; see Warder v. Brady, 115 F.2d 89, 93, 94. Other courts have thought the suspension of § 23 in Chapter X cases would give the reorganization court jurisdiction to hear plenary suits. See Clarke v. Fitch, CCH Bankr.Law Ser.
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