Title: Kirtley v. Chamberlin

State: iowa

Issuer: Iowa Supreme Court

Document:

93 N.W.2d 80 (1958) C. M. KIRTLEY, Trustee for Automatic Washer Company, Debtor in Reorganization, Plaintiff-Appellant, v. John W. CHAMBERLIN, Defendant-Appellee. No. 49559. Supreme Court of Iowa. November 18, 1958. *81 W. Z. Proctor, Howard A. Steele, Harris M. Coggeshall and James L. Rogers, Des Moines, for appellant. Bridges & Peshkin, Des Moines, for appellee. LINNAN, Justice. This is an action at law brought in the Polk County District Court by the Trustee of the Automatic Washer Company, a Delaware corporation, with its principal place of business in Newton, Iowa, Debtor in Reorganization, against John W. Chamberlin, a non-resident of the State of Iowa, and former President, Director and Chief Executive Officer of the debtor corporation, claiming damages in excess of Nine Million Dollars for alleged fraud and mismanagement in his dealings with the company. Defendant filed a special appearance and motion to quash the service of notice on him upon the ground that service of notice was made upon him while he was attending a hearing in the court of the Referee in Bankruptcy on a claim filed by him in said court for services and unreimbursed expenses owing to him by the Debtor in Reorganization and a counterclaim filed thereto by the Trustee, and at a time when he was immune from service. The trial court held that defendant as a non-resident of the state was immune from service of process in a plenary action in the state court, while attending the hearing in question and sustained the special appearance and quashed the service of notice. The Trustee has appealed from that ruling and decision. While this appeal presents but a single narrow issue, to-wit, was the defendant, a non-resident, immune from service of process while in the state attending the hearing in the Bankruptcy Court, yet the questions involved are troublesome, involved, and not entirely free from doubt. So far as we have been able to discover, the precise matter has never been passed upon by this court. The appellant does not challenge the broad general rule of immunity granted to non-resident litigants and witnesses while in the state attending court hearings, but contends that under a well recognized exception to the general rule, such immunity does not extend to a person who voluntarily comes into the state to attend the trial of litigation commenced by him from service of process in a plenary action dealing with the same subject matter between the same parties, where a full and complete determination of the rights of the parties cannot be had in the first action. The case has been ably briefed on both sides and numerous authorities have been cited which it is contended support their respective positions. It is utterly impossible to reconcile all of these cases so we will have to be guided by those which we think present the most sound and reasonable view. The facts, all of which were stipulated, must be set out at some length to present the precise issue between the parties: Automatic Washer Company is a Delaware corporation with its principal place of business in Newton, Iowa, where it was formerly engaged in the manufacture and sale of washing machines and to some extent to the performance of government contracts. The defendant, John W. Chamberlin, has been President and Chief Executive Officer since March 22, 1955, and a member of the Board of Directors since December 23, 1955. He is a non-resident of the State of Iowa. On October 29, 1956, a petition for reorganization under Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq. was filed in the United States Court for the Southern District of Iowa, which petition was verified by the defendant Chamberlin as President of the company. The petition was allowed and pursuant thereto the plaintiff-appellant was *82 appointed Trustee for the Debtor in Reorganization. Notice was duly given pursuant to order of court of the time for filing claims and on March 15, 1957, defendant Chamberlin filed a claim of $25,000 for alleged unreimbursed expenses incurred by him on behalf of the debtor corporation. The Trustee denied liability on said claim and filed a counterclaim for $82,970.95, based on misappropriation of corporation funds in the guise of expense allowances. The claim and counterclaim, together with many other claims, were set down for hearing by the Referee in Bankruptcy for December 10, 1957. Because of automobile difficulty, defendant Chamberlin did not arrive in Des Moines until the afternoon of that day. Meanwhile the hearing on claims had been recessed until 3:00 p. m. of that day. Shortly before 3:00 p. m., Chamberlin appeared in the Referee's courtroom and at about the same time was served with the original notice of this action by a deputy sheriff of Polk County, Iowa. The notice was served in the Referee's courtroom and before the Referee had returned and court was not at session. At that time Chamberlin was without counsel and the Referee in Bankruptcy adjourned the hearing on his claim until December 11, 1957. The hearing commenced on that day and was again continued until December 12, 1957 in order for defendant to obtain counsel. On December 12, 1957, defendant appeared by counsel and counsel gave verbal notice of a proposed amendment to the claim, and on December 13, 1957, an amendment and substituted claim in the amount of $120,500 for alleged services and expenses were filed. Up to the time of the trial of this case, no ruling had been made by the Referee on the claim or counterclaim. Defendant Chamberlin left Des Moines on December 13, 1957 at the conclusion of the hearing. The petition in this case is in seven counts, claiming damages in excess of Nine Million Dollars, based upon alleged fraud and mismanagement by the defendant while President and Chief Executive Officer of the Debtor in Reorganization. I. The general rule of immunity from service of civil process of witnesses and parties is well established in Iowa. It was first announced in the case of Murray v. Wilcox, 122 Iowa 188, 97 N.W. 1087, 64 L.R.A. 534, and has been consistently followed up to the present time. See Stutsman v. Hilltop Farm Feed Co., 242 Iowa 268, 45 N.W.2d 892, Frink v. Clark, 226 Iowa 1012, 285 N.W. 681, Kelly v. Shafer, 213 Iowa 792, 239 N.W. 547, Moseley v. Ricks, 223 Iowa 1038, 274 N.W. 23. This is in line with the almost universal rule prevailing in other states and in the federal courts. While there is difference in opinion as to the reason for the rule, whether it is for the protection of the courts or is a personal privilege of the party involved, the former seems the soundest and most logical reason for granting the immunity. It is so stated by Justice Brandeis in the case of Long v. Ansell, 293 U.S. 76, 83, 55 S. Ct. 21, 22, 79 L. Ed. 208, thus: This court in the case of Moseley v. Ricks, 223 Iowa 1038, 274 N.W. 23, 24, expressed the same views for in the opinion in that case we quote with approval from a note in 85 A.L.R. 1335, 1341, the following language: II. It is equally well established that there are certain exceptions to the general rule and situations in which immunity will not be granted. In the case where we have first announced the rule, Murray v. Wilcox, supra, we recognize this fact for we there said [122 Iowa 188, 97 N.W. 1088]: So the precise question before us is whether or not under the facts and circumstances in this case, the general rule is to be applied, or whether a situation is disclosed which brings the case within one of the exceptions to the general rule. III. The Bankruptcy Court is a court of law within the scope of securing immunity of process to parties and witnesses therein. Powell v. Pangborn, 161 App.Div. 453, 145 N.Y.S. 1073; 72 C.J.S. Process, § 81, p. 1121. IV. One of the generally recognized exceptions to the general rule is well stated in the case of Velkov v. Superior Court, 40 Cal. 2d 289, 253 P.2d 25, 26, 35 A.L.R.2d 1348, in the following language: Perhaps the leading case on the subject is the case of Lamb v. Schmitt, 285 U.S. 222, 52 S. Ct. 317, 318, 76 L. Ed. 720. There the principal action was brought to set aside conveyances of land and dispositions of money in fraud of general creditors. The plaintiffs being successful, a receiver was appointed and the receiver then brought suit against one Lamb, an attorney for one of the defendants in the main case, to recover funds paid to him as attorney fees while the main action was pending. Lamb, a resident of Illinois, was served with process while he was in attendance at Federal court in Mississippi in connection with the principal action as such attorney. He claimed that as a resident of Illinois that he was immune from service at the time. The Supreme Court of the United States in overruling this contention held that no immunity existed because of the connection between the two cases. In the opinion the court said: A fairly recent (1951) Nebraska case, Miller v. Miller, 153 Neb. 890, 46 N.W.2d 618, 626, being a situation where a husband returned to the jurisdiction to litigate his application for modification of a divorce decree, held the husband not immune from service on application of the wife to cite him for contempt for failure to pay alimony. The court in that case adopts the same position, saying: V. It is the contention of appellant that the present case comes within the above exception because it arises out of, is related to or involves the same subject matter as the first, or is in aid of it, or is necessary to enable a determination of the complete controversy between the same parties. Appellee's main contention is that the matters claimed in the present action should have been made a part of the counterclaim which plaintiff filed to defendant's claim in the Bankruptcy Court. To answer that question, it becomes necessary to examine and attempt to analyze the factual situation at bar. VI. When the petition for reorganization of Automatic Washer Company was allowed, it brought into operation all of the machinery of the Bankruptcy Court in reorganization proceedings, including the provisions for the filing and allowing of claims for creditors, the rights and powers of the Trustee to institute and prosecute on behalf of the Debtor in Reorganization, plenary actions to recover property, assets, or claims for moneys due, and all other actions authorized or provided by law to effectuate the general overall purpose of the reorganization proceedings. It would appear, therefore, that the filing of the claim by the defendant in the bankruptcy proceedings and the bringing of this action by the Trustee are but parts or segments of one subject matter, namely, the orderly administration of the affairs of the debtor corporation, Automatic Washer Company, under the laws of the *86 United States providing for corporate reorganizations. The primary purpose of Chapter X of the Bankruptcy Act is to prevent unnecessary or premature liquidations and whenever possible to rehabilitate the debtor under the rules and regulations of the Bankruptcy Act. In some cases the debtor corporation is left in possession. In other cases, a trustee is appointed to take charge of and manage the affairs of the debtor corporation until it can be determined whether or not a reorganization can be effected. If reorganization fails, then the corporation is liquidated as in ordinary bankruptcy cases. In order to accomplish the intended purpose of the act, the financial status of the corporation must be determined, which entails the determination of the rights of creditors and the ascertainment of the assets of the debtor corporation, so that the true financial picture may be presented to the creditors when the plan for reorganization provided for by the act is presented to them for their approval or disapproval. The procedure provides for the filing and allowance of claims of creditors on one hand and on the other hand vests in the trustee the power and authority to enforce payment of obligations due to the debtor corporation. It would appear, therefore, that the filing of the claim by the defendant in the bankruptcy action and the bringing of this action by the Trustee against the defendant for moneys alleged to be due by him to the debtor corporation are so related as to bring this action within the exception to the general rule. Defendant came into Iowa for the purpose of attempting to establish his right as a creditor to participate in the assets of the debtor corporation. The plaintiff-trustee charged with the duty of collecting the assets of the debtor corporation under the order and direction of the Bankruptcy Court, promptly sued him for a large amount which, if recovered, would be an asset of the debtor corporation. We cannot see how defendant can properly claim immunity in such a situation. The language of the United States Supreme Court in the case of Lamb v. Schmitt, which we have quoted above, can be very aptly applied to the situation now before us. VII. Appellee's main answer to this proposition is that the plaintiff should have joined this action as a part of his counterclaim to the defendant's claim in the Bankruptcy Court. In his brief, he states: "The principal area of disagreement then in this appeal is whether or not the appellant herein could have brought this action as an additional counterclaim in the Bankruptcy Court rather than as an entirely new action in the State District Court, for upon this question hangs the answer to the immunity of the defendant to the original notice served by the plaintiff in the action at bar." We are unable to follow this reasoning as we are unable to see how the question of whether plaintiff could or should have filed these claims as additional counterclaims could be determinative of the question of defendant's immunity from process in this action. There is grave question as to whether or not the matters pleaded in plaintiff's petition could have been filed as a counterclaim to defendant's claim in the Bankruptcy Court, but most certainly they could not have been so filed without his consent and plaintiff had no reason to anticipate that such consent would have been given. Section 68 of the Bankruptcy Act (11 U.S.C.A. § 108) provides for the filing of two types of counterclaims, one compulsory and the other permissive. Subsection a of Section 68, which reads as follows: provides for the filing of compulsory counterclaims. These are claims arising out of *87 the same subject matter. Defendant's claim in this case was for services and expenses. Plaintiff did file a counterclaim covering so much of his claim as related to the same subject matter based on excessive expense payments and personal expenses improperly charged to the debtor corporation. This is as far as he could go without debtor's consent. The filing of the claim in the Bankruptcy Court by defendant was an implied consent to the filing of a counterclaim relating to the same subject matter, even though it exceeded in amount the original claim, which would give the Bankruptcy Court jurisdiction to enter judgment against him for the excess, but the claims must be mutual and arise out of the same subject matter. The rule is stated in 5 Remington on Bankruptcy, Section 2202, page 359, as follows: The decisions of the Federal courts are not in harmony on this question, but one fairly recent case, In re Majestic Radio and Television Corporation, 7 Cir., 1955, 227 F.2d 152, 156, holds squarely that the filing of a claim does not authorize the filing of a counterclaim based on an unrelated, unliquidated claim for damages such as claimed by plaintiff in this action. There the creditor filed a claim for goods, wares and merchandise sold to debtor in the amount of $1481.99. The trustee filed a counterclaim of $442,067.25 based on alleged breaches of fiduciary duty by the creditor who was a director of the debtor corporation. This was also a reorganization proceeding. The counterclaim was dismissed for want of jurisdiction and the trustees appealed and the case was affirmed on appeal. In passing on this question, the court in that case said: Some of the other federal cases contain language indicating they believe the rule to be broader and that the Bankruptcy Court has jurisdiction to entertain any and all types of counterclaims. It would be impossible to review them all without unduly extending this opinion. It is sufficient to say that none of them go so far as to hold that it is compulsory upon the trustee to file a counterclaim based upon an entirely different and unrelated matter. VIII. Another reason why we think the appellee's position is not sound is that there is nothing in Chapter X of the Bankruptcy Act which takes away the trustee's choice of forum. The proceedings in bankruptcy are summary proceedings where no trial by jury is allowed. The trustee most certainly had a right to trial by jury on the matters claimed in his petition if he so desired and elected. The defendant had no right to dictate the forum. This is clearly announced by the Supreme Court of the United States in the case of Williams v. Austrian, 331 U.S. 642, 67 S. Ct. 1443, 1450, 91 L. Ed. 1718, where Chief Justice Vinson, writing the opinion, said: I. Another reason why we cannot agree with appellee is that we feel that the question of whether plaintiff could or should have filed an additional counterclaim in the Bankruptcy Court on the matters now claimed in his present petition is not at all decisive of the question of his immunity of service of process. This matter might very well be pleaded as a defense, but does not support the special appearance. The question of whether or not he was immune from service does not hinge on whether or not the plaintiff had the right to maintain this action in the state court. The plaintiff did bring this action in the state court and if it was improperly brought, defendant has the right to challenge it in the proper manner, but not by the filing of a special appearance based upon immunity from service. In the case of Iowa Electric Company v. State Board of Control, 221 Iowa 1050, 266 N.W. 543, 547, an action in equity was brought to quiet title to certain land, to which defendants filed a special appearance alleging that the petition showed on its face that it was an action against the State of Iowa in its sovereign capacity and that defendants were immune from service and the court had no jurisdiction over them. The special appearance was overruled and this was affirmed on appeal. We there said: So also in Anderson v. Moon, 225 Iowa 70, 279 N.W. 396, 397, defendant was sued for damages growing out of an automobile collision. He filed a special appearance claiming immunity as an employee of the state of Iowa. The special appearance was overruled and affirmed on appeal. We there said: See also Scott v. Wamsley, 215 Iowa 1409, 245 N.W. 214, Bachman v. Iowa State Highway Commission, 236 Iowa 778, 20 N.W.2d 18. X. It is argued by appellee that the bringing of this plenary action was an impediment to the proceedings in the Bankruptcy Court causing unnecessary and undue delay. We do not agree. The record discloses that prior to the commencement of this action, defendant was examined as an officer of the debtor corporation pursuant to the investigative powers conferred upon the Bankruptcy Court and that after such examination and further investigation by the trustee, an order was entered authorizing the bringing of this action by the plaintiff as trustee of the debtor corporation. It can, therefore, be properly assumed that something was disclosed as the result of this investigation that justified the bringing of this action and where plaintiff, as an officer of that court, acting with the authority of that court, brought this action, there is no reason to claim that he was impeding the administration of his own court. XI. It is our conclusion, therefore, that this is the case where immunity should be denied. It is not a case where, in the words of Justice Brandeis, "judicial necessities require," that immunity be extended. [293 U.S. 76, 55 S. Ct. 22.] In reaching this conclusion, we wish to make it clear to the bench and bar that we are not in any way receding from the general rule as announced in our previous decisions. The rule is a wholesome and salutary one and should not be unduly limited or restricted. All we hold is that under the peculiar facts and circumstances in this case, immunity should not be granted. The case is, therefore, reversed and the order sustaining the special appearance is overruled and the order quashing the service of notice on defendant is set aside. Reversed. All Justices concur.