Source: http://pa.findacase.com/research/wfrmDocViewer.aspx/xq/fac.19650311_0040205.C03.htm/qx
Timestamp: 2016-12-08 16:29:56
Document Index: 591956607

Matched Legal Cases: ['§ 1332', '§ 11', '§ 23', '§ 23', 'Art. 1', '§ 8']

| Wymard v. McCloskey & Co.
Having determined that this is, as alleged, a suit by receivers of a Pennsylvania corporation against a Delaware corporation on a claim in excess of $10,000, the parties and the trial judge treated these facts as sufficient to create diversity jurisdiction. However, in determining whether diversity exists, the principal place of business of a corporation, as well as its place of incorporation, must now be treated as the corporate seat. 28 U.S.C., 1958 ed., § 1332(c). Kelly v. United States Steel Corp., 3d Cir. 1960, 284 F.2d 850. The present complaint contains no allegation of the principal place of business of either corporate party*fn1 And matter in the record at least suggests that the principal place of business of the defendant corporation is Pennsylvania, the very state in which the bankrupt is incorporated. Accordingly, we have given the plaintiff an opportunity to amend its pleadings and supplement its proof in an attempt to satisfy the jurisdictional requirements of diversity, but the plaintiff has elected to stand on its original pleadings.
Although the parties and the court below viewed this as a diversity case, the quoted language of the complaint discloses another possible basis of jurisdiction. It is alleged and admitted that the plaintiffs are receivers in bankruptcy authorized by a referee in bankruptcy to sue the defendant on a contract claim of the debtor.Aware of these circumstances, the defendant entered a general appearance and interposed defenses. First, it unsuccessfully moved to stay the proceedings to permit arbitration. Thereafter, it filed an answer and a counterclaim and went to trial on the merits of the controversy. These circumstances, it is now contended, suffice to establish federal jurisdiction under the provisions of section 2 sub. a(7) and 23 sub. b of the Bankruptcy Act. 11 U.S.C. §§ 11, sub. a(7), 46, sub. b. It is not disputed that these sections, read together, confer upon district courts plenary jurisdiction over suits in which bankruptcy receivers seek to collect from third persons sums allegedly owed to the debtor when bankruptcy intervened, provided that such a suit must be brought in a court where the bankrupt might have sued the defendant unless the defendant shall consent to the receiver's suit. Schumacher v. Beeler, 1934, 293 U.S. 367, 55 S. Ct. 230, 79 L. Ed. 433; Williams v. Austrian, 1947, 331 U.S. 642, 652, 67 S. Ct. 1443, 91 L. Ed. 1718. Obviously, the administration of bankruptcy and the adjudication of such suits as may be required for the collection and distribution of bankrupt estates are matters within federal power and primary federal responsibility in our constitutional scheme. Thus, Congress might have subjected a bankrupt's debtor to such a suit as this without regard to federal jurisdiction over a similar suit by the bankrupt before bankruptcy. However, as a matter of policy, Congress so framed section 23, sub. b as to enable a defendant to avoid a plenary suit by a receiver in any federal court in which the bankrupt himself could not have sued that defendant. Viewing this as a limitation of grace upon the normal reach of federal jurisdiction, the courts have consistently held that a defendant's consent to be sued where the debtor could not have sued him need not be express. Rather, submission by the defendant to the jurisdiction of the court without asserting any objection predicated upon section 23, sub. b is deemed a sufficient consent within the meaning of that section. Gins v. Mauser Plumbing Supply Co., 2d Cir. 1945, 148 F.2d 974 (filing answer); Detroit Trust Co. v. Pontiac Savings Bank, 6th Cir. 1912, 196 F. 29, aff'd 237 U.S. 186, 35 S. Ct. 509, 59 L. Ed. 907 (filing answer); McEldowney v. Card, C.C.E.D.Tenn.1911, 193 F. 475 (answer, set-off and trial).
In this case, the defendant's appearance, its answer and, most strikingly, its affirmative request for relief by way of counterclaim, were manifestations of acquiescence that this controversy be adjudicated in the federal forum. The defendant's motion for a stay pending arbitration, which was ultimately denied, Wymard v. McCloskey & Co., E.D.Pa.1960, 190 F. Supp. 420, aff'd per curiam, 3d Cir. 1961, 292 F.2d 839, was not inconsistent with this acquiescence. Presupposing federal jurisdiction, it merely invoked federal authority to hold litigation in abeyance to permit resort to an allegedly agreed administrative procedure.
Nevertheless, the defendant urges that its conduct in litigating this case to final judgment on the merits without objection to the exercise of jurisdiction should not be viewed as voluntary submission to a plenary suit under the Bankruptcy Act because it thought that this was a proper diversity suit to which it could not interpose any valid objection. However, the averments in the opening paragraphs of the complaint asserted facts enough to disclose that jurisdiction could be exercised under the Bankruptcy Act, unless consent should be withheld under section 23, sub. b. And the additional allegations of the complaint concerning diversity jurisdiction were insufficient on their face. What happened was that the defendant, misled by a mistaken view of the legal sufficiency of the complaint under one branch of federal jurisdiction and overlooking its sufficiency under another, consented to litigation in the federal forum. Mere mistake or oversight as to the legal consequence of facts clearly alleged in the complaint does not vitiate such consent. Certainly, if the defendant had simply been unaware that section 23 sub. b existed, that would not have invalidated its consent. We think the additional legal mistake as to the existence of diversity jurisdiction had no greater effect.And since the plaintiff perpetrated no fraud, the fact that it made the same mistake of law does not alter the situation. Cf. McEldowney v. Card, supra.
One other observation seems pertinent. No significant interest is sacrified and no injustice is done by treating the defendant's conduct as requisite consent to the federal forum. The controversy is within an area of federal power and primary federal concern.The defendant has availed itself of the opportunity to present its case, both defense and counterclaim, in the federal forum and the matter has proceeded to final judgment. Certainly, a judgment for the defendant, on claim or counterclaim, would have been binding upon the plaintiff. It would serve no worthwhile purpose to permit the unsuccessful defendant now to avoid the outcome of this fully litigated case.
However, the cost plus contract was not detailed. The court found merely an oral agreement in the most general terms that "all painting work performed by Kemmel be paid for on a 'cost plus' basis". To establish the amount of their claim at trial, Kemmel's receivers undertook to prove charges in various categories thought to be allowable under such an agreement.Labor costs, material costs, expenditures for taxes and workmen's compensation and other cost items directly allocable to this job were proved and allowed. In addition, an amount equal to 15 per cent of the total labor cost was added to reimbursable costs as "overhead", which witnesses said was allowable under the custom of the trade in such cases. This overhead item, amounting to $78,843.44, was separate from and additional to a 10 per cent profit item.
In both states there are clear, authoritative decisions that an agreement in general terms to pay for a job on a cost plus basis does not impose an obligation to pay anything for general overhead, in addition to whatever percentage of cost may be allowed for profit. House v. Fissell, 1947, 188 Md. 160, 51 A.2d 669; Lytle, Campbell & Co. v. Somers, Fitler & Todd Co., 1923, 276 Pa. 409, 120 A. 409, 27 A.L.R. 41. Accord, Charles Elmer & Sons v. Kelly, 5th Cir. 1920, 263 F. 687; Denemark v. Ed B. Mooney, Inc., 1951, 218 Ark. 944, 237 S.W.2d 41. Yet, in this case there has been added to the total cost of labor allocable to this job, what was described in the testimony of the secretary-treasurer of the bankrupt as a charge "of fifteen per cent for overhead, plant equipment, supervision, etc." This was justified as being in accordance with the custom of the trade. But custom cannot prevail over a rule of law that such overhead charges, unless specified in the agreement, are not recoverable under a general promise to pay on a cost plus basis.
What is involved here is not the allocation of power between federal and state sovereignties. It seems to me too artificial, therefore, to say that the so-called jurisdictional element - where authority rather than power is involved - requires the casting aside of a laborious process of factual decision in an adversary proceeding hotly contested by both parties, solely because it is brought to the attention of the parties that the jurisdiction which they had thought supported the adjudication of their controversy has evaporated even though the suit could be sustained if the defendant consented. The reality of the contest is for me stronger than a formal expression of consent at this late date.
The purpose of the statutory provision is to afford to a defendant sued by a bankruptcy receiver the choice of having the claim decided by the State or Federal courts. The defendant has the power of choice because Congress intended, as said in Schumacher v. Beeler, 293 U.S. 367, 374, 55 S. Ct. 230, 79 L. Ed. 433 (1934), that these controversies should be heard and determined in the State courts for the greater economy and convenience of litigants and witnesses, but saw no reason to deny the jurisdiction of the Federal courts if the defendant consented to be sued therein. The defendant here tried its case in the Federal court; it never sought a determination of the controversy in the State courts*fn1 The reason why the defendant failed to channel the trial into the State courts is not of decisive significance. Error of fact or mistake of law by the defendant, or whatever else may have been the cause of its silence, has now produced the result that resort to the State courts at this time, far from being for the economy and convenience of the litigants and witnesses, or even of the defendant, would cast a double burden on all the parties to the litigation. Its only purpose would be to afford the defendant a chance to relitigate an issue that has been adversarily determined.
Section 23(b) provides that suits must "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 * * *." (emphasis supplied)
It is obvious from the Complaint that it premised the District Court's jurisdiction solely on the diversity of the citizenship of the bankrupt and the defendant.
The majority agrees that "the parties and the court below viewed this as a diversity case". That the District Court so viewed it is established by the fact that in its Findings of Fact*fn1 it specifically found:
The majority's holding that "consent need not be express" is premised on its view that "* * * as a matter of policy Congress so framed section 23, sub. b as to enable a defendant to avoid a plenary suit by a receiver in any federal court in which the bankrupt himself could not have sued that defendant," and that "Viewing this as a limitation of grace upon the normal reach of federal jurisdiction, the courts have consistently held that a defendant's consent to be sued where the debtor could not have sued him need not be express", and "submission by the defendant to the jurisdiction of the court without asserting any objection predicated upon section 23, sub. b is deemed a sufficient consent within the meaning of that section." (emphasis supplied)
In the landmark case of Bardes v. First National Bank of Hawarden, Iowa, 178 U.S. 524, at page 538, 20 S. Ct. 1000, at page 1006, 44 L. Ed. 1175 (1900) it was said:
"* * * Congress, by the 2d clause of § 23 of the present bankrupt act, appears to this court to have clearly manifested its intention that controversies, not strictly or properly part of the proceedings in bankruptcy, but independent suits brought by the trustee in bankruptcy to assert a title to money or property as assets of the bankrupt against strangers to those proceedings, should not come within the jurisdiction of the district courts of the United States, 'unless by consent of the proposed defendant,' of which there is no pretense in this case ." (emphasis supplied) and at page 539, 20 S. Ct. at page 1006:
"'1st. The provisions of the 2d clause of § 23 of the bankrupt act of 1898 control and limit the jurisdiction of all courts, including the several district courts of the United States, over suits brought by trustees in bankruptcy to recovery or collect debts due from third parties, or to set aside transfers of property to third parties, alleged to be fraudulent as against creditors, including payments in money or property to preferred creditors.
"'2d. The district court of the United States can, by the proposed defendants' consent, but not otherwise, entertain jurisdiction over suits brought by trustees in bankruptcy to set aside fraudulent transfers of money or property, made by the bankrupt to third parties before the institution of the proceedings in bankruptcy.'" (emphasis supplied)
In Bush v. Elliott, 202 U.S. 477, 479-480, 26 S. Ct. 668, 670, 50 L. Ed. 1114 (1906), the Court said:
"The bankruptcy act of 1898, * * was a radical departure from the act of 1867 [14 Stat. at L. 517, chap. 176], 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. * * * The intention of Congress to prevent actions not strictly proceedings in bankruptcy from coming within the jurisdiction of the United States courts, except in certain cases, was enacted into law in the section of the statute [Section 23(b) ] now under consideration ." (emphasis supplied)
In Schumacher v. Beeler, 293 U.S. 367, 55 S. Ct. 230, 79 L. Ed. 433 (1934) the Court not only declared that Congress intended in Section 23, sub. b to limit the jurisdiction of the federal courts in independent actions brought by bankruptcy trustees and to leave their trial "for the most part in the state courts", but emphasized that "Congress prescribed in section 23b the condition of consent on the part of the defendant sued by the [bankruptcy] trustee", and that "Section 23b was thus in effect a grant of jurisdiction subject to that condition " (emphasis supplied)
Said the Court at page 374, 55 S. Ct. at page 233:
"In enacting section 23 [in 1898], it was clearly the intent of the Congress that the federal courts should not have the unrestricted jurisdiction of suits between trustees in bankruptcy and adverse claimants which these courts had exercised under the broad provisions of section 2 of the Act of 1867. The purpose was to leave such controversies to be heard and determined for the most part in the state courts 'to the greater economy and convenience of litigants and witnesses .' But no reason appeared for a denial of jurisdiction to the federal court if the defendant, the adverse claimant, consented to be sued in that court. The Congress, by virtue of its constitutional authority over bankruptcies (Const. Art. 1, § 8), could confer or withhold jurisdiction to entertain such suits and could prescribe the conditions upon which the federal courts should have jurisdiction. See Sherman v. Bingham, 3 Cliff. 552, 21 Fed.Cas. 1270, 1272, No. 12,762. Exercising that power, the Congress prescribed in section 23b the condition of consent on the part of the defendant sued by the trustee. Section 23b was thus in effect a grant of jurisdiction subject to that condition ." (emphasis supplied)
More recently, in Williams v. Austrian, 331 U.S. 642, 67 S. Ct. 1443, 91 L. Ed. 1718 (1947) the Court had occasion to note, in another context, that Section 23, sub. b "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 ." (emphasis supplied)
Here the Complaint alleged only the diversity ground and not that of consent . The majority has properly rejected the diversity ground because it was not properly pleaded. Surely the total failure to plead the consent ground is as fatal as the inadequate pleading of the diversity ground. Bare as it was of "a short and plain statement of the grounds upon which the court's jurisdiction depends", as required by Rule 8(a), the Complaint should have been dismissed by the District Court for lack of jurisdiction at the very outset of this case.
The majority has relied on a number of lower federal court cases to support its view that the failure to plead consent jurisdiction in a complaint is not fatal, and that such jurisdiction is sufficiently established by the "submission*fn2 by the defendant to the jurisdiction of the court without asserting any objection predicated upon section 23, sub. b".
Independent of the circumstance that these cases are inapposite on their facts*fn3, they lack precedential value for these two further salient reasons: first, most of them were decided before Rule 8(a) became effective on September 1, 1938, and second, those later decided do not afford the slightest indication that they considered the impact of the Rule.
I cannot discern in averments that receivers have been authorized by a bankruptcy referee to bring a suit even a glimmer of an intimation that jurisdiction is based on consent .
Assuming, arguendo, that a complaint is not required to state in terms that consent is the basis of jurisdiction it is settled that it must at least make such allegation as will put the defendant on notice that jurisdiction is based on his consent .
For the reasons stated I would vacate the judgment of the District Court because of its lack of jurisdiction to entertain this action*fn*