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In re Majestic Radio and Television Corp.

November 10, 1955


Author: Swaim


SWAIM, Circuit Judge.

The bankruptcy proceeding involved in this case was commenced February 6, 1948, when the Majestic Radio and Television Corporation filed its petition for an arrangement under Chapter 11 of the Bankruptcy Act, 11 U.S.C.A. §§ 701-799. The Bankruptcy Court ordered that the Chapter 11 proceeding be dismissed and that reorganization be had under Chapter 10 of the Bankruptcy Act, 11 U.S.C.A.§§ 501-676. While the case was pending under Chapter 10, the appellee, Curtis Franklin, filed his proof of a general claim for $1,481.99 owed to him by Majestic Radio & Television Corporation for "goods, wares and merchandise sold to the debtor." The court thereafter concluded that reorganization could not be successfully effected. Majestic was adjudicated a bankrupt, and trustees were appointed.

The trustees filed an objection to Franklin's proof of claim for $1,481.99, and asserted an offset and counterclaim for $442,067.25. The trustees' setoff and counterclaim were based on alleged breaches of fiduciary duty by Franklin during the time he had been a director of the bankrupt and of a subsidiary of the bankrupt. Franklin moved to dismiss the trustees' objection, setoff and counterclaim for lack of jurisdiction in the Bankruptcy Court over either the person of claimant or of the subject matter involved in the setoff and counterclaim. The setoff and counterclaim were amended; the motion to dismiss was renewed; and the trustees' objection, setoff and counterclaim were then dismissed. The trustees are here appealing the dismissal of their objection, setoff and counterclaim, as well as the subsequent denial of their motion to vacate the dismissal and to determine the setoff, as distinguished from the counterclaim, up to the amount of the appellee's claim.

The Bankruptcy Court took the position that Franklin was an adverse party over whose claim it had no jurisdiction unless Franklin consented to its jurisdiction. It further held that filing by the defendant of a proof of claim in the Bankruptcy Court did not constitute implied consent to be tried in that court on a counterclaim arising out of a different transaction. The trustees, as appellants, disagree with both of these conclusions.

The "Amended Objection, Offset and Counterclaim to the Claim of Curtis Franklin" sets forth the cause of action which the trustees wanted the Bankruptcy Court to try in a summary proceeding as part of the pending bankruptcy matter. This pleading alleged that Franklin had been a director of the bankrupt corporation and as such had breached his fiduciary duty by causing, in cooperation with others, one of whom was also a director of the bankrupt, certain contracts to be entered into which were for the benefit of others and were injurious to the best interests of the corporation. It was not alleged, however, that Franklin had personally profited from these transactions; nor was it alleged that he had thereby acquired any of the assets of the bankrupt.

Although the District Judge, sitting as Judge of the Bankruptcy Court, held that he did not have jurisdiction to decide the merits of this claim, he ordered that Franklin's claim against the bankrupt corporation be stayed until this alleged cause of action against Franklin was adjudicated in a proper court, and that all dividends that would accrue on the claim, if allowed, be held until the alleged action of the trustees against Franklin is adjudicated.

Courts of bankruptcy were created and their basic jurisdiction defined by Section 2, sub. a of the Bankruptcy Act, 11 U.S.C.A. § 11, sub. a.

"The courts of the United States hereinbefore defined as courts of bankruptcy are hereby created courts of bankruptcy and are hereby invested * * * with such jurisdiction at law and in equity as will enable them to exercise original jurisdiction in proceedings under this title * * *."

Paragraph (7) of Section 2, sub. a empowers the Bankruptcy Court 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 * * *." 11 U.S.C.A. § 11, sub. a(7).

The words "except as herein otherwise provided" include the provisions of Section 23 of the Bankruptcy Act, 11 U.S.C.A. § 46. Bardes v. First National Bank of Hawarden, 178 U.S. 524, 20 S. Ct. 1000, 44 L. Ed. 1175. Section 23, sub. a provides:

"(a) The United States district courts shall have jurisdiction of all controversies at law and in equity, as distinguished from proceedings under this title, 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."

The sum of money ($442,067.99) which the trustees claim as the amount of damages which the bankrupt suffered as a result of the alleged breaches by Franklin of his fiduciary duty is certainly "property acquired or claimed by the receivers or trustees" within the meaning of Section 23, sub. a, and Franklin is an "adverse claimant" as to that property. We agree with the conclusion of the referee in bankruptcy, approved by the judge, that, "* * * claimant [Franklin] as to the counterclaim herein is an adverse party * * *." But Section 23, ...

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