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IN RE F. W. KOENECKE & SONS

October 5, 1973

IN THE MATTER OF F. W. KOENECKE & SONS, INC., AN ILLINOIS CORPORATION, BANKRUPT.


The opinion of the court was delivered by: Marovitz, District Judge.

MEMORANDUM OPINION

Review of Order of Referee in Bankruptcy

The Issue

The matter before the court is a petition for review of an order of the referee in bankruptcy. The petition was filed by Wilkes, Besterfield & Company*fn1 (hereafter Wilkes), a firm of accountants, who appeal from the referee's order overruling their motion to dismiss the complaint of the trustee in bankruptcy against them. It is the contention of Wilkes that the summary jurisdiction of the Bankruptcy Court does not extend to determine the liability of Wilkes in an accountant's malpractice suit.

The trustee's complaint, taken as true for our purposes here,*fn2 seeks recovery of $315,000.00 damages allegedly sustained by the bankrupt estate because of respondents' failure properly to perform an accounting assignment for which they had been hired by the trustee. The trustee asserts that Wilkes is before the court because they were retained by court order to complete some routine bookkeeping entries. The referee found that the Court of Bankruptcy had summary jurisdiction to determine the liability of the accountants for the criminal action of one of their employees, on the rationale that Wilkes' consent to perform the bookkeeping task was sufficient consent to make them subject to the summary jurisdiction of the Bankruptcy Court for all matters flowing from the contract.

The Proceedings Below

F. W. Koenecke & Sons, Inc., was adjudicated a bankrupt on a petition filed March 13, 1969, by three creditors. On June 26, 1972, the trustee filed a petition (the complaint), wherein he alleges that shortly before the bankruptcy Clifford Kahler and Robert Koenecke, both officers of the company, conspired, with the aid of one Alex Birnie, an employee of Wilkes, to engage in alleged fraudulent transfers made by the bankrupt corporation to Kahler.

The employment of Wilkes to update all of Koenecke's accounting was specifically authorized by an order entered by the Court of Bankruptcy on March 27, 1969. The trustee alleges (Count VI, Paragraph 4) that "the partnership, through Alex R. Birnie, altered or caused to be altered the books and records of the bankrupt corporation in such manner as to conceal from the trustee and from the court the fact that $315,000.00 in cash had been diverted from the estate to one Clifford Kahler with the aid, abetment and participation of Alex R. Birnie, the employee of the partnership."

Wilkes moved to dismiss the complaint on the grounds that the Bankruptcy Court lacked summary jurisdiction to grant relief, and contends that a plenary proceeding is called for.

The Arguments

The boundaries of the summary jurisdiction of the Bankruptcy Court are not clearly defined, and the absence of clearly demarcated areas accounts for the difficulty in resolving this particular dispute. It is agreed by both parties that the specific category under consideration is whether summary jurisdiction has been obtained by the Court of Bankruptcy through either express or implied consent. See generally, 2 Collier, Bankruptcy 23.08 (14th ed.). The sole issue is whether Wilkes' employment by the trustee constitutes a consent to summary jurisdiction.

The trustee argues that a person who contracts with the Bankruptcy Court submits himself to the jurisdiction of the court for all purposes connected with or arising out of the contract, including any damage which might be sustained by virtue of the failure of Wilkes, or its employee Birnie, properly to perform the duties for which they had been retained by the court.

The respondents contend that this consent is only partial, and that consent jurisdiction based on contracting is limited to the following three circumstances:

  1. When a party sues the estate under the contract or
     otherwise uses the contract ...

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