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In re International Power Securities Corporation.

decided: September 28, 1948.


Author: Kalodner

Before McLAUGHLIN, O'CONNELL, and KALODNER, Circuit Judge.

KALODNER, Circuit Judge.

International Power Securities Corporation filed a petition for reorganization under Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq., in the United States District Court for the District of New Jersey on February 24, 1941.

Its principal assets, other than approximately $1,250,000 of cash and marketable domestic securities, consist of three separate mortgages on properties in Italy executed by certain companies merged into Societa Edison of Milan ("Edison"). These mortgages are deposited with the Bankers Trust Company, Indenture Trustee, as collateral for three series of the debtor's bonds, known as "C", "E" and "F." The bonds of these series were issued in the same principal amounts, respectively, as the Edison mortgages.*fn1 Edison has been in default in the payment of principal and interest on the underlying mortgages since 1940. As a result, the debtor in turn defaulted on its bonds and filed its petition for reorganization.

The order from which the present appeals were taken was made in connection with proceedings instituted by the Court Trustee and the Series "E" Bondholders' Committee relating to the status in the reorganization of two large blocks of debtor's bonds, together constituting nearly one-third of its outstanding bonds. One of these blocks in the principal amount of $3,929,000 is concededly owned by Edison, and the bonds are physically held outside the United States. The other block in the amount of $1,250,000 is held at the National City Bank of New York in a custodial account ostensibly for Banco di Roma of Lugano, Switzerland.

A vigorous controversy exists as to the real ownership of the bonds held by the National City Bank. The Court Trustee contends that they are actually owned by Edison and that consequently he can set-off the debtor's obligations thereon against the indebtedness of Edison on the mortgages as subsequently discussed.

On June 23, 1947, the District Court issued an order upon petition of the Court Trustee, directing the National City Bank, Edison, Banco di Roma, and others to show cause why they should not be restrained from selling, transferring, or otherwise disposing of the stocks, bonds or other securities of the debtor until the return date of the order. The show cause order contained a provision restraining the parties from said acts until the return day, July 11, 1947. Upon the return day, Edison, National City Bank and the Banco di Roma appeared specially and objected to the jurisdiction of the Court to enter the stay. The hearing was adjourned to September, following submission by the Court Trustee of exhibits and statements in support of his claim that the bonds in controversy had been acquired and were being held for the benefit of Edison.

On August 4, 1947, the Court issued an order directing the Trustee to pay $50 per $1,000 principal amount of the bonds, excepting that "Pending the further order of this Court, no payment shall be made on any bonds now held by the National City Bank of New York in a custodial account for the Banco di Roma", etc. Payment to Edison on bonds, directly or indirectly owned by it, was also barred.

The Bondholders' Protective Committee for Series "E" bonds of the Debtor moved by petition and order to show cause, dated October 14, 1947, for an order consolidating all prior proceedings with respect to the $3,929,000 of the debtor's bonds concededly held by Edison, and the $1,250,000 of debtor's bonds held at the National City Bank, together with the undetermined portions of the order of the Court, dated August 4, 1947, withholding cash distributions upon these bonds, and for the following further relief in connection therewith: that National City Bank, Banco di Roma and Edison be directed to file proofs of claim with respect to these bonds, pursuant to Section 196 of the Bankruptcy Act, 11 U.S.C.A., § 596; that any party in interest should be allowed to file objections, defenses, off-sets, or counterclaims thereto; that the Court determine such claims and objections after the taking of such testimony as might be requisite in connection therewith; they any claims founded upon the said $1,250,000 of bonds held at the National City Bank, and on the $3,929,000 of bonds held by Edison, should be disallowed, limited to cost or subordinated; and that the temporary injunction contained in the order of June 23, 1947, be continued in full force and effect until the determination of such proceeding as so consolidated.

At a further hearing before the District Court on December 15, 1947, counsel for Banco di Roma submitted certain sworn statements purporting to show that Edison had no direct or indirect interest in the $1,250,000 bonds.

On December 22, 1947, the District Court entered an order (1) vacating the preliminary injunction in its entirety with respect to the National City Bank and Banco di Roma; (2) modifying the preliminary injunction with respect to Edison so as to permit it to buy, but not to sell, the debtor's bonds; and (3) reserving decision with respect to all other relief requested in the orders to show cause and petitions before it.

The present appeals were taken from that part of the aforementioned order vacating the preliminary injunction against National City Bank and Banco di Roma with respect to the bonds in the custodial account. On December 22, 1947, on application of the appellants, we reinstated the District Court's stay against transfer of the bonds in the custodial account, pending hearing and determination of the appeals.

Since the taking of these appeals, the District Court on February 16, 1948, granted most of the relief sought in the proceedings. A copy of the order granting such relief has been submitted to this Court. It provides that all persons claiming any interest in the $1,250,000 of debtor's bonds held at the National City Bank shall file proofs of claim with the Court Trustee by May 1, 1948; that any party may file objections, defenses, off-sets, counterclaims or other pleadings or petitions with respect to such proofs of claim within a time to be fixed by the Court; and that the Court reserves decision with respect to the remaining relief requested in the proceedings.

Two distinct questions are presented by these appeals: (1) did the District Court have jurisdiction to grant the injunctive relief sought by the appellants, and (2) if jurisdiction existed, did the District Court commit reversible error in denying the injunctive relief:

As to jurisdiction:

Preliminarily, it must be noted that the District Court did not rule specifically on the jurisdictional question but denied the application for injunctive relief on its merits. This, despite the fact that in their respective special appearances National City Bank and Banco di Roma had objected that the Court was without jurisdiction because the bonds in the custodial account were held in New York City (outside the territorial jurisdiction of the Court); the two banks were likewise situated outside the territorial limited of the Court; neither did any business or had an office in New Jersey and no process had been served upon either personally within the District. The two banks had further urged, in support of their objections, that the summary extra-territorial jurisdiction of the bankruptcy court under Chapter X functioned only to protect the property of the debtor and that in the instant case the bonds in the custodial account constituted obligations and not assets of the debtor. The same contentions are advanced in the present appeals.

Certain well-established principles are applicable in the determination of the issue as to jurisdiction.

They are: Courts to bankruptcy are invested with such jurisdiction at law and in equity as will enable them to exercise original jurisdiction in bankruptcy proceedings.Local Loan Co. v. Hunt, 1934, 292 U.S. 234, 240, 54 S. Ct. 695, 78 L. Ed. 1230, 93 A.L.R. 195. They are empowered to issue an injunction in a summary proceeding when necessary to prevent the defeat or impairment of their exclusive jurisdiction or to protect the property and assets of a bankrupt wherever situated.*fn2 The power of a bankruptcy court to protect by injunction the subject matter of its jurisdiction is inherent in the court as a virtual court of equity and exists as well by virtue of Sec. 2, sub. a(15) of the Bankruptcy Act, 11 U.S.C.A. § 11, sub. a(15), and the "all writs" provision of Sec. 262 of the Judicial Code, 28 U.S.C.A. § 377.*fn3 The process necessary to render such injunction effective may extend beyond the territorial limits of the issuing court. Bankruptcy proceedings are inherently proceedings in equity. Reorganization proceedings under the Bankruptcy Act are "special" proceedings which seek only to bring about a reorganization. The tendency of judicial interpretation of the Act has been in the direction of progressive liberalization in respect of the operation of the bankruptcy power so as to meet the challenge of present day economic and business conditions. Continental Illinois National Bank & Trust Co. v. Chicago, Rock Island & Pacific Ry. Co., 1935, 294 U.S. 648, 675, 676, 55 S. Ct. 595, 79 L. Ed. 1110. Among the powers granted under the Act are the collection and distribution of the estates of bankrupts and the determination of controversies in relation thereto. The bankruptcy court may invoke its equitable powers to the end that fraud will not prevail, that substance will not give way to form, that technical considerations will not prevent substantial justice from being done. By reason of the express provisions of Sec. 2 and Sec. 57, sub. k, these powers are to be exercised in the allowance, disallowance or subordination of claims according to the equities of the case. Pepper v. Litton, 1939, 308 U.S. 295, 60 S. Ct. 238, 84 L. Ed. 281.

The above principles, as established by the Supreme Court of the United States, have been applied by the Seventh Circuit in Re Burton Coal Co., 1942, 126 F.2d 447; the Sixth Circuit in Re Cuyahoga Finance Co., 1943, 136 F.2d 18; and this Court in Re Standard Gas & Electric Co., 1943, 139 F.2d 149.

These three cases are of considerable significance in the determination of the jurisdictional issue presented by these appeals. In the Burton Coal Co. case the claim of a creditor was secured by common stock of the debtor corporation. Upon a claim by other persons that they were the owners of the same stock the creditor brought an application in the reorganization proceeding for an order establishing its superior right to the stock. Upon a ruling in its favor an appeal was taken challenging the jurisdiction of the District Court. As stated by the Circuit Court of Appeals, the sole question raised was 126 F.2d at page 448:

"Does a court of bankruptcy, in administering the bankruptcy law, have jurisdiction and power to determine a dispute between parties, concerning ownership of and title to property in which neither the debtor corporation nor its trustee has any interest?"

In answering the question in the affirmative, the Court said 126 F.2d at pages 448, 449:

"It was impossible to administer the estate, or to reorganize the debtor, without determining the controversy between appellants and appellee respecting this stock. Upon that determination depended the amount of appellee's claim against the debtor. Because of such fact, the jurisdiction of a court of bankruptcy is extended beyond what it ordinarily would be. It extends to disputes such as existed between appellants and appellee, without the settlement of which reorganization cannot proceed. United States Fidelity & Guaranty Co. v. Bray, 225 U.S. 205, 32 S. Ct. 620, 56 L. Ed. 1055; In re Railroad Supply Co., 7 Cir., 78 F.2d 530."

The Cuyahoga Finance Co. case is of especial pertinence in view of the contention made by the appellants here that if the bonds in the custodial account are owned by Edison they are subject to equitable claims and set-offs assertable on behalf of the bankrupt estate against such bonds in ...

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