The opinion of the court was delivered by: WOOD
On May 13, 1963, we entered judgment in favor of the plaintiff Receivers in this plenary action to recover a contract claim against the defendant, McCloskey & Company (McCloskey).
Subsequently, McCloskey appealed to the United States Court of Appeals for the Third Circuit which vacated the judgment and remanded the matter to the District Court on June 18, 1964.
A rehearing en banc was held on September 17, 1964, and the Court of Appeals vacated its prior Order, but remanded the case for further proceedings by its Order of September 21, 1964, which reads in part as follows:
'* * * with leave to the plaintiffs to apply to that Court for leave to amend their complaint * * * so as to properly allege its jurisdictional basis, whether it be based on diversity of citizenship, or bankruptcy, or both, bearing in mind that an allegation of the principal place of business of a corporate party is an essential part of a proper pleading of diversity jurisdiction * * *.'
Upon receipt of the mandate we ordered the parties to appear for a conference hoping to reach an amicable settlement on the facts and to resolve future procedural problems. During the discussion (a matter of record)
on September 25, 1964, plaintiffs voiced their intention not to amend their complaint and thereafter filed a written statement to this effect on September 29, 1964.
As we view it 'leave' was given to amend which has been waived, and considering the mandate and this request, it is our duty to render an opinion on the legality of our jurisdiction of the issue involved.
Must the District Court in view of the provisions of § 23, sub. b of the Bankruptcy Act, 11 U.S.C.A. § 46, sub. b, and having in mind the consent, actual or implied, of the defendant, determine the issue on the merits? For reasons more specifically set forth in this opinion, we find as a matter of law, based on the facts, that the defendant has consented to the jurisdiction of the District Court and that under the provisions of the aforementioned act, we were compelled to determine liability on a factual basis.
Congress, through the Bankruptcy Act § 2, sub. a(7), has conferred original jurisdiction upon the District Court to collect and to hear controversies relating to the estate of the bankrupt 'except as herein otherwise provided.' 11 U.S.C.A. § 11, sub. a(7). The Supreme Court has held in Williams v. Austrian, 331 U.S. 642, 644, 67 S. Ct. 1443, 91 L. Ed. 1718 (1947), that the above-quoted exception refers to § 23, sub. b which requires that 'Suits by the receiver and trustee shall 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 has been further held by the Supreme Court that if the consent of the defendant is shown, no independent ground of Federal jurisdiction need be present.
'The Congress, by virtue of its constitutional authority over bankruptcies, * * * could confer or withhold jurisdiction to entertain such suits and could prescribe the conditions upon which the federal courts should have jurisdiction. * * * Exercising that power, the Congress prescribed in section 23b the condition of consent on the part of the defendant sued by the trustee.' Schumacher v. Beeler, 293 U.S. 367, 374, 55 S. Ct. 230, 233, 79 L. Ed. 433 (1934) reaffirmed in Williams v. Austrian, 331 U.S. 642, 652, 653, 67 S. Ct. 1443 (1947). Also see National Mut. Ins. Co. v. Tidewater Transfer Co., 337 U.S. 582, 594-599, 69 S. Ct. 1173, 93 L. Ed. 1556 (1949) discussion by Mr. Justice Jackson of § 23, sub. b.
In reaching this conclusion the Supreme Court adopted the rationale of § 23, sub. b as set forth by the Court of Appeals for the Sixth Circuit in Toledo Fence & Post Co. v. Lyons, 290 F. 637, 640, 646 (1923). In this case the court found that the defendant 'tacitly acquiesced' to the jurisdiction of the District Court when it was heard on the merits regarding a preliminary motion. In so finding consent under § 23, sub. b the Court made the following observation at p. 646:
'We must observe, too, the not uncommon practice by which adverse parties, who are entitled under section 23 to insist that they be sued only in the state court, have voluntarily appeared and submitted their rights to the federal district court in a plenary suit by the trustee, thus joining in the common endeavor to get a speedy decision of all questions by one court. It would seem unfortunate if it must be held that such submissions to the jurisdiction have been ineffective.'
Another case considering this question, May v. Moss, 194 F.2d 133, 137 (8 Cir. 1952), held that an answer to the merits fulfilled the consent requirement of § 23, sub. b. Also, in Detroit Trust Co. v. Pontiac Savings Bank, 196 F. 29, 32 (6 Cir. 1912) aff'd 237 U.S. 186, 35 S. Ct. 509, 59 L. Ed. 907 (1915), a trustee sued the defendant bank to recover certain sums of money. The complaint was defective as to jurisdiction unless the bank consented. The defendant appeared generally and answered to the merits. After the bank had taken some testimony it challenged the jurisdiction of the court by contending that § 23, sub. b requires consent before the suit is filed. This argument was specifically rejected, and the Court held that consent is presumed when the defendant appears generally and answers to the merits. Such conduct acts as a waiver of any objections which the defendant may have.
In all of the cited cases ordinary Federal jurisdiction based upon diversity of citizenship and amount was lacking. The initial pleading in all of these plenary actions
gave no advance notice to the defendant that § 23, sub. b would be relied upon. In spite of these facts where the defendant answered, filed a counterclaim or was heard on the merits, consent to the jurisdiction of the District Court was imputed to the defendant.
Turning to the instant case, the Complaint in its caption identifies the plaintiffs as Receivers. Paragraph one of the pleading asserts that the plaintiffs are suing in their capacity as Receivers. Paragraph two recites the authority of the Receivers to sue pursuant to the Order of the Referee in Bankruptcy. All of these allegations are admitted by the defendant in its Answer to the merits which also demanded proof of the plaintiff's claim at trial of the cause (Paragraph 2:06 Document 17).
Furthermore, this defendant filed a counterclaim for $ 249,000 and a supplemental answer on August 14, 1962. Pretrial memoranda were submitted, and a conference was held on April 9, 1963.
Thereafter, a thorough and exhaustive trial on the merits was conducted for four days on all claims complete with post-trial motions for a new trial,
a judgment N.O.V., and ...