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Wymard v. McCloskey & Co.

March 11, 1965


Author: Hastie


HASTIE, Circuit Judge.

This plenary action was instituted in the district court by the bankruptcy receivers of a painting contractor to recover agreed compensation for work, originally undertaken under a detailed written contract but allegedly completed under a subsequent agreement that the entire job should be paid for on a cost plus basis. The receivers recovered a judgment for $271,346.37 and the defendant appealed.

On first hearing, only the merits of the award were challenged by the appellant. However, this court on its own motion has inquired whether requisite federal jurisdiction is present, and that issue has now been fully presented and considered. We dispose of it first.

The averments relevant to jurisdiction appear as follows in the first three paragraphs of the complaint:

"1. N. L. WYMARD and GEORGE L. STARK were, by Order of this Court, dated March 2, 1960, appointed receivers of KEMMEL & CO., INC., Debtor Plaintiff in the above entitled matter and have duly qualified and are now acting in such capacity as receivers.

"2. On May 2, 1960 Plaintiffs obtained an Order of the Referee in Bankruptcy permitting them to sue the above named MCCLOSKEY & CO., INC., Defendant, by reason of the facts more fully set forth herein.

"3. Plaintiff is a corporation incorporated and existing under the laws of the Commonwealth of Pennsylvania. Defendant is a corporation incorporated under the laws of the State of Delaware. The matter in controversy exceeds, exclusive of interest and costs, the sum of $10,000."

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.

In these circumstances, the claim of diversity jurisdiction fails. In so holding, we observe that numbers of cases continue to come before us on appeal in which failure to allege and prove the principal place of business of a corporate party has caused the record to be insufficient to establish the existence of alleged diversity jurisdiction. Yet, absent federal jurisdiction, no judgment of a federal court can stand. It is the continuing responsibility of trial counsel and trial courts to see that all essential jurisdictional facts are alleged and adequately established in the record.

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.

We come now to the merits of the case. McCloskey and Co., a general contractor, had obligated itself to construct some 1000 housing units at Fort Meade, Maryland. By formal agreement it subcontracted the painting work to Kemmel and Co. Serious difficulties and delays, not chargeable to Kemmel, greatly increased the amount and cost of the painting work. The court below found that during the progress of the job McCloskey and Kemmel orally substituted for their original contract an agreement that Kemmel would do whatever painting was required and be reimbursed for all of his work on a "cost plus" basis. We think the evidence was sufficient to support this finding and that the authority of McCloskey's representatives who so agreed was sufficiently established.

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.

On this appeal, McCloskey argues that the charge for overhead was not allowable, as a matter of law. We find merit in this contention.

The court below did not decide, and in the absence of certain findings it is difficult for us to decide, whether the law of Pennsylvania or the law of Maryland determines the proper interpretation of this oral agreement. Apparently, though the record is not clear on this, both parties had their home offices and principal places of business in Pennsylvania and the original contract seems to have been negotiated and executed there. However, the contract concerned work to be done in Maryland, and there is a trial finding that the oral cost plus agreement was reached at the job site. But because we find no significant difference between Pennsylvania law and Maryland law on the question in controversy, the choice of law question need not be resolved.

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.

The judgment of the district court must be modified to exclude the item of $78,843.44 allowed for overhead. Otherwise, it will be affirmed. Neither party shall be allowed its costs as against the other.

FREEDMAN, Circuit Judge (concurring).

The question presented is a close and difficult one. Decisive for me, however, is the fact that in the present case a full trial has been held and a decision reached on the merits, including the defendant's counterclaim, ...

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