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IN RE UNION NATL. BANK & TRUST CO.

August 1, 1968

In the Matter of UNION NATIONAL BANK AND TRUST COMPANY OF SOUDERTON, PENNSYLVANIA and The Citizens Bank, formerly the Citizens and Southern Bank of Philadelphia, Adjudging said Depositories as Contemnors


The opinion of the court was delivered by: CLARY

 CLARY, Chief Judge.

 This matter is before the Court on the motions of The Citizens Bank (hereinafter "Citizens") and the Union National Bank and Trust Company of Souderton, Pennsylvania (hereinafter "Union National"), to dismiss a rule to show cause why they should not be adjudged in contempt of Court. Citizens grounds its motion on two bases - (1) lack of subject matter jurisdiction, Rule 12(b)(1) F.R.Civ.P., and (2) failure to state a claim upon which relief can be granted, Rule 12(b)(6) F.R.C.P. Union National relies solely on the latter ground.

 The underlying cause of action was instituted by Reliance Insurance Company (hereinafter "Reliance") on a petition to show cause why the two abovementioned banks should not be adjudged guilty of contempt for acting in direct contradiction and defiance of the Orders issued by Judge John W. Lord, Jr., of this Court, which, in effect, designated these banks as lawful depositories for bankruptcy funds. Generally, the banks are charged with (1) failing to set aside, protect or preserve the funds received by referees, trustees, receivers, custodians, and parties designated by this Court in various proceedings under the Bankruptcy Act; (2) failing to tender monthly or other periodic statements of each bankruptcy account on deposit within their banks and (3) failing to properly prepare and act in a qualified manner as a depository for bankruptcy funds in their possession. More specifically, Union National is charged with appropriating certain funds deposited in an agency account in its bank by Auctioneers, Inc., as designated auctioneer in various bankruptcy causes, and applying these funds to a debt owed Union National by Auctioneers, Inc., when it knew or should have known that all or part of these appropriated funds were bankruptcy assets. Union National is also charged with unlawfully garnishing Auctioneers' account in Citizens Bank to satisfy Auctioneers' debt to Union National, when both depository banks knew or should have known that the seized funds were all or part of bankruptcy assets.

 The Order to show cause why the banks should not be held in civil contempt was issued by Judge John W. Lord, Jr. on December 5, 1966. Approximately nine years before the issuance of this Order, April 15, 1958, Judge Lord designated Union National as a lawful depository for bankruptcy funds. *fn1" On August 28, 1957, Citizens was duly designated as a depository bank by Order of the same Judge. It is these Orders that were allegedly violated when Auctioneers' funds were appropriated and garnished by Union National and the garnishment acceded to by Citizens.

 Auctioneers, Inc. was an authorized auctioneer appointed by the Court to sell bankruptcy assets at auction in certain instances. In the course of its business, Auctioneers opened an agency account with Union National and subsequently opened another account with Citizens. The funds which Auctioneers received from all sources were intermixed into these accounts. On November 19, 1964, Union National entered judgment against Auctioneers for $20,000 for defaulting on a loan, in the Court of Common Pleas #1 of Philadelphia County, September Term, 1964, No. 4106, and issued an attachment against Auctioneers' funds at Citizens. The latter honored this attachment upon advice of counsel and paid $8981.11 over to Union National. On December 22, 1964, Union National seized the funds in Auctioneers' agency account and applied them to a debt owing Union National by Auctioneers.

 Upon the failure of Auctioneers to account to the respective trustees and receivers in bankruptcy for the moneys collected from the sale of various bankruptcy assets, Reliance was forced to pay the sum of $25,000 to its obligee, the United States of America, which was the amount of the bond Auctioneers had obtained from Reliance pursuant to Local Rule 7 of the Bankruptcy Rules for this Court. Reliance, therefore, in seeking to be indemnified upon its bond, instituted the contempt action at which the banks' motions to dismiss are directed. It has also instituted suit in this Court (Civil Action No. 39512) against Auctioneers for defaulting on the bond and its failure to indemnify Reliance as agreed.

 Reliance, the petitioner herein, opposes the motions to dismiss because they were filed more than eighteen months after service of the pleadings. It contends that the motions to dismiss are untimely because Rule 12(a) of the Federal Rules of Civil Procedure provides that such a motion must be served within twenty days of the service of the pleadings and before a responsive pleading is served. However, Rule 12(h)(2), F.R.C.P. clearly provides that a motion to dismiss for failure to state a claim upon which relief must be granted can be made at any stage of permissible pleading, however late, and therefore is not within the time strictures of 12(a). The Court finds the banks' motions to be permissible and timely in this instance. McLaughlin v. Curtis Publishing Co., 5 F.R.D. 87 (S.D.N.Y.1943).

 Citizens' motion to dismiss for lack of subject matter jurisdiction is also timely and permissible since such a motion can never be waived and can be interposed at any stage of the action. See Rule 12(h)(3) F.R.C.P.

 LACK OF SUBJECT MATTER JURISDICTION

 Citizens contends that an alleged breach of a depository bank's duty under Section 61 of the Bankruptcy Act, 11 U.S.C. § 101 cannot be remedied by a civil contempt proceeding and therefore moves for dismissal for lack of subject matter jurisdiction. With this contention, the Court does not agree.

 A sufficient basis for this Court's jurisdiction has been laid in Reliance's petition. Petitioner has alleged that a standing Order of this Court has been wilfully violated by the alleged contemnor banks. In stating that there is jurisdiction, I do so solely on the basis of petitioner's allegations in its pleadings without any regard to the merits of the claim. The Court's reason for doing so is that it must assume jurisdiction to decide whether the allegations state a claim under which it can grant relief. Stella v. Kaiser, 82 F. Supp. 301 (S.D.N.Y.1948).

 Contempt proceedings for disobedience of a lawful order are specifically authorized by two distinct provisions in the Bankruptcy Act. Civil contempt is a remedy which the Court is authorized to use to "enforce obedience by persons to all lawful orders, by fine or imprisonment or fine and imprisonment." 11 U.S.C. § 11(a)(13), Maggio v. Zeitz, 333 U.S. 56, 67, 68 S. Ct. 401, 92 L. Ed. 476 (1947). The Court also has the jurisdiction to cause the estates of bankrupts to be collected, reduced to money, and distributed, and determines controversies in relation thereto, 11 U.S.C. § 11(a)(7). The question before me encompasses both these jurisdictional points. A standing Order of this Court was allegedly violated when the depository banks appropriated and/or allowed to be garnished assets of bankruptcy estates which had been reduced to money by Auctioneers, Inc. Thus, the Court has jurisdiction under the Bankruptcy Act to determine if petitioner's allegations have merit.

 The banks argue that funds deposited in depository banks are not in the registry of the Bankruptcy Court and therefore may not be collected in a summary proceeding such as the one now before us. Matter of Bologh, 185 F. 825 (S.D.N.Y.1911). However, Bologh was concerned with the Bankruptcy Court's summary power over insolvent depository banks which, when exercised, might result in a preference over ...


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