Freedman,*fn* Van Dusen and Adams, Circuit Judges.
This case involves a "clash of jurisdiction" between two federal district courts*fn1 -- the District Court for the District of New Jersey, which has jurisdiction of Imperial "400" National, Inc., presently undergoing a Chapter X reorganization, and the District Court for the Western District of Michigan where Appellants here, Douglas I. Kuball and Mary Ellen Kuball, filed a bankruptcy petition on behalf of a partnership in which Imperial has a 75% interest and the Kuballs have a 25% interest.
The present appeal is from an order entered by Judge Shaw in the New Jersey District Court enjoining the Michigan bankruptcy proceeding and transferring that proceeding to New Jersey. Judge Shaw issued the injunction and transfer order in connection with the reorganization of Imperial, which was before his Court. He based jurisdiction for the transfer on the authority of sections 32(a) (11 U.S.C.A. § 55(a)) and 111 of the Bankruptcy Act (11 U.S.C.A. § 511). Before considering the precise issue raised in this appeal, it is necessary to examine the nature of Imperial's business organization and the history of the reorganization proceeding in the New Jersey District Court.
Imperial is a corporation whose principal business is the construction, furnishing and operation of a chain of motels throughout the United States. The chain consists of approximately 116 standardized motels located in 35 states and operated under the name "Imperial '400' Motels." Ninety-seven of these motels are owned by partnerships formed under partnership agreements between Imperial and co-owner operators; eight are completely owned by Imperial; eleven are operated under franchise and license agreements. In each of the ninety-seven partnership-operated motels, Imperial has at least a 50% general partners' interest.
This appeal concerns the Benton Harbor Imperial "400" Motel in Benton Harbor, Michigan. The Benton Harbor Motel is owned by a partnership formed pursuant to an agreement to form a limited partnership, executed October 11, 1963, in New Jersey. The Appellants, Douglas and Mary Kuball, own a 25% interest in the Benton Harbor partnership, as general partners; Imperial owns a 50% interest as a general partner and a 25% interest as a limited partner.*fn2
Imperial had previously, on September 21, 1962, obtained a sixty-five year lease on the land where the motel was later built, and pursuant to the partnership agreement assigned thirty-five years of such term by sub-lease to the partnership which Imperial had formed with the Kuballs.
The partnership agreement states that the "Co-owner operator," the Kuballs, and Imperial shall own their respective interests in the "Motel Business as tenants-in-common." The partnership agreement also provides that both the co-owner and Imperial may sell their respective interests in the "Motel Business."
On June 3, 1965, Imperial filed a petition for an arrangement under Chapter XI of the Bankruptcy Act in the New Jersey District Court. The petition was amended to comply with Chapter X when the New Jersey Court granted the Securities and Exchange Commission's motion to intervene and to dismiss the Chapter XI proceeding unless it was so amended. A Trustee who took over the operation of Imperial's business was appointed on February 21, 1966. The New Jersey District Court issued an order which restrained all actions against Imperial in law or in equity and the issuance of any process or conduct of any proceeding which would interfere with the Trustee's possession of Imperial's property.*fn3
More than three years after the appointment of the Trustee by the New Jersey Court, the Kuballs filed a petition on behalf of the partnership for partnership bankruptcy proceedings in the District Court for the Western District of Michigan.*fn4 The petition was filed without the prior knowledge of the Trustee in the New Jersey reorganization and without permission of the New Jersey District Court. A subpoena to nonjoining partners, dated April 24, 1969, summoned Imperial to appear and plead in the partnership bankruptcy proceedings. Because he was in California on Imperial's business, the Trustee filed a petition requesting a new date for such appearance. Following instructions from the New Jersey Court, the Trustee went to the Referee in Bankruptcy in the Michigan District Court and informed him and the Kuballs' counsel of the reorganization proceedings in New Jersey, and the restraints issued by the New Jersey Court.
The Referee in Michigan nevertheless issued a notice scheduling a meeting of creditors on June 6, 1969. On May 28, 1969, the Trustee filed in the New Jersey reorganization court a petition to restrain the prosecution of the partnership bankruptcy proceedings in the Benton Harbor Motel matter. On the same day, Judge Shaw issued a temporary restraining order and an order to show cause why the Kuballs should not be permanently enjoined from continuing the prosecution of the partnership bankruptcy proceedings in Michigan.
On June 9, 1969, the Kuballs appeared by counsel in New Jersey. The Kuballs stated that they believed the Michigan proceedings would continue on June 16, 1969. Judge Shaw continued the hearing until June 23, 1969, to allow all parties additional preparation time. On June 11, 1969, Judge Shaw filed an order continuing the restraints and enjoining the bankruptcy in Michigan until a further determination was made in the New Jersey Court. On the same day, the Trustee was informed by the Referee in Michigan that the hearing scheduled for June 16, 1969, in Michigan was to be held unless the Kuballs agreed to an adjournment. The Trustee then filed with the reorganization court a supplemental petition to restrain the partnership bankruptcy proceedings instituted in Michigan, and to transfer it to New Jersey. On June 12, 1969, Judge Shaw issued a temporary restraining order and an order directing the Kuballs to show cause on June 23, 1969, why the partnership bankruptcy proceedings should not be transferred to and consolidated in the New Jersey proceedings. At the direction of the New Jersey Court, the Trustee appeared before the Referee in Michigan on June 16, 1969. An offer was made by the New Jersey Trustee to pay in full all claims accruing at Benton Harbor after June 3, 1965. This same offer was also made before Judge Shaw. The offer was refused by the Kuballs. The Michigan Referee then adjourned the hearing until July 9, 1969.
The Kuballs failed to appear at a hearing before Judge Shaw. Scheduled for June 23, 1969. On June 27, 1969, Judge Shaw filed an order transferring the proceedings instituted in the Michigan District Court to the New Jersey District Court. On July 9, 1969, the Kuballs applied for a stay of the order of transfer, stating that notice of the proceedings to transfer, or of the order itself had not been given to partnership creditors. Judge Shaw filed a notice to creditors on July 16, 1969, with copies to the partnership creditors listed in the Kuballs' partnership petition. After considering the responses to ...