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In re Dolly Madison Industries Inc.

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT


decided: October 10, 1974.

IN THE MATTER OF DOLLY MADISON INDUSTRIES, INC., AND ITS SUBSIDIARIES DOLLY MADISON LEASING AND FURNITURE CORP., MILAN FURNITURE MANUFACTURING COMPANY, KOEN MANUFACTURING COMPANY, CREATIVE CARPET COMPANY, INC., J.S. AUTOMATIC SALES, INC., DAGLEE SEATING COMPANY, BEVIL CO., INC., DOLLY MADISON RESTAURANTS, INC. SUBSIDIARIES OF DOLLY MADISON LEASING AND FURNITURE CORP., DORRIS-HEYMAN HOME FURNISHINGS STORE, INC., HARBOUR-LONGMIRE, INC., DML OF ELMIRA, INC., DOLLY MADISON LEASING AND FURNITURE OF NEW YORK, INC., DEMAND ADVERTISING, INC., DEBTORS; STATE CORPORATION COMMISSION OF VIRGINIA, AN ADMINISTRATIVE, LEGISLATIVE AND JUDICIAL DIVISION OF THE GOVERNMENT OF VIRGINIA, APPELLANT

APPEAL FROM THE ORDER OF THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA Bankruptcy No. 70-354.

Seitz, Chief Judge, Gibbons and Garth, Circuit Judges.

Author: Garth

Opinion OF THE COURT

GARTH, Circuit Judge

This appeal involves the scope of summary jurisdiction in bankruptcy. We are called upon to determine whether it is within the summary jurisdiction of a Chapter X reorganization court to order a State Corporation Commission to reinstate a debtor's certificate of authority to do business. The District Court's order of October 3, 1973 ordered reinstatement. We reverse and hold that jurisdiction to issue such an order was lacking.

I.

In 1969, Dolly Madison Industries, Inc. (hereinafter "DMI") was issued a certificate of authority to transact business in the State of Virginia by the State Corporation Commission (hereinafter "SCC"). Article IX, Section 2 of the Virginia Constitution (1971) provides that ". . . the [SCC] shall be the department of government through which shall be issued all . . . licenses of foreign corporations to do business in this Commonwealth." In 1970, a registration fee was assessed against DMI pursuant to Sections 58-450 and 58-451, 1950 Code of Virginia, as amended.*fn1 DMI failed to pay the required registration fee and failed to file the annual report required by Sections 13.1-120 and 13.1-121, 1950 Code of Virginia, as amended.*fn2

On June 24, 1970, the District Court for the Eastern District of Pennsylvania entered an order approving DMI's petition for reorganization under Chapter X of the Bankruptcy Act, 11 U.S.C. § 501, et seq. That order, which authorized the trustee to operate the business of the debtor, included, among other provisions, authority to incur the expenses necessary to preserve, protect and conduct the affairs of the debtor;*fn3 specific authority to pay, "The cost of maintaining the corporate existence of said debtor . . ." (Par. 10(c), order of June 24, 1970); and an injunction against interference with the trustee's management of the debtor.*fn4

The trustee, having received notices from several states of the revocation of DMI's certificate of authority to do business, petitioned the District Court for an order enjoining various secretaries of state from cancelling DMI's authorizations. The reorganization court, on the same day, December 4, 1970, issued the desired injunctive order.*fn5

In January 1971, the SCC mailed a notice of registration fee assessment and an annual report form to the debtor corporation. Neither the fee nor the completed 1971 annual report was received by the SCC before the March 1st due date. Accordingly, by letter dated April 30, 1971, the SCC notified DMI that its certificate of authority would be automatically revoked on June 1, 1971, pursuant to Section 13.1-117,*fn6 1950 Code of Virginia, as amended, for failure to file the required annual reports and to pay the related fees for two consecutive years. On May 31, 1971 (one day prior to the statutory revocation date), the SCC received from the trustee of DMI, the debtor's annual reports for the years 1970 and 1971. DMI did not remit any registration fees, contending that ". . . the U.S. District Court . . . has enjoined us from paying any obligations incurred prior to June 24, 1970 and has prohibited any public officials from instituting any actions or proceedings until further notice." (Letter from DMI to the SCC dated May 28, 1971). On June 4, 1971, the SCC returned the two annual reports, pursuant to § 13.1-121, 1950 Code of Virginia, as amended (see n.2, supra), on the ground that the reports were inaccurate as filed. SCC further advised the debtor that its certificate of authority was revoked by operation of law on June 1, 1971, and that the SCC had no discretion in the matter.*fn7

Unwilling to proceed pursuant to Virginia's re-entry statute,*fn8 the trustee petitioned the District Court on May 3, 1973 for an order to show cause why the certificate of authority should not be deemed in full force and effect. The order to show cause issued on May 4, 1973. The SCC argued that the certificate had been revoked automatically under Virginia law for failure of DMI to file annual reports for two successive years (since, when filed, the reports were inaccurate) and for failure of DMI to pay the required registration fees before the June 1, 1971 deadline. The SCC also denied the jurisdiction of the District Court. The Court, in its Memorandum Opinion and Order of October 3, 1973, implicitly rejected SCC's jurisdictional argument and interpreted its prior order of December 4, 1970, as precluding the SCC from taking into consideration pre-petition failures to comply with Virginia law (i.e., the delinquent 1970 filing and fees).*fn9 Concluding that at worst the debtor had failed to comply with Virginia's statutes for one year (1971), the Court ordered the SCC to reinstate DMI's certificate of authority. The SCC appeals from that order.

II.

Section III of the Bankruptcy Act confers on a reorganization court ". . . exclusive jurisdiction of the debtor and its property, wherever located." 11 U.S.C. § 511. Courts of bankruptcy 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. 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. § 11, sub. a(15). In re International Power Securities Corp., 170 F.2d 399, 402 (3d Cir. 1948). See In re Standard Gas and Electric Co., 139 F.2d 149, 152 (3d Cir. 1943); First National Bank in Houston, Texas v. Lake, 199 F.2d 524, 528 (4th Cir. 1952).

Summary jurisdiction is generally limited to the adjudication of questions concerning (1) the administration of the debtor's estate, and (2) the property in the court's actual or constructive possession. See Katchen v. Landy, 382 U.S. 323, 327, 15 L. Ed. 2d 391, 86 S. Ct. 467 (1966). See also 2 Collier on Bankruptcy, para. 23.02(1), et seq., 6 Collier on Bankruptcy, para. 3.03, et seq. (14th ed.). The trustee does not contend that the District Court's order was based on the power of the Court to administer the reorganization.*fn10 Thus, the District Court's summary jurisdiction, if any, must stand or fall on whether that Court was exercising control over the debtor's property.

The trustee does not argue that the certificate of authority is itself a property right. Rather, the trustee points to DMI's Blackstone, Virginia manufacturing plant as the res required for the exercise of summary jurisdiction by the District Court. The trustee then argues that revocation of the certificate of authority deprives DMI of the right to operate that plant; thus, constituting an interference with "property" within the jurisdiction of the reorganization court.*fn11 We do not believe, however, that the scope of a bankruptcy court's summary jurisdiction is as broad as the trustee suggests.*fn12

In the instant case, the reorganization court has not acted to preserve its power to adjudicate claims relating to the trustee's property. Unlike the situation in which a bankruptcy court enjoins prosecution of a claim in a different forum,*fn13 here the SCC has made no claim against "property" of the debtor corporation. The mere fact that the debtor's property may be affected by state law does not constitute a "claim" against that "property" and absent such a "claim" summary jurisdiction is unavailable.*fn14

In Gillis v. California, 293 U.S. 62, 79 L. Ed. 199, 55 S. Ct. 4 (1934), the receiver of a corporation undergoing reorganization asked the District Court to sanction non-compliance with a California licensing law. The receiver contended that without such an exemption he would be unable to continue operating the business. The Supreme Court held that the bankruptcy court was powerless to authorize non-compliance with the state licensing statute, regardless of the consequences. Significantly, the Court concluded its opinion with this statement:

We are not dealing here with the acknowledged power of courts to protect property in their custody. (emphasis added).

293 U.S. at 67. In light of Gillis, the District Court's order to reinstate DMI's certificate of authority to do business cannot be viewed as protective of a res within the Court's jurisdiction. Since preservation of the debtor's property is the only theory advanced by the trustee in support of the District Court's jurisdiction, it follows that the Court lacked the summary jurisdiction necessary to issue the October 1973 order under review.

The cases relied upon by the trustee do not compel a contrary result. In re International Power Securities Corp., 170 F.2d 399 (3d Cir. 1948) involved the consolidation of claims against the debtor's estate. As the court indicated, "It was impossible to administer the estate, or to reorganize the debtor, without determining the controversy between appellants and appellee." 170 F.2d at 405. In re Standard Gas and Electric Co., 139 F.2d 149 (3d Cir. 1943) and In re Preston Mining Co., 203 F. Supp. 103 (E.D. Pa. 1962) affirmed the power of the District Court to enjoin direct interferences with potential choses in action of the debtor corporation. In each of these cases, unlike the instant case, the District Court acted to preserve the "property" of the debtor.

The District Court's reliance on Stout v. Green, 131 F.2d 995 (9th Cir. 1942) and In re Hotel Martin Co. of Utica, 41 F. Supp. 392 (N.D. N.Y. 1941) was misplaced.*fn15 In Stout, the Court upheld the issuance of an injunction against the enforcement of California's Alcoholic Beverage Control Act. Section 51 of that Act authorized the seizure of unlicensed stills. One of the debtor's assets consisted of such a still and the injunction, therefore, only prevented interference by State Liquor Officers with property belonging to the debtor and clearly within the traditional summary jurisdiction of the bankruptcy court. In Hotel Martin, the District Court granted a motion for an order restraining the New York Department of Labor from holding a hearing to determine the debtor's liability for unemployment taxes. Once again the threatened state action was aimed directly at the property of the debtor corporation and warranted an exercise of summary jurisdiction to preserve the debtor's res for ultimate disposition in the bankruptcy court. Neither of these cases authorize an injunction against the operation of a state law absent a claim against a "property" interest of the debtor.

Since the order of the District Court, requiring the reinstatement of DMI's certificate of authority to do business was based neither on the Court's power over the administration of the debtor's estate nor on its power to preserve the debtor's property, the District Court lacked summary jurisdiction.

The judgment of the District Court will be reversed, with the direction that the order of October 3, 1973 be vacated.


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