The opinion of the court was delivered by: FULLAM
Re: Petition of American Investors Company No. 5
The petitioners, Joseph H. Rosenbaum, Francis N. Rosenbaum, William M. Goldstein, and MDC Corporation, are general partners trading as American Investors Company No. 5 (AIC No. 5). AIC No. 5 purchased approximately 1500 rail cars from Penn Central and, with the aid of outside financing, caused the cars to be rebuilt. On completion of the reconstruction the cars were leased back to Penn Central under a lease dated May 19, 1969. The lease was one of many equipment financing arrangements affirmed by the Trustees in August of 1970. Rental payments were made through August of 1973. AIC No. 5 contends that effective May 1973 the rent was validly increased to cover increased debt service costs incurred when the original reconstruction loan was refinanced. After the Trustees ceased making payments in August of 1973, AIC No. 5 declared a default and now claims accelerated rentals plus certain interest items totaling $17.25 million (alternatively, $7.05 million, the accelerated balance less the outstanding debt on the equipment).
In addition to making various denials and asserting certain affirmative defenses, the Trustees filed a three-count counterclaim. In Count I, the Trustees allege that AIC No. 5, its partners, and two officers of the Debtor, Messrs. David Bevan and William Gerstnecker, individually and in concert, withheld and misrepresented facts pertinent to Penn Central's decision to enter into the lease. The Trustees seek rescission of the lease, an accounting for profits, and compensatory and punitive damages.
Count II alleges that in September of 1969, Joseph and Francis Rosenbaum, and Messrs. Bevan and Gerstnecker, individually and in concert, caused $10 million borrowed by a subsidiary of the Debtor to be transferred in trust for the Debtor to a Lichtenstein business trust controlled by the Rosenbaums. Thereafter, approximately $4 million of the fund held by the trust was illegally converted by transferring it to a foreign business entity controlled by one Fidel Goetz.
In Count III, the same defendants and another partnership entity, American Investors Company, which is controlled by the Rosenbaums, are named. This count alleges that the defendants, acting individually and in concert, caused Penn Central improperly to transfer $2.115 million to the Rosenbaums between May of 1968 and August of 1969, in a number of separate "security deposit transactions;" and that, although the funds were eventually returned, no interest was ever paid thereon. Paragraphs 53 and 54 of Count III allege that the deposit transfers and the AIC No. 5 lease transaction were part of an illegal conspiracy to secure for the defendants personal gain and unjust enrichment at the expense of the Debtor. Compensatory and punitive damages are sought in each count.
Now before the Court are a host of motions by the counter-defendants contesting the validity of this Court's summary jurisdiction over the counterclaims.
A. Motions of the Partners as Individuals to Dismiss
When AIC No. 5 filed its petition, it subjected itself to the summary jurisdiction of this Court. Since Count I arose out of the same transaction and occurrence, this Court has summary jurisdiction over the Trustees' counterclaim against AIC No. 5. Katchen v. Landy, 382 U.S. 323, 15 L. Ed. 2d 391, 86 S. Ct. 467 (1966); In re Penn Central Trans. Co. (UDC), 468 F.2d 1222 (3d Cir. 1972); In re Carnell Const. Corp., 424 F.2d 296 (3d Cir. 1970). The partners contend, however, that even though the petition is brought by them individually trading as AIC No. 5, they have not in any way consented to the summary jurisdiction of this Court. This contention is incorrect.
Under Rule 17(b) of the Federal Rules of Civil Procedure, Pennsylvania law is applicable to determine the capacity of a partnership to sue or be sued. In conformity with Rule 2127 of the Pennsylvania Rules of Civil Procedure, the present petition is by the partners trading as AIC No. 5, and Count I of the Trustees' counterclaim is in conformity with Rule 2128 which permits an action against a partnership to be prosecuted against one or more of the partners as individuals trading as a partnership. The purpose of the Pennsylvania requirement that the partners be named as individual plaintiffs is to insure that a counterclaim may be enforced against the partner's individual property. See Note of the Procedural Rules Committee to Rule 2127; Morrison's Estate, 343 Pa. 157, 22 A.2d 729 (1941); McConnell & Breiden v. Lee Templeton Motors, 68 Mont. Cty. L.R. 215 (1952).
It is obvious, of course, that Rule 17(b) has very limited effect in this context. Capacity to sue is not at issue. AIC No. 5's amended petition conforms to Rule 2127, and under the law of the partners' domiciles they are subject to suit. Rather, there are two interrelated issues: (1) under federal procedural law are persons who file a petition as partners trading as a partnership "parties," and (2) are such individuals "opposing parties" for the purpose of Rule 13(a) of the Federal Rules of Civil Procedure?
With respect to Count I, these questions are answered without difficulty, since the allegations of Count I are fairly read as alleging that the individual conduct of the partners was in pursuance of the partnership business relating to the subject lease. Under the Pennsylvania cases previously cited and relied on by the partners, it is clear that individual partners subject themselves to personal liability for counterclaims arising out of the same transaction or occurrence as the partnership's complaint or action.
Federal procedural law does not provide for limited appearances as plaintiffs. The partners are parties to the petition and opposing parties under Rule 13(a), and as such have subjected themselves to compulsory counterclaims. Therefore, in terms of the summary jurisdiction of a § 77 reorganization court, the prosecution of the present petition by partners as individuals constitutes the partners' consent to summary jurisdiction.
In re Penn Central Transportation Co. (UDC), 468 F.2d 1222 (3d Cir. 1972); In re Carnell Const. Corp., 424 F.2d 296 (3d Cir. 1970).
An equally sound analysis is predicated on the reasoning of Katchen v. Landy, supra. Essentially the same conduct as is alleged in Count I is the basis of the Trustees' affirmative defense to the petition. Thus, this Court will have to determine the Count I factual issues as part of the hearing on the petition. Even if only the partnership were a party, the partners would be bound in the partnership action. 1B Moore's Federal Practice, para. 4.111 n. 12. Katchen v. Landy suggests that in such a situation the court may decide the issues relating to the defense and also enter appropriate affirmative judgments. Addressing the contention that a bankruptcy ...