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Austrian v. Williams

decided.: August 15, 1952.


Author: Chase

Before SWAN, Chief Judge, and CHASE and CLARK, Circuit Judges.

CHASE, Circuit Judge.

Central States Electric Corporation, organized under the laws of Virginia in 1912 and hereafter to be called Central, was in business as an investment company having its principal office at Richmond, Virginia until, on February 23, 1942, it filed a petition for reorganization under Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq., in the District Court for the Eastern District of Virginia. The petition was approved on February 27, 1942 and the trustees who were first oppointed investigated the affairs of the debtor pursuant to § 167 of the Bankruptcy Act, 11 U.S.C.A. § 567, and recommended to the court that no suits be brought against the officers, directors or the principal stockholder of the corporation to recover for possible breach of fiduciary duty. The recommendation was approved by order of the court but the Court of Appeals reversed and directed further investigation by new trustees. Committee for Holders, etc. v. Kent, 4 Cir., 143 F.2d 684. Following this, new trustees were appointed who made a further investigation and recommended that this suit be brought. The reorganization court so ordered and the trustees sued the officers, directors and the principal stockholder of the debtor, Williams, and others in the District Court for the Southern District of New York. The complaint, filed on July 5, 1945, charged the officers, directors and Williams with breach of their fiduciary duty to Central in that they overreached Central in respect to thirteen transactions and charged the other defendants with conspiring with them so to do. After trial by court, the complaint, as to nine of these transactions, was dismissed on the merits as to all the defendants; it was also dismissed on the merits with respect to the remaining four transactions as to all the defendants except Williams and one Kilmarx, a director of Central during the period of the alleged overreaching. From a judgment entered against them on these four transactions, which the court below designated by the letters B, C, I and L, defendant Williams has appealed.

These transactions are described in detail in the opinion of the district court, Austrian v. Williams, D.C., 103 F.Supp. 64, 116. Reference to that opinion will be adequate for present purposes to show what they were. In respect to transactions C, I and L, a money judgment was entered; transaction B was rescinded and a rather complicated method for accomplishing that was provided with an alternative money judgment. Interest was allowed at the rate of 4% up to the date of the judgment and thereafter at the rate of 6% and the plaintiffs have appealed from so much of the judgment as did not provide for interest at 6% for the period prior to the entry of the judgment. But, as will be seen, we do not reach that question.

The statute of limitations was pleaded as a defense to each of the transactions here involved and the court found, on undisputed evidence, that "The interdicted acts occurred in 1927 and 1929." Moreover, it was recognized, citing Zwerdling v. Bent, 291 N.Y. 654, 51 N.E.2d 933, that "under a recent decision of the New York Court of Appeals the claims herein would have been barred before the date of adjudication."*fn1 As we hold that this defense is sufficient, we do not find it necessary to deal with the contention of the appellant that there should also be a reversal on the merits.

The controlling statute is Section 11, sub. e of the Bankruptcy Act, 11 U.S.C.A. § 29, sub. e, which provides in pertinent part:

"A receiver or trustee may, within two years subsequent to the date of adjudication or within such further period of time as the Federal or State law may permit, institute proceedings in behalf of the estate upon any claim against which the period of limitations fixed by Federal or State law had not expired at the time of the filing of the petition in bankruptcy. * * *"

These causes of action accrued between fifteen and thirteen years before the filing of the petition.*fn2 Since the federal statute above quoted incorporates by reference the applicable state statute of limitations, the court held that the New York statute applied. This was correct because it is undisputed that these causes of action were created by state law, National Mut. Ins. Co. v. Tidewater Transfer Co., 337 U.S. 582, 598-599, 69 S. Ct. 1173, 93 L. Ed. 1556, and, though the causes of action may have arisen under Virginia law since Central is a Virginia corporation with its principal place of business in that state, Restatement, Conflicts of Law, § 187, the applicable statute of limitations is that the law of the forum, Id., § 603; Goodrich, Conflicts of Law, page 240 (3rd ed., 1949). The forum being a federal court sitting in a federal district in New York, the state law which applies to these causes of action under Section 11, sub. e of the Bankruptcy Act, in accordance with this conflict of laws' principle, is the law of New York.*fn3

However, while the court below held that the New York statute of limitations was applicable, the statute was not applied in the same way that the New York courts would have applied it. The New York courts have held that "The statute begins to run from the date of the commission of each separate wrongful act alleged in each cause of action regardless of the date of the discovery or of the continuance in control by [the officers and directors of the corporation]." Pollack v. Warner Bros. Pictures, Inc., 266 App.Div. 118, 41 N.Y.S.2d 225, 226.See also Hastings v. H. M. Byllesby & Co., 293 N.Y. 404, 57 N.E.2d 733; Laird v. United Shipyards, Inc., 2 Cir., 163 F.2d 12, certiorari denied 332 U.S. 842, 68 S. Ct. 264, 92 L. Ed. 413. Instead of adopting this construction of the state statute, the court construed it in accordance with the federal equitable rule which suspends the running of statutes of limitations while the party "injured by fraud * * * 'remains in ignorance of it without any fault or want of diligence * * * on his part, * * * though there be no special circumstances or efforts on the part of the party committing the fraud to conceal it from the knowledge of the other party.'" Bailey v. Glover, 21 Wall. 342, 348, 22 L. Ed. 636. Cf. Holmberg v. Armbrecht, 327 U.S. 392, 66 S. Ct. 582, 585, 90 L. Ed. 743. And this federal doctrine is extended to include the period during which the corporation continues under the domination of the wrongdoers. Michelsen v. Penney, 2 Cir., 135 F.2d 409; Dabney v. Levy, 2 Cir., 191 F.2d 201, certiorari denied 342 U.S. 887, 72 S. Ct. 177. Under this rule the statute of limitations did not begin to run until the domination of Central by Williams was ended and this did not occur until the filing of the petition for reorganization, in 1942. Consequently, the court held that this suit was timely commenced.

The decisive issue presented, therefore, is whether a federal court may apply this federal equitable rule in construing a state statute of limitations which Congress has directed be applied in a situation like this in determining whether a cause of action was barred before any petition for reorganization was filed.

The refusal of the district court to follow the New York courts' interpretation of the New York statute of limitations was due largely to the assumption that, since federal jurisdiction was conferred by the Bankruptcy Act, Williams v. Austrian, 331 U.S. 642, 67 S. Ct. 1443, 91 L. Ed. 1718,*fn4 it was not compelled to reach its decision in conformity with state decisional law as it would if diversity of citizenship was the basis of jurisdiction. Guaranty Trust Co. v. York, 326 U.S. 99, 65 S. Ct. 1464, 89 L. Ed. 2079. Further, it was thought necessary to apply the federal equitable doctrine of Bailey v. Glover, supra, to further the purposes of, and achieve uniformity in the application of, the Bankruptcy Act. We do not agree.

The fact that diversity jurisdiction is lacking does not, alone, preclude a result similar to that which would be reached if there were such jurisdiction. Though it may be true that the rationale of Guaranty Trust Co. v. York, supra, and Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S. Ct. 817, 82 L. Ed. 1188, is inapplicable where a federal statute or a federal interest is involved, D'Oench, Duhme & Co. v. F.D.I.C., 315 U.S. 447, 62 S. Ct. 676, 86 L. Ed. 477; Clearfield Trust Co. v. United States, 318 U.S. 363, 63 S. Ct. 573, 87 L. Ed. 838, there may be other reasons to support, or require, the same result. Here there is such another reason provided by Section 11, sub. e of the Bankruptcy Act. See 1 Collier, Bankruptcy, Page 104 (Cum.Supp., 1951). This provision expressly precludes the trustee in bankruptcy (or reorganization) from bringing suit upon "any claim against which the period of limitations fixed by * * * State law" has expired at the time of the filing of the petition in bankruptcy. Herget v. Central Nat. Bank & Trust Co., 324 U.S. 4, 65 S. Ct. 505, 507, 89 L. Ed. 656. And, this is consonant with Section 70 of the Bankruptcy Act, 11 U.S.C.A. § 110, which equates the right of the trustee with that of the bankrupt. This clear mandate to apply the state limitations statute in a case like this includes its application in the manner established by other relevant provisions of state law, N.Y.Civ.Prac.Act § 11,*fn5 and state court interpretations of state law, Pollack v. Warner Bros. Pictures, Inc., supra. Certainly, both are as much state law as is the particular statute which sets forth the number of years within which actions are to be brought. When New York enacted Section 53 of the Civil Practice Act it did not merely prescribe a ten-year period within which suit must be brought to avoid being barred; it enacted a comprehensive statutory scheme to further what was thought to be a worth-while legislative objective, and what the details of this scheme were are what the New York courts have decided they are. We hold that this statutory scheme, as interpreted by the New York courts, is what is incorporated in Section 11, sub. e of the Bankruptcy Act and it is this composite which federal courts are directed to apply.*fn6

Much reliance is placed upon Holmberg v. Armbrecht, 327 U.S. 392, 66 S. Ct. 582, 90 L. Ed. 743, to support the judgment. That case was an action to enforce liability under the Federal Farm Loan Act, 12 U.S.C.A. § 812, against a stockholder who had concealed his ownership of stock upon which it was alleged he was liable under the Act. It was held that the New York statute of limitations applied to determine the timeliness of the suit because there was no applicable federal statute of limitations, Campbell v. Haverhill, 155 U.S. 610, 15 S. Ct. 217, 39 L. Ed. 280; Chattanooga Foundry & Pipe Works v. Atlanta, 203 U.S. 390, 27 S. Ct. 65, 51 L. Ed. 241, and that the federal equitable doctrine of Bailey v. Glover, supra, was superimposed on the state statute. In Holmberg v. Armbrecht, 327 U.S. 392, 66 S. Ct. 583, however, the state statute of limitations was being applied to a federally created cause of action while here the cause of action is state created. This distinction as to the source of the cause of action was emphasized by the Supreme Court in distinguishing Guaranty Trust Co. v. York, supra:

"But in the York case we pointed out with almost wearisom reiteration, in reaching this result, that we were there concerned * * * with State-created rights. * * * The considerations that urge adjudication by the same law in all courts within a State when enforcing a right created by that State are hardly relevant for determining the rules which bar enforcement of an ...

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