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Austrian v. Williams

decided oct. 19 1954 decided.: May 17, 1954.


Author: Harlan

Before CLARK, HINCKS and HARLAN, Circuit Judges.

HARLAN, Circuit Judge.

These appeals are another chapter in a protracted series of litigations growing out of proceedings for the reorganization of Central States Electric Corporation, a Virginia corporation, which were initiated by the filing of a petition under Chapter X of the Bankruptcy Act, 11 U.S.C. § 501 et seq., 11 U.S.C.A. § 501 et seq., in the United States District Court for the Eastern District of Virginia on February 23, 1942, and approved by that Court on February 27, 1942.

Pursuant to an order of the Virginia Reorganization Court, on July 5, 1945 Carl J. Austrian and Robert G. Butcher, as Trustees of Central States, filed an action in the Southern District of New York, where Central States was doing business, against its officers, directors and principal stockholder charging them with various derelictions in their handling of Central States' affairs. A lengthy trial before Judge Weinfeld resulted in a dismissal of the action against the defendants who are parties to the present appeals, viz., Fogarty, Freeman, Johnson, McCornack, Eccles, Baker and Jonas (deceased and now represented by his Executor Pasternak), and also against the other defendants, not parties to these appeals, except Harrison Williams and Louis E. Kilmarx as to whom a judgment in excess of $14,000,000 was entered. See Austrian v. Williams, D.C.S.D.N.Y.1952, 103 F.Supp. 64. The District Court reserved jurisdiction to deal, among other things, with "costs, expenses and allowances." On appeal by Williams to this Court, the judgment was reversed (Clerk, C.J., dissenting) on the ground that the action was barred under both the 6 and 10-year New York statutes of limitation, N.Y.Civil Practice Act § 48, subd. 3, and § 53. See Austrian v. Williams, 2 Cir., 198 F.2d 697, certiorari denied 1952, 344 U.S. 909, 73 S. Ct. 328, 97 L. Ed. 701.

Following the successful result of the Trustees' action as to them, the seven defendants who are parties to these appeals brought on applications before Judge Weinfeld for allowances of expenses and attorneys' fees in that action. Except as to Jonas, all of these applications were made pursuant to Article 6A, §§ 63-68, of the General Corporation Law of New York, McKinney's Consol.Laws. c. 23, which provides that directors, officers or employees of corporations who have successfully defended their official conduct in an action brought by or on behalf of their corporation may recover from the corporation their reasonable expenses and attorneys' fees incurred in such action. Jonas, who was never a director, officer or employee of Central States, addressed his application to the general equity powers of the District Court.

Upon these applications, Judge Weinfeld made allowances in various amounts, aggregating some $45,000, and his action has resulted in the following appeals: (1) the Trustees appeal from the District Court's order and judgment of October 17, 1953 granting the allowances, contending that the Court was without power to make any of them; (2) Jonas (Pasternak) appeals from so much of the order and judgment of October 17, 1953 as limits his allowance to $3,500; and (3) Fogarty and Freeman appeal from the District Court's order of December 10, 1953 vacating a separate judgment, dated November 4, 1953, covering the allowances in their favor. The Securities and Exchange Commission has appeared as amicus curiae and has furnished us with a helpful brief.

We come first to the appeal of the Trustees so far as it relates to the allowances made under Article 6A of the New York General Corporation Law. The District Court held that application of the New York Statute followed from the decision of this Court in Austrian v. Williams, 2 Cir., 198 F.2d 697, certiorari denied 1952, 344 U.S. 909, 73 S. Ct. 328, 97 L. Ed. 701, holding the action herein barred by the New York Statute of Limitations. The District Court further held that it, rather than the Virginia Reorganization Court, was the proper forum for the determination of these claims to reimbursement, but stated in its opinion that the order would not direct enforcement of the allowances as that was a matter for the Reorganization Court. Austrian v. Williams, D.C.S.D.N.Y., 120 F.Supp. 900, decision of Judge Weinfeld, August 21, 1953.

The District Court evidently read our decision on the limitations question as extending the doctrine of such cases as Erie R. Co. v. Tompkins, 1938, 304 U.S. 64, 58 S. Ct. 817, 82 L. Ed. 1188, and Cohen v. Beneficial Industrial Loan Corp., 1949, 337 U.S. 541, 69 S. Ct. 1221, 93 L. Ed. 1528, which require the application of State "substantive" law by Federal courts in diversity cases, to cases where although, as here, jurisdiction depends on a Federal ground independent of diversity [see Williams v. Austrian, 1947, 331 U.S. 642, 67 S. Ct. 1443, 91 L. Ed. 1718] the cause of action involved seeks enforcement of a State created right.

This is a mistaken view of our decision. We held the New York Statute applicable in its full sweep in accordance with New York's decisional rules because of the provisions of Section 11, sub. e, of the Bankruptcy Act, 11 U.S.C. § 29(e), 11 U.S.C.A. § 29, sub. e, making State statutes of limitation applicable to suits instituted by a receiver or bankruptcy trustee where no Federal period of limitation existed. The New York Statute, rather than the Virginia Statute of limitations, was held to apply since even if the causes of action sued upon were to be regarded as stemming from the law of Virginia (where Central States was incorporated), nonetheless under the conflicts of law rule the governing statute of limitations is that of the forum.

In this instance, we have no provision of the Bankruptcy Act which directs the application of any state laws providing for the recovery of expenses by defendants who have successfully defended actions brought against them. The question of whether there are other reasons why Article 6A should be applied therefore must turn on considerations which were not reached by this Court in its decision as to the statute of limitations. However, we think that we need not and should not decide this question since we are of the opinion that in no event did the District Court have jurisdiction to consider or make any of the allowances. This was a function belonging exclusively to the Virginia Reorganization Court.

The administration of the estate of a bankrupt or debtor belongs exclusively to that Court which has acquired jurisdiction over its affairs. While the Plan of Reorganization of Central States is not before us, it appears that it has been finally approved and consummated except for the winding up of the action against the Central States directors which, together with other contingent assets of the Debtor, was retained in the hands of the Trustees. Funds were also reserved in the hands of the Trustees to provide for "allowances and expenses * * * in retaining and enforcing the contingent assets of the Estate, and in distributing the proceeds thereof." See Austrian v. Williams, D.C.S.D.N.Y., 120 F.Supp. 900, decision of Judge Weinfeld, August 21, 1953; Central States Electric Corp. v. Austrian, 4 Cir., 1950, 183 F.2d 879, 882, certiorari denied 1951, 340 U.S. 917, 71 S. Ct. 350, 95 L. Ed. 662; Chase v. Austrian, 4 Cir., 189 F.2d 555, certiorari denied 1951, 341 U.S. 952, 71 S. Ct. 1021, 95 L. Ed. 1374. The determination of these claims of the successful defendant-directors for reimbursement of their expenses in that action - constituting as they did claims against the assets of the Debtor remaining in the hands of the Virginia Reorganization Court - lay, we think, within the exclusive jurisdiction of the Reorganization Court. Brown v. Gerdes, 1944, 321 U.S. 178, 64 S. Ct. 487, 88 L. Ed. 659.

In the Brown case the attorneys for the Trustees of a Chapter X Debtor brought a proceeding in the New York courts under § 475 of the New York Judiciary Law, McKinney's Consol.Laws, c. 30, to establish a lien for their fees in a number of actions in the New York courts instituted under the authority of the Reorganization Court, in which they had represented the Debtor, and later the Trustees, until their services had been terminated by the Trustees before final judgment in any of the actions had been entered. The Supreme Court, confirming a decision of the New York Court of Appeals, In re Brown, 290 N.Y. 468, 49 N.E.2d 718, held that the New York courts had no jurisdiction to determine the attorneys' fees, because Chapter X of the Bankruptcy Act had committed that function exclusively to the Reorganization Court.

We do not think that the force of that case is lessened here by reason of the fact that Brown was concerned with the compensation of the attorneys for the estate, whereas in the present case the allowances related to expenses and attorneys' fees of former directors of the Debtor. These allowances were nonetheless payable out of the Debtor's estate, and Chapter X "contains detailed machinery governing all claims for allowances from the estate." Brown v. Gerdes, supra, 321 U.S. at page 182, 64 S. Ct. at page 489. Indeed, so paramount is a reorganization court's jurisdiction over allowances which may affect the administration of the estate that the Supreme Court has held that such jurisdiction extends to allowances for services performed by attorneys for a stockholders' committee in a reorganization proceeding, even though not payable out of the estate. Leiman v. Guttman, 1949, 336 U.S. 1, 69 S. Ct. 371, 93 L. Ed. 453.

Nor is the impact of the Brown and Leiman cases affected by the fact that the claims of the defendant-directors were grounded on the State statute. Even if it be assumed that the doctrine of Cohen v. Beneficial Industrial Loan Corp., supra, should be extended to carry into this action the right of reimbursement given by Article 6A, we find nothing in that case which would divest the Reorganization Court of jurisdiction to pass upon these claims. At most, Cohen would reach only the "substantive" aspects of Article 6A, that is the right of the successful ...

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