January 24, 1961
SLENDERELLA SYSTEMS OF BERKELEY, INC., SLENDERELLA SYSTEMS OF BEVERLY HILLS, INC., SLENDERELLA SYSTEMS OF CALIFORNIA, INC., SLENDERELLA SYSTEMS OF HUNTINGTON PARK, INC., SLENDERELLA SYSTEMS OF LAKEWOOD, INC., SLENDERELLA SYSTEMS OF PALO ALTO, INC., SLENDERELLA SYSTEMS OF SAN FRANCISCO, INC., SLENDERELLA SYSTEMS OF STONESTOWN, INC., SLENDERELLA SYSTEMS OF UNION SQUARE, INC., SLENDERELLA SYSTEMS OF VALLEY PLAZA, INC., SLENDERELLA SYSTEMS OF WESTCHESTER, INC., DEBTORS-IN-POSSESSION-APPELLANTS,
PACIFIC TELEPHONE & TELEGRAPH COMPANY, APPELLEE.
Before LUMBARD, Chief Judge, and WATERMAN and MOORE, Circuit Judges.
MOORE, Circuit Judge.
This is an appeal from an order of the District Court reversing and vacating an order of the Referee in Bankruptcy in the Southern District of New York. Appellants, eleven debtors-in-possession in the business of operating salons at which slenderizing treatments were given to their patrons, have filed petitions for arrangement under Chapter XI of the Bankruptcy Act, 11 U.S.C.A. §§ 701-799. In this proceeding, they have petitioned the Referee for an order enjoining the Pacific Telephone and Telegraph Company (referred to as "Telephone Company") from changing the telephone numbers assigned to, and then currently being used by, them or, in the alternative, if new telephone numbers are assigned to the various salons, that an order be made directing the Telephone Company to furnish the new numbers so assigned to persons calling the old numbers.
Each appellant contracted with the Telephone Company for telephone service. The tariffs and rules which regulated the relationship between the Telephone Company and its subscribers were terms of the contracts. Hischemoeller v. National Ice & Cold Storage Co., 1956, 46 Cal.2d 318, 294 P.2d 433. In accordance with regulations,*fn1 the Telephone Company offered the debtors in possession a choice with respect to future telephone service, namely, (1) discontinuance of all telephone service; (2) discontinuance of existing services and the assignment of new services with new telephone numbers, or (3) supersedure to (continuation of) existing services under conditions acceptable to the Telephone Company upon payment of charges outstanding prior to the Chapter XI filing. Certain of the debtors elected the first choice and certain of them chose the second but, in order to avoid the condition of payment of the past-due charges, none elected to supersede to the old telephone service.
The primary question upon this appeal is whether the dispute is appropriate for a summary proceeding or must it be resolved in a plenary suit?
Jurisdiction of the Bankruptcy Court in a Chapter XI proceeding depends upon whether the rights sought to be enforced concern property of the debtor within the meaning of § 311 of the Bankruptcy Act, 11 U.S.C.A. § 711.*fn2 The power of the Referee to act to vacillate the debtors' reorganizations, the specific issue here presented, depends upon whether the Bankruptcy Court has summary jurisdiction. Bankruptcy Act, § 1(9), 11 U.S.C.A. § 1(9). Although the debtor's undisputed title to property not in his possession would be enough under the language of Section 311 to authorize the court to act summarily, the court does not acquire summary jurisdiction if the property does not belong to the debtor and is not in his possession, or if the title to property not in his possession is disputed by a substantial adverse claim. See In re Adolf Gobel, Inc., 2 Cir., 1936, 80 F.2d 849; in re Journal-News Corp., 2 Cir., 1951, 193 F.2d 492.
The fundamental error of the Referee was in the assumption that the main question before him was "the right of Respondent to dispossess the Debtorin-Possession of certain telephone numbers which it possessed." Dispossession of the bankrupts' property is not involved because by the specific terms of the contracts and the tariffs, Rules and Regulations as filed with the Public Utilities Commission of the State of California, any property right in any telephone number was expressly denied to the subscriber. Rule and Regulation 17(D), a term of the contracts between debtors and the Telephone Company, provides in clear language that "The Subscriber has no proprietary right in the number." The telephone numbers were thus not property of each debtor such as to give the Bankruptcy Court summary jurisdiction. Furthermore, the debtors were not in possession of the telephone numbers on the date of the filing of the petitions so as to authorize the court to take summary jurisdiction over the controversy in order to protect that possession. See In re Gunder, 7 Cir., 1937, 88 F.2d 284, certiorari denied sub nom. 164 East 72nd Street Corp. v. Gunder, 1937, 301 U.S. 701, 57 S. Ct. 931, 81 L. Ed. 1356. The license to use a specific telephone number does not amount to the possession required as a basis for summary jurisdiction.
Appellants also contend that their contract rights to continued service amount to property within the meaning of Section 311 of the Bankruptcy Act. But if the debtors are to have recourse for a violation of a contract right, it must be by way of a plenary action. Where a substantial issue of law or fact exists as to title, and where the debtor was not in physical possession of the property on the date of filing his petition, the rights under the contract should not be settled in a summary proceeding. See In re Roman, 2 Cir., 1928, 23 F.2d 556; cf. Matter of Wire Corp. of America, D.C.D.N.J. 1955, 131 F.Supp. 586; In re Meiselman, 2 Cir., 1939, 105 F.2d 995, 997. Thus, there being no property of the debtor involved in this controversy, the Bankruptcy Court does not have summary jurisdiction.
Section 2(a) (15) of the Bankruptcy Act*fn3 and Section 1651 of Title 28, U.S.C.A.*fn4 do not change this result for those sections only broaden the remedial devices available to the court once it has jurisdiction. They do not give the bankruptcy court the authority to deal with creditors where property of the bankrupt is not involved. In re Adolf Gobel, Inc., supra, 80 F.2d at pages 852, 853. The summary jurisdiction of the Bankruptcy Court does not extend to "all litigation between the debtor and third persons." In re Prudence Bonds Corp., 2 Cir., 122 F.2d 258, at page 263; see also Schumacher v. Beeler, 1934, 293 U.S. 367, 374, 55 S. Ct. 230, 79 L. Ed. 433. If appellants have a remedy it is by way of a plenary action and not a summary procedure before the Bankruptcy Court.