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Bartle v. Markson

decided: February 14, 1966.


Waterman, Moore and Friendly, Circuit Judges.

Author: Friendly

FRIENDLY, Circuit Judge:

Judge Medina's opinion in Bartle, Receiver v. Markson, 340 F.2d 30, 31-33 (2 Cir. 1965), so well describes the tangled background of the proceeding now before us that a summary statement will suffice at this point. On March 31, 1961, Markson Bros., Inc., a large retailer of furniture and house furnishings in New York, filed a petition for arrangement under Chapter XI of the Bankruptcy Act in the District Court for the Northern District of New York. Following a complicated series of challenges by creditors, the bankruptcy hearings were terminated on October 28, 1963, by a Referee's order confirming the transfer of all the debtor's assets and reserving to the unsecured creditors all causes of action against its officers, directors and stockholders. Bankruptcy Act § 4(b). At that time a suit against Asher S. Markson, one of the officers and directors, had been instituted in the New York courts on behalf of all creditors; another class action was commenced shortly thereafter. When Markson subsequently challenged the use of the class action device and contended that each creditor must establish his individual claim, creditors petitioned the district court to reopen the bankruptcy hearing for the purpose of appointing a receiver or trustee to appear in the New York proceedings. On March 3, 1964, Judge Brennan reopened the estate and appointed a receiver. After the receiver's motion to intervene in the state court was denied without prejudice, he commenced a suit against Markson in the District Court for the Northern District of New York. Judge Brennan dismissed the complaint and on appeal this court concluded that when all the debtor's assets had been transferred and all causes of action against its officers and directors had been reserved to the creditors, no basis remained to support prosecution of creditors' claims by a receiver appointed under Chapter XI of the Bankruptcy Act, and that such a suit was "an improper method of gaining admission to the federal courts." 340 F.2d at 33. Observing that the question had not been presented, the court did not deem the occasion appropriate to consider "whether some alternative procedure might render a federal forum available for the prosecution of these claims." 340 F.2d at 33. That issue now comes before us.

Shortly after our decision, a special meeting of creditors of Markson Bros. was held on due notice, and Bartle was elected trustee. He immediately renewed the attack by bringing this action against Markson in the District Court. Markson moved for summary judgment dismissing the complaint both for failure to state a claim upon which relief could be granted and for lack of capacity to sue; the contention was that all claims against him had been reserved to the individual creditors, who were pursuing their remedies in an action in the New York courts, and that the re-opening of the estate and the appointment of a trustee did not vest the latter with the claims thus transferred. Judge Brennan expressed doubts as to federal jurisdiction, but since the point had not been briefed or argued,*fn1 thought it more practical to act upon the contentions urged in the moving papers. So doing, he dismissed the complaint on the ground that "plaintiff has no capacity to sue since he has no ownership or control of the asserted claim for relief and is therefore not the real party in interest." From this judgment the trustee appeals.


Despite the attractiveness of the course followed by the district judge, we think the question of federal jurisdiction should be faced in limine before reaching the issue of the trustee's capacity to sue, see Arrowsmith v. United Press International, 320 F.2d 219, 221 (2 Cir. 1963). It is true that Arrowsmith was concerned with jurisdiction over the person, in the absence of which any judgment would be void, whereas lack of federal jurisdiction would not usually afford ground for collateral attack. Restatement, Judgments § 7, comment c (1942). However, a federal court which has noted a possible lack of federal jurisdiction must generally decline to proceed further until it has favorably resolved the doubt, Mitchell v. Maurer, 293 U.S. 237, 55 S. Ct. 162, 79 L. Ed. 338 (1934), and, despite the special considerations outlined in the margin that might justify departure from that practice in this case,*fn2 we shall first examine the jurisdictional issue.

The complaint, as Judge Brennan noted, failed to comply with the command of F.R.Civ.P. 8(a) (1) that it contain "a short and plain statement of the grounds upon which the court's jurisdiction depends." This must be spelled out from the rather obscure factual allegations. Defendant Markson and his relatives owned all the stock of Markson Bros., the bankrupt. For many years preceding the filing of its Chapter XI petition on March 31, 1961, he was in active charge of its affairs, and, except for an interval from November 6 to December 30, 1959, was its president and a director. In August 1959, he negotiated the sale of the Markson Bros. stock for $1,350,000 to Son-Mark Industries, Inc., a corporation organized by the purchasers. Son-Mark borrowed $1,350,000 from Markson Bros. The latter, with the knowledge and consent of Markson, parted with various sound assets in order to make the loan, for which it received subordinated debentures of Son-Mark having "no market value and no readily saleable value."*fn3 Although the public was informed of the purchase of the stock by Son-Mark, there was no disclosure that $1,350,000 of Markson Bros. assets had been liquidated and used to facilitate the purchase. The depletion of these assets on November 6, 1959, rendered Markson Bros. insolvent, and it remained so. In addition, with Markson's knowledge and consent, between January 1960 and February 1961, $1,329,039.42 was withdrawn from Markson Bros. bank accounts and paid over to Son-Mark, nearly half being appropriated to the latter's use; other sums were paid by Markson Bros. to Son-Mark without consideration; in February 1961 Markson Bros. acquired the assets of a company from Son-Mark for cash, but thereafter paid over to Son-Mark the receipts from its operation; on March 28, 1960, Markson Bros. assigned accounts receivable to Redisco, Inc., for a loan of $985,464, of which $639,000 was used to pay the balance of the Walter E. Heller & Co. loan to Son-Mark for the purchase of Markson Bros. stock; and advances under this agreement with Redisco increased to $1,970,320 by February 7, 1961. The various transactions were alleged to violate Article 10 of the New York Debtor and Creditor Law, McKinney's Consol.Laws, c. 12, § 60 of the General Corporation Law, McKinney's Consol.Laws, c. 23, §§ 15 and 58 of the Stock Corporation Law, McKinney's Consol.Laws, c. 59, and § 67 of the Bankruptcy Act.

Federal jurisdiction over such a suit by a trustee is controlled by § 23 of the Bankruptcy Act:*fn4

§ 23. Jurisdiction of United States and State Courts. a. The United States district courts shall have jurisdiction of all controversies at law and in equity, as distinguished from proceedings under this Act, between receivers and trustees as such and adverse claimants, concerning the property acquired or claimed by the receivers or trustees, in the same manner and to the same extent as though such proceedings had not been instituted and such controversies had been between the bankrupts and such adverse claimants.

b. Suits by the receiver and the trustee shall be brought or prosecuted only in the courts where the bankrupt might have brought or prosecuted them if proceedings under this Act had not been instituted, unless by consent of the defendant, except as provided in sections 60, 67, and 70 of this Act.

The District Court was justified in assuming that Markson is a resident of New York and thus in concluding that the debtor, a New York corporation, could not have sued him in federal court. Markson has not yet consented to such a suit, and it seems unlikely that he will, see fn. 2. Absent such a consent, federal jurisdiction does not exist unless the suit falls within the provisions of §§ 60, 67 or 70 of the Bankruptcy Act -- applicable in Chapter XI proceedings by virtue of §§ 302, 342 and 352 -- which confer federal jurisdiction over certain plenary actions to recover property. On the other hand a fair reading of § 23 sustains federal jurisdiction in any such case even though this may not precisely square with every letter; despite the disturbing redundancy and contradictions in the statute, which badly needs overhaul,*fn5 it seems fairly plain that Congress intended a trustee to be able to prosecute a plenary suit in federal court if, although only if, one of the enumerated conditions was satisfied. See MacLachlan, Bankruptcy § 219 (1956); 1 Moore, Federal Practice para. 0.60 [8. -6], at 654-656 (2d ed. 1964).

The complaint, lacking any allegation of a debtor-creditor relationship between Markson Bros. and Son-Mark, does not sufficiently charge a preference avoidable under § 60. Section 67, to which the complaint refers, is a rather slender reed since most of the transactions alleged, even if within the definition of fraudulent conveyances, did not occur within a year prior to the filing of the petition, as § 67 requires. A much stronger and, in our view, sufficient basis for jurisdiction can be found in § 70e, which declares that the trustee can avoid any transfer of property that is fraudulent or voidable "under any Federal or State law applicable thereto."

The complaint, when read with appropriate charity, does allege conveyances condemned as fraudulent by §§ 273-276 of the New York Debtor and Creditor Law, and transfers of corporate property violating § 15 of the Stock Corporation Law. If the action were against Son-Mark to set aside the transfer of November 1959, the applicability of § 70e (1) and consequent federal jurisdiction would be too clear for discussion. We see no reason for taking a different view because the action is solely against Markson, who, along with the other stockholders of Markson Bros., was alleged to be the ultimate recipient of the proceeds of the company's assets that were transferred to Son-Mark to pay the purchase price of the stock; as to the initial transfer of $1,350,000 from Markson Bros., Son-Mark is claimed to have been simply a vessel wherein these sums, exchanged for unmarketable subordinated debentures, were mingled with the loan from Heller before the payment to the stockholders. To the extent that Markson has received the benefit of a conveyance allegedly fraudulent against creditors, he is the proper defendant in a suit to avoid the transfer and § 70e is applicable even on the most literal reading. Cf. Lytle v. Andrews, 34 F.2d 252 (8 Cir. 1929); Eisenrod v. Utley, 211 F.2d 678 (9 Cir. 1954).

The other transactions challenged in the complaint, where Markson's liability is for having caused or consented to a fraudulent transfer, cf. New York General Corporation Law § 60, subd. 2, rather than for having received its fruits, may not fit so neatly under § 70e. Compare Glenn, Fraudulent Conveyances and Preferences §§ 56, 605 (1940). But, assuming arguendo that the claims are not within that section, we see no reason why federal jurisdiction to hear them should not attach under the principle of Hurn v. Oursler, 289 U.S. 238, 53 S. Ct. 586, 77 L. Ed. 1148 (1933), since the alleged fraudulent conveyance of Markson Bros. assets to Son-Mark and thence to Markson and other stockholders was the source from which all else flowed. To be sure, these other transactions may not constitute "different grounds asserted in support of the same cause of action," 289 U.S. at 247, 53 S. Ct. at 590; Strachman v. Palmer, 177 F.2d 427, 12 A.L.R.2d 687 (1 Cir. 1949), and recovery for them may not rest upon facts that are substantially identical, see Musher Foundation, Inc. v. Alba Trading Co., 127 F.2d 9, 10 (2 Cir.), cert. denied, 317 U.S. 641, 63 S. Ct. 33, 87 L. Ed. 517 (1942); Zalkind v. Scheinman, 139 F.2d 895, 900 (2 Cir. 1943), cert. denied, 322 U.S. 738, 64 S. Ct. 1055, 88 L. Ed. 1572 (1944). But the formulation of the standard for recognizing pendent jurisdiction in the Hurn case, prior to Erie R.R. v. Tompkins, 304 U.S. 64, 58 S. Ct. 817, 82 L. Ed. 1188 (1938), was made at a time when federal adjudication of state-created rights offered greater danger of a result incongruent with state law, cf. Maternally Yours, Inc. v. Your Maternity Shop, Inc., 234 F.2d 538, 540 n. 1 (2 Cir. 1956); and the narrow view that would limit pendent jurisdiction to situations within that formulation has not been universally adopted. Compare United Lens Corp. v. Doray Lamp Co., 93 F.2d 969 (7 Cir. 1937); Musher Foundation, Inc. v. Alba Trading Co., supra, 127 F.2d at 11 (Clark, J., dissenting); Manosky v. Bethlehem-Hingham Shipyard, Inc., 177 F.2d 529, 534 (1 Cir. 1949); Errion v. Connell, 236 F.2d 447, 454 (9 Cir. 1956); Wechsler, Federal Jurisdiction and the Revision of the Judicial Code, 13 LAW & Contemp.Prob. 216, 232-233 (1943); ALI, Study of the Division of Jurisdiction between State and Federal Courts, Tent. Draft No. 3, pp. 9, 54-58 (1965); cf. Maternally Yours, Inc. v. Your Maternity Shop, Inc., supra, 234 F.2d at 544. The proper balance between the evils of piecemeal litigation in different courts and undesirable federal handling of state law claims depends upon the nature of the state claim to be adjudicated and its relationship to the cause of action on which federal jurisdiction is based. See Wechsler, supra, at 232. Here the claims which we are assuming not to come within the grant of federal jurisdiction, advanced by a trustee in bankruptcy to gather assets of the estate, are simply the second act of a play in which the claim within federal jurisdiction (state-created but ...

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