The opinion of the court was delivered by: WEINFELD
EDWARD WEINFELD, District Judge.
Oceana International, Inc. (Oceana), the debtor, seeks review of an order of the Referee in Bankruptcy which dismissed a proceeding previously instituted by petitioner against the Bank of Commerce on the ground that the Bankruptcy Court, upon the entry of its order confirming the debtor's Plan of Arrangement, was divested of summary jurisdiction to adjudicate the issues raised in the proceeding. Consideration of the issue requires reference to the facts which led to the order under review.
On December 22, 1967, Oceana filed a Petition for Arrangement under Chapter XI of the Bankruptcy Act,
whereupon an appropriate order was entered by the referee authorizing the debtor to continue in possession and to operate its business, and a further order was entered enjoining all parties from commencing or continuing suits against the debtor other than suits to enforce liens upon its property.
The Bank of Commerce (the Bank) then held three chattel mortgages on various assets of Oceana at its three locations. The Bank petitioned for leave to foreclose its chattel mortgages,
which was denied by the referee, it appearing that the mortgaged property had a value in excess of the outstanding loans, upon condition that the debtor pay accumulated interest and subsequent interest as it became due. On June 30, 1968, upon the debtor's failure to apply for confirmation of a Plan of Arrangement, it was adjudicated a bankrupt
and a trustee appointed who took possession of its assets subject to the Bank's mortgages. On August 3 the Bank again petitioned for and this time was granted leave to sell at public auction the chattels and personal property scheduled in the mortgages with any excess over and above the Bank's liens that might be realized upon the sale to be held subject to the further order of the court. The sale was conducted on August 29 and 30 and the Bank purchased the chattels for $100 in excess of the amount of its lien, then $213,728.76 plus interest. Thereafter, on September 26, the Bank sold the chattels which were the subject of its foreclosure sale to Cap-Roc, Inc. for $217,000.
On October 9, 1968, Oceana filed a second Petition for Arrangement under section 321 of the Bankruptcy Act,
following which on January 22, 1969, an order was entered revesting it with possession of all remaining undisposed assets of the bankrupt estate, including but not limited to "patents, dies and molds" and causes of action or claims with respect to their alleged unauthorized or illegal use. The same order enjoined the trustee from further administration of the estate.
Oceana's second Petition for Arrangement was predicated essentially upon a claim that at the foreclosure sale the Bank acquired and then sold to Cap-Roc molds and dies related to patents which allegedly were not subject to the chattel mortgage, and that a recovery of such property could result in a Plan of Arrangement. Based thereon, Oceana, as debtor in possession, on March 14, 1969, commenced a summary proceeding against the Bank and Cap-Roc and sought an order declaring the sale null and void and other relief incidental thereto.
The petition alleged four causes of action: one charged that the Bank stifled bidding, froze out competitive bidding and conspired in various respects with Cap-Roc to defraud the court, the creditors of the estate and the debtor and thereby illegally acquired possession of the dies and molds which the debtor contended were not subject to the mortgage; another charged the Bank was "guilty of overreaching and unconscionable conduct with respect to the dies and molds"; and another charged Cap-Roc with "violation and infringement of the patents owned by Oceana." These claims, even if cloaked with the label of a turnover proceeding or one to determine whether the Bank violated the referee's order authorizing the sale, on their face, raised substantial questions as to the bankruptcy court's summary jurisdiction. Both the Bank and Cap-Roc asserted as an affirmative defense lack of jurisdiction. In any event, in apparent recognition of the problem, Oceana, on May 1, 1969, withdrew its proceeding against both Cap-Roc and the Bank.
This was followed up by a new proceeding filed on May 7, 1969 solely against the Bank to void the sale. The petition in substantial measure tracked allegations of the prior petition, including the charge that the Bank conspired with Cap-Roc; that it fraudulently obtained and illegally acquired possession of the dies and molds belonging to the debtor's estate which it sold to Cap-Roc. The Bank denied these charges and again advanced as an affirmative defense that the bankruptcy court was without jurisdiction to determine the issues in a summary proceeding. Oceana moved before the referee for summary judgment against the Bank upon its claims, but the motion was denied by the referee in July 1969. Cap-Roc, claiming an interest in the property which was the subject matter of the proceeding, moved to intervene to protect its rights, as well as to defend against the conspiracy and fraud charges, but the referee denied its motion; however, upon review, the order was reversed by the District Court on December 3, 1970, and Cap-Roc was permitted to intervene pursuant to Rule 24(a) (2) of the Federal Rules of Civil Procedure.
On May 19, 1971, the debtor's Plan of Arrangement, as amended several times, was confirmed and an order entered to that effect. Under its terms all general unsecured creditors were paid ten percent. Although the plan as proposed by the debtor did not so provide, the referee's order of confirmation contained a provision that "this court retain jurisdiction of the proceeding presently pending before it brought on by the debtor herein against the Bank of Commerce, in which Cap-Roc, Inc. has intervened pursuant to orders of the Court to finally determine the issue raised by the pleadings."
On January 17, 1972, pursuant to an agreement approved by the referee, all disputes between the debtor and Cap-Roc were compromised, whereby the debtor received from Cap-Roc a cash sum and the return of some of the molds acquired by Cap-Roc from the Bank, and Cap-Roc received a royalty free non-exclusive license to use the patents owned by the debtor. The settlement also provided for the termination of the proceeding against Cap-Roc so that the Bank remained as the sole respondent in the proceeding. Oceana, after the denial of its motion for summary judgment in July 1969, took no other step to prosecute its alleged claims against the Bank.
Subsequently, the Bank on November 1, 1972, moved to dismiss the proceeding still pending against it on the ground that the bankruptcy court no longer had jurisdiction; it also moved to delete the last "ORDERED" paragraph of the confirmation order referred to above. Its basic contention was that upon the entry of the order of confirmation the court lost jurisdiction and was without power to adjudicate the controversy between the Bank and the debtor. The referee granted the Bank's motion based upon section 367(4) of the Bankruptcy Act,
which provides that "upon confirmation of an arrangement . . . except as otherwise provided in sections 769 and 770 of this Act, the case shall be dismissed." Section 369
provides for the retention of jurisdiction to allow or disallow claims affected by the arrangement, and section 370
provides for retention of jurisdiction over the distribution of the consideration deposited for payment of the allowed claims. The referee held that the case did not come within either of those sections to justify retention of jurisdiction; he further held that since the arrangement proposed by Oceana did not provide for retention of jurisdiction, it was not retained under section 368,
notwithstanding that his order did include such a provision. Moreover, he held even if the debtor's plan had contained such a proposal, it would not have afforded a basis of jurisdiction of the controversy between the debtor and the Bank, since section 368 confers jurisdiction only of the limited powers specified in section 344
and section 377,
which respectively relate to the court's power (1) to authorize the issuance of certificates of indebtedness after confirmation, and (2) to take action in instances where the debtor defaults in any of the terms of the arrangement or where the arrangement terminates by reason of the happening of a condition specified in the arrangement.
The referee's position that jurisdiction did not survive confirmation of the plan under any of the foregoing referred-to sections is unassailable
-- indeed the debtor appears to concede as much, but contends nonetheless that jurisdiction was retained and continued upon an entirely different theory.
The debtor acknowledges that its proceeding against the Bank was plenary, normally involving all the attributes of a court trial.
However, it contends that the "bankruptcy court obtained summary jurisdiction of what would otherwise have been a plenary action not by virtue of Chapter XI, but pursuant to section 23 of the Bankruptcy Act."
It also relies upon section 2a(7) to support its jurisdictional claim. Thus it argues that the bankruptcy court having acquired jurisdiction under those sections, it did not lose it when the Chapter XI case was dismissed upon confirmation of the arrangement despite the mandate of section 367(4) of the Act because that section pertains only to controversies concerning an arrangement, whereas the proceeding against the Bank was "an independent litigation" not related to the arrangement and "not governed by the provisions of Chapter XI."
The debtor's claim of continued jurisdiction under either section cannot be upheld. Section 23(b), in specified instances (of which this is not one) and where a defendant consents, grants limited plenary jurisdiction to a bankruptcy court even though no diversity or other independent basis of federal jurisdiction exists.
When a defendant consents under section 23, this operates to confer jurisdiction over a plenary suit in a bankruptcy court with power in the referee to decide the issues presented in a summary trial.
The debtor contends that the Bank impliedly consented to such summary jurisdiction when it applied for and obtained leave to foreclose its chattel mortgages and that once having thus consented the jurisdiction continued until the disputed issues raised by its subsequent proceeding with respect to the dies and molds were disposed of.
The theory that the Bank consented to the court's summary jurisdiction is without substance. Here the Bank did not give its affirmative consent; to the contrary, it expressly challenged the bankruptcy court's jurisdiction to determine the issues raised in summary proceeding.
The referee never passed upon this defense although he ordered dismissal of the proceeding on the grounds noted above. Upon filing of the Petition for Arrangement, the debtor was in possession of all property mentioned in the mortgage. The court had power to stay enforcement of the Bank's lien to protect the debtor's estate as to any possible equity over and above the secured debt for the benefit of creditors during the existence of the arrangement proceeding. The Bank perforce was compelled to apply to the bankruptcy court for permission to foreclose its lien,
the validity of which was not then challenged. Since its action was only defensive and it sought no affirmative relief, the Bank cannot be deemed to have consented to summary jurisdiction.
Any theory of consent is negated by the Bank's resistance to jurisdiction over the proceeding wherein it advanced the affirmative defense of lack of jurisdiction.
Alternatively, the defendant argues that since it was in possession of the molds and dies when the petition for arrangement was filed, the bankruptcy court acquired jurisdiction by virtue of section 2a(7), which confers summary jurisdiction over disputes of property in the actual or constructive possession of the court.
However, accepting that ...