UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK
December 9, 1974
In the Matter of LAW RESEARCH SERVICES, INC., Debtor-Appellant, Lawrence Bengert, Claimant-Appellant
Werker, District Judge.
The opinion of the court was delivered by: WERKER
WERKER, District Judge.
The debtor in this case, Law Research Service, Inc. (LRS), a New York corporation, filed a petition for an arrangement with its unsecured creditors pursuant to Chapter XI of the Bankruptcy Act on June 18, 1971. By order dated June 20, 1972, as amended on July 6, 1972, Bankruptcy Judge Asa Herzog confirmed the debtor's plan of arrangement, and provided for a subsequent hearing of all "objections to claims which have been proved and filed but not allowed or disallowed herein prior to the date hereof." One of the objections raised by debtor pursuant to Judge Herzog's order was directed to Appellant Bengert's claim, which had been filed with the Bankruptcy Court on February 18, 1972.
The grounds for objection were stated in debtor's Motion to Reduce or Expunge Claims as follows:
Claimant asserted a lien against the proceeds of the suit by debtor against Western Union Telegraph Company in the amount of $36,691.77. A default judgment was obtained by claimant against the debtor prior to filing of the petition for Chapter XI. Said default judgment was obtained in the State of Connecticut.
The basis of objections is: Said claim should be set aside for the reason that no process, summons or notice of any kind of the commencement of a suit was served by the claimant on the debtor or anyone on behalf of the debtor.
As a result of debtor's motion, which raised objection to a large group of claims, the controversy as to Mr. Bengert's claim was examined at a plenary hearing on April 9, 1973.
This is an appeal from the order of Bankruptcy Judge Herzog, dated January 9, 1974, sustaining Mr. Bengert's claim against the debtor's objection, but granting it unsecured status only. Each side is appealing from that part of the order which it finds adverse.
A Bankruptcy Judge's findings of fact must be accepted by the District Judge on appeal unless clearly erroneous. Rule 810, Rules of Bankruptcy Procedure. Judge Herzog's findings, which are not clearly erroneous, are as follows:
The debtor's business was the marketing of computerized legal services using a New York computer and the nationwide communication lines of Western Union Telegraph Company of New York. By advertising in the New York Times the debtor solicited franchisees to sell its services in designated territories.
Mr. Bengert, a resident of Connecticut, read the advertisement in a Sunday edition of the Times and as a result, entered into an agreement with debtor to sell its services in Fairchild County, Connecticut on a commission basis. Similar franchises were granted to two other persons in Connecticut.
The franchise agreement provided that the debtor receive all prospective inquiries from franchise advertising and publicity, that it service all inquiries of Fairchild County "subscribers' by using its computer retrieval system, that it handle all billing and accounting, paying a commission to Mr. Bengert on a monthly basis, and that it control all promotion of the Bengert franchise; claimant Bengert was merely a sales agent for debtor. Pursuant to the agreement, debtor mailed letters to attorneys in Fairchild County advertising its services. As a result thereof Mr. Bengert received responses from two or three attorneys and paid sales calls to them. He sold a Thesaurus (index to LRS services by subject and code number) to one attorney, who received it by mail from debtor, and was billed for it by debtor. He sold another LRS service referred to as "a special inquiry" to "someone in Connecticut," who was also billed by debtor from New York. The debtor corresponded with Mr. Bengert about arranging to furnish its services to law libraries in Connecticut, but nothing was done to implement this idea.
When debtor breached its contracts with its franchisees, as a result of Western Union's failure to allow the use of its computer, Mr. Bengert had the Sheriff garnish the Western Union debt to LRS by serving copies of a writ, summons and complaint for breach of contract on the Connecticut Secretary of State as agent designated for that purpose by Western Union. The Secretary of State mailed a copy to Western Union.
Mr. Bengert also sought in personam jurisdiction over the debtor by serving two other copies of the writ, summons and complaint on the Connecticut Secretary of State pursuant to the Connecticut long-arm statute. The Secretary mailed a copy to the debtor, but the mail was returned marked "Not Accepted."
Debtor's president was aware of the suit and the garnishment in January 1970. Debtor deliberately defaulted in the action.
Default judgment was entered in the Connecticut action on May 19, 1970.
The issues to be considered on appeal are whether the Bankruptcy Judge erred in finding as a matter of law (1) that prejudgment garnishment of the Western Union indebtedness, without prior notice and hearing, violated the due process clause of the Fourteenth Amendment, thus depriving Mr. Bengert's claim of secured status; and (2) that in personam jurisdiction was properly obtained over the debtor in Connecticut.
The nub of the first issue is whether the fact that a garnishment is made in order to secure quasi-in-rem jurisdiction insulates it from the due process requirements established by the Supreme Court in Fuentes v. Shevin, 407 U.S. 67, 92 S. Ct. 1983, 32 L. Ed. 2d 556 (1972). This court thinks not. The Court in Fuentes found that outright seizure of property without prior hearing was justified in certain extraordinary situations only if three factors, discussed below, were present. This court finds that as only two of those factors were present in the Bengert garnishment, that garnishment violated due process and did not establish a valid lien against LRS.
In Fuentes v. Shevin, supra, the Supreme Court ruled that temporary deprivation of property without prior notice or opportunity for a hearing, and without judicial participation, violates the due process clause even where the chances of a wrongful taking are reduced by the requirement that the creditor post a security bond. Mitchell v. W. T. Grant Co., 416 U.S. 600, 614, 94 S. Ct. 1895, 40 L. Ed. 2d 406 (1974). The Court recognized, however, that there are "extraordinary situations" that justify postponing notice and the opportunity for a hearing. It went on to state:
These situations, however, must be truly unusual. Only in a few limited situations has this Court allowed outright seizure without opportunity for a prior hearing. First, in each case, the seizure has been directly necessary to secure an important governmental or general public interest. Second, there has been a special need for very prompt action. Third, the State has kept strict control over its monopoly of legitimate force: the person initiating the seizure has been a governmental official responsible for determining, under the standards of a narrowly drawn statute, that it was necessary and justified in the particular instance.
Id., 407 U.S. at 90-91, 92 S. Ct. at 1999-2000. These three factors common to each seizure case may be said to comprise a tripartite test which, at a minimum, must be satisfied in order to justify departure from normal due process requirements. Roscoe v. Butler, 367 F. Supp. 574, 579 (D.Md.1973); U.S. Industries, Inc. v. Gregg, 348 F. Supp. 1004, 1021 (D.Del.1972).
In footnote 23 to the passage quoted above the Court cites Ownbey v. Morgan, 256 U.S. 94, 41 S. Ct. 433, 65 L. Ed. 837 (1921), a quasi-in-rem case in which only the first two factors of the tripartite test are present.
The question therefore arises whether in citing Ownbey the Fuentes Court was affirming as fully consonant with due process the Ownbey procedures, and was thus absolving quasi-in-rem attachment from the necessity of meeting the third part of the tripartite test. This court does not believe that it was, for in Ownbey the constitutionality of the jurisdictional attachment was never challenged; the debtor in fact argued for its continuation.
Fuentes, furthermore, cannot be read as endorsing all aspects of the 1921 Ownbey decision, if only because the principal Ownbey holding, that a defendant's access to the civil courts can be conditioned upon the posting of a bond, has since been overtaken by significant changes in the law. See, Boddie v. Connecticut, 401 U.S. 371, at 379, 91 S. Ct. 780, 28 L. Ed. 2d 113 (1971). Lastly, despite any doubt which might exist as to whether the Fuentes Court intended the tripartite test to be applied to quasi-in-rem situations, courts and commentators alike have so construed the decision.
See, e. g., U.S. Industries, Inc. v. Gregg, supra, 348 F. Supp. at 1021 ("While the opinion in the Fuentes case should not be read as endorsing all of the views stated in the Ownbey opinion, Fuentes does indicate that seizures of the kind made here [sequestration of a nonresident defendant's stock] are constitutionally permissible when the tripartite test set forth there is met."); Quasi-in-Rem Jurisdiction and Due Process Requirements, 82 Yale L.J. 1023, 1026 (1973). Cf. Roscoe v. Butler, supra, 367 F. Supp. at 579. See also Arnett v. Kennedy, 416 U.S. 134, 188, 94 S. Ct. 1633, 40 L. Ed. 2d 15 (1974) (White, J., concurring).
Indeed, there is no reason why the third requirement of the tripartite test should not be enforced when the plaintiff is seeking to establish quasi-in-rem jurisdiction. It in no way interferes with the quasi-in-rem mechanism or its goals, yet it minimizes the chance that attachment will be abused by creditors without valid claims, and it guarantees to the defendant at least a modicum of objectivity in the ex parte decision to immobilize his property. As the determination of what due process requires in a given context depends upon a balancing of the governmental interests involved and the private interests affected, Mitchell v. W. T. Grant Co., supra, 416 U.S. at 624, 94 S. Ct. 1895 (Powell, J., concurring), there is no reason to exclude a requirement that benefits both while harming neither.
In light of the above, this court concludes that in quasi-in-rem situations, prior notice and the opportunity for a hearing may be dispensed with only so long as the Fuentes tripartite test is met. In Mr. Bengert's Connecticut action against LRS, the attachment made did not conform in full with the Fuentes requirements; under the foreign attachment statute applicable at the time, the writ issued automatically, without benefit of governmental review, upon plaintiff's (then) unsubstantiated assertion that he had a claim for damages against the defendant.
Although the Connecticut court has since concluded that Mr. Bengert's claim was indeed valid, he could have just as easily immobilized the LRS property had his claim been totally and transparently unfounded. Due process requires that a governmental official with power to go beyond the documentary evidence presented review the creditor's claim, assess the necessity for summary attachment and if appropriate, deny the writ. Roscoe v. Butler, supra, 367 F. Supp. at 582.As the Bengert garnishment was effected without such review, it deprived LRS of due process of law in violation of the Fourteenth Amendment. This court therefore must sustain Judge Herzog's conclusion that the garnishment, and the lien thereby established was invalid; Mr. Bengert's claim, as a result, is not entitled to secured status.
As to the second issue which this court must consider on appeal, the Bankruptcy Judge's decision that the Connecticut Court validly exercised in personam jurisdiction over LRS is likewise sustained. The Connecticut long-arm statute which Mr. Bengert invoked in asserting in personam jurisdiction is section 33-411 of the Connecticut General Statutes. That section provides in relevant part:
(a) Any process, notice or demand in connection with any action or proceeding required or permitted by law to be served upon a foreign corporation . . . may, when timely made, be served upon such corporation . . . as follows:
(1) When the secretary of the state and his successors have been appointed such corporation's attorney for service of process, by leaving two true and attested copies thereof together with a fee of five dollars at the office of the secretary of the state or depositing the same in the United States mails, by registered or certified mail, postage prepaid, addressed to such office. The secretary of the state shall file one copy of such process and keep a record of the date and hour of such receipt. He shall immediately notify the corporation of such receipt, and within two days after such service, forward by registered or certified mail the other copy of such process to the corporation . . . . Service so made shall be effective as of the date and hour recorded by the secretary of the state.
(b) Every foreign corporation which transacts business in this state in violation of section 33-395 or 33-396 [ i. e., without a certificate from the secretary authorizing it to do so] shall be subject to suit in this state upon any cause of action arising out of such business.
(c) Every foreign corporation shall be subject to suit in this state, by a resident of this state or by a person having a usual place of business in this state, whether or not such foreign corporation is transacting or has transacted business in this state and whether or not it is engaged exclusively in interstate or foreign commerce, on any cause of action arising as follows: (1) Out of any contract made in this state or to be performed in this state; or . . . .
(d) In any action brought under subsection (b) or (c) of this section . . . the secretary of the state shall be deemed the agent and attorney of the corporation in this state and service of process on such corporation shall be made as provided in subsection (a) of this section, . . . .
The Bankruptcy Judge below found that the debtor "purposefully availed itself of the privileges of conducting activities in Connecticut, thus invoking the benefits and protections of its laws;" he found it fair, therefore, under the standard of Hanson v. Denckla, 357 U.S. 235, 253, 78 S. Ct. 1228, 2 L. Ed. 2d 1283 (1958), that LRS be subject to that state's jurisdiction. In so finding, Judge Herzog did not specifically state which subsection of the long-arm statute, (b) or (c), he relied upon. However, it is clear to this court that at least in personam jurisdiction was properly established under subsection (c).
Under the terms of the franchise agreement, the entirety of Mr. Bengert's performance, and a substantial proportion of LRS's performance was to take place in Connecticut. LRS was to arrange and control all franchise advertising and promotion in Connecticut, with a view towards directing Connecticut attorneys to contact Mr. Bengert about subscribing to the service. It was to respond to the inquiries of such subscribers (i. e., forward the answers produced by the computer in New York to Mr. Bengert in Connecticut for him to transmit to the Connecticut attorneys). Lastly, it was to, and did, send into Connecticut copies of the Thesaurus and bills for services to Fairchild County subscribers, as well as commission payments to Mr. Bengert himself.
In Electric Regulator Corp. v. Sterling Extruder Corp., 280 F. Supp. 550 (D.Conn.1968), Chief Judge (now Court of Appeals Judge) Timbers stated of § 33-411(c):
The section must be read to authorize the assertion of jurisdiction in every instance where a cause of action arises out of a contract made or to be performed here so long as there are sufficient total contacts to meet constitutional requirements. The qualifications engrafted on the term "transacting business" in section 33-411(b) . . . [see note 5, supra ] . . . do not pervade the other provisions of Connecticut's long-arm statute, which, taken as a whole, is meant to extend Connecticut's jurisdictional reach to the constitutional limits. Winchester Electronics Corporation v. General Products Corporation, 198 F. Supp. 355, 358 (D.Conn.1961); Sheridan v. Cadet Chemical Corp., 25 Conn.Supp. 17, 20, 195 A.2d 766, 768 (Super.Ct.1963).
The constitutional requirements which must be met here are those first prescribed by the Supreme Court in International Shoe Co. v. State of Washington, 326 U.S. 310, 316, 66 S. Ct. 154, 90 L. Ed. 95 (1945) i. e., that the defendant have certain minimum contacts with the forum state such that "the maintenance of the suit does not offend traditional notions of fair play and substantial justice." This International Shoe rule, which stressed the nature and quality of the defendant's contacts with the forum state rather than their quantity, was reinforced in McGee v. International Life Insurance Co., 355 U.S. 220, 78 S. Ct. 199, 2 L. Ed. 2d 223 (1957), where the Court sustained jurisdiction on contacts less substantial than those found here. The Texas defendant in McGee had no agents and no offices in the forum state of California, had written no insurance policies in that state other than that of plaintiff, and had simply mailed nO certificate of insurance to plaintiff there. Although the Court's opinion included some language emphasizing considerations peculiar to the field of insurance, the Court of Appeals for the Second Circuit has read the holding of that decision as a general principle: "that the due process clause imposes no bar to a state's asserting personal jurisdiction, of course on proper notice,
in favor of a person within its borders who suffers damage from the breach of a contract the defendant was to perform there . . . ." Buckley v. New York Post Corp., 373 F.2d 175, 181 (1967). See also McFaddin v. National Executive Search, Inc., 354 F. Supp. 1166 (D.Conn.1973); and Scher v. HMH Publishing Co., Inc., 289 F. Supp. 917 (D.Conn.1968).
The defendant here maintained more than minimal contacts with the state of Connecticut. Indeed, it maintained general business connections evidenced by the three franchises it had established in the state, the mass mailings to Connecticut attorneys to solicit their patronage, and the Connecticut situs of Mr. Bengert's initial interest in the LRS franchise contract. These contacts could well have required the exercise of Connecticut jurisdiction and law for the debtor's benefit. It is entirely fair, therefore, that LRS be subjected to Connecticut jurisdiction on Mr. Bengert's breach of contract claim, a cause of action arising therefrom.
Because the Connecticut court validly exercised in personam jurisdiction over LRS, Mr. Bengert correctly relied on the judgment which it rendered in his favor to prove his claim below against the debtor. However, as the lien on which he relied to provide collateral for his claim has been found invalid, he cannot satisfy his claim out of funds set aside by the Bankruptcy Court for secured creditors. He must be satisfied instead with the funds provided unsecured creditors under the terms of the debtor's confirmed plan of arrangement.
The Bankruptcy Judge's decision is in all respects affirmed.