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Clarkson Co. v. Shaheen

November 1, 1976

THE CLARKSON CO., LTD., AS TRUSTEE IN BANKRUPTCY, APPOINTED BY THE SUPREME COURT OF THE PROVINCE OF NEWFOUNDLAND, OF THE PROPERTY OF NEWFOUNDLAND REFINING CO., LTD., AND PROVINCIAL REFINING CO., LTD., APPELLEE
v.
JOHN M. SHAHEEN, ROY M. FURMARK, ALBIN W. SMITH, PHILIP GANDERT, PETER L. CARAS, PAUL W. RISHELL, WILLIAM J. SHERIDAN, AND JOHN DOE, APPELLANTS. *FN1



Appeal from an order of the United States District Court for the Southern District of New York, Richard Owen, Judge, granting appellee's motion for a preliminary injunction directing former officers and directors of two bankrupt Canadian corporations to turn over corporate records to the Canadian-appointed bankruptcy trustee and restraining appellants from disbursing or secreting any property of the bankrupts. Affirmed.

Author: Oakes

Before: Smith, Oakes and Meskill, Circuit Judges.

Oakes, Circuit Judge:

This suit was brought by a Canadian trustee in bankruptcy to obtain records located in the New York offices of the trustee's two Canadian bankrupt corporations and in the possession of their officials, who are the appellants here. The United States District Court for the Southern District of New York, Richard Owen, Judge, granted to the trustee a preliminary injunction that required appellants to turn over the record and restrained them from disbursing or secreting any corporate property in, or coming into, their hands. This appeal lies by right from the grant of that injunction. 28 U.S.C. § 1292(a)(1).

Provincial Refining Co., Ltd. (PRC), and Newfoundland Refining Co., Ltd. (NRC), are interrelated corporations, commonly owned, organized under the laws of the Province of Newfoundland, Canada; they have executive offices and do business in New York. PRC owns and operates a petroleum refinery at Come-by-Chance, Newfoundland, and NRC manages the operation of the refinery. On March 12, 1976, after a week-long adversary hearing at which PRC and NRC were represented by counsel, the Supreme Court of Newfoundland (Trial Division) adjudicated the two corporations bankrupt and appointed appellee, The Clarkson Co., Ltd. (Clarkson), as trustee of both. Canadian law requires a trustee to take possession of the records of a bankrupt corporation,*fn2 and Clarkson brought the present suit for that purpose. Named as defendants were appellants here, who, as officers of the bankrupts, had custody or control of the records in New York.*fn2

A temporary restraining order preserving the records and directing the appellants to give Clarkson immediate and continuing access to them was issued by Judge Owen in federal district court on March 23, 1976, the day the federal complaint was filed. On March 24, appellants' attorney obtained an ex parte order in the New York Supreme Court in order to prevent Clarkson from further examining PRC and NRC records.*fn3 Immediately thereafter, Clarkson representatives were denied access to the books and records. On March 25, the state court order was modified at Clarkson's request so as not to restrain Clarkson from taking action pursuant to the federal court order. Appellants' request for the state order followed by their denial of access to Clarkson on March 24 led to the grant of a preliminary injunction by Judge Owen below on April 1, 1976, after notice and hearing. On that date the district court held both that the trustee had a lawful right to all property of the bankrupts and that "there is enormous risk of irreparable injury to the trustee" because the records "may well be destroyed." No security against the possibility of wrongful restraint under Fed. R. Civ. P. 65(c) was sought by appellants or ordered by the court. Notice of appeal was duly filed.*fn4

I. Jurisdiction.

Initially, as we are bound to do, Fed.R.Civ.P.12(h)(3); Mansfield, Coldwater & Lake Michigan Ry. v. Swan, 111 U.S. 379, 28 L. Ed. 462, 4 S. Ct. 510 (1884), we raise on our own motion the question of jurisdiction, which is alleged on the ground od diversity of citizenship under 28 U.S.C. § 1332. As a matter of American bankruptcy law, the citizenship of the bankrupt, rather than that of the trustee in bankruptcy, is determinative for purposes of diversity jurisdiction. Bankruptcy Act, § 23, 11 U.S.C. § 46; Bush v. Elliott, 202 U.S. 477, 50 L. Ed. 1114, 26 S. Ct. 668 (1906); Tilton v. Model Taxi Corp., 112 F.2d 86, 88 (2d Cir. 1940); 2 Collier on Bankruptcy Par. 23.13, at 596 (14th ed. 1975). If this rule governed here, a question would arise as to whether PRC and NRC are to be treated as citizens of New York or Newfoundland.*fn5 It is also true, however, that the determination of diversity citizenship under the Federal Bankruptcy Act is in derogation of the general common law rule that courts will look to the citizenship of a trustee, receiver, administrator, or other representative, and not the party which he represents, in determining diversity jurisdiction. Mecom v. Fitzsimmons Drilling Co., 284 U.S. 183, 186, 76 L. Ed. 233, 52 S. Ct. 84 (1931); New Orleans v. Gaines's Administrator, 138 U.S. 595, 606, 34 L. Ed. 1102, 11 S. Ct. 428 (1891); Nunn v. Feltinton, 294 F.2d 450, 453 (5th Cir. 1961), cert. denied, 369 U.S. 817, 7 L. Ed. 2d 784, 82 S. Ct. 829 (1962); Nolan v. Transocean Air Lines, 276 F.2d 280, 283 n.3 (2d Cir.1960) (Friendly, J.), Vacated on other grounds, 365 U.S. 293, 5 L. Ed. 2d 571, 81 S. Ct. 555 (1961); Waxman v. Kealoha, 296 F. Supp. 1190, 1192 (D. Hawaii 1969(; 13 C. Wright, A. Miller & E. Cooper, Federal Practice & Procedure § 3606, at 634-35 (1975).*fn6 Thus, a trustee appointed under a law other than the Federal Bankruptcy Act may use his own citizenship in claiming diversity jurisdiction unless that law imposes its own restrictions. Since Clarkson was duly appointed a trustee in bankruptcy under the laws of Canada and appellants are citizens of New York, we hold that diversity jurisdiction exists in this case. Accord, Waxman v. Kealoha, supra.

A related point, which in a sense goes to jurisdiction, involves this court's equitable responsibility, under Fed.R. Civ.P. 19, to dismiss a suit when the absence of an indispensable party makes impossible a just resolution of the entire action. See Kamhi v. Cohen, 512 F.2d 1051, 1053-55 (2d Cir. 1975); 7 C. Wright & A. Miller, Federal Practice & Procedure § 1611 (1972). Appellants urge that this action cannot be justly adjudicated without the presence as parties of PRC and NRC, and that, since their joinder would destroy diversity jurisdiction, the action must be dismissed. See id. § 1610. Under the flexible test governing Rule 19 questions, enunciated in Provident Tradesmens Bank & Trust Co. v. Patterson, 390 U.S. 102, 118-19, 19 L. Ed. 2d 936, 88 S. Ct. 733 (1968) (Harlan, J.), we find that the presence of PRC and NRC is irrelevant to a just resolution of the case. While it is true that the records sought are those of the bankrupt corporations, it is also true that the trustee in bankruptcy seeks them in connection with the administration of the bankrupt estates, and that the two corporations have already been adjudicated bankrupt. There is here no possibility of prejudice through multiple suits; no one's rights are being or will be injured. The bankruptcy trustee, as appellants seem consistently to forget, is a fiduciary accountable to a court of law. If on appeal the adjudication of bankruptcy is overturned, the trustee would, of course, be duty-bound to return the records to their rightful owners, who would then be the on-going corporations, not the appellants herein. But in the interim, since it is the duty of the trustee to marshal the assets of the bankrupt companies and to examine the corporate records toward that end, and since it is the appellants who must be sued to obtain those records, we hold that PRC and NRC are not essential parties here.

II. Abstention.

Appellants next urge that the federal courts should stay their proceedings in this case*fn7 until various of appellants' claims are determined in the pending state court proceedings (the SNR suit) described in note 3 supra. While the law in this circuit is clear that a district court may stay federal proceedings to allow resolution of a similar cause of action pending in state court, see, e.g., Klein v. Walston & Co., 432 F.2d 936, 937 (2d Cir. 1970) (per curiam); Mottolese v. Kaufman, 176 F.2d 301, 302-03 (2d Cir. 1949) (L. Hand, J.), it is equally clear that a district court has wide discretion, and in some cases a duty, not to abstain merely because a state suit is pending in which some of the same issues may be decided, see, e.g., Burch v. Carmody, 377 F. Supp. 1157, 1158-59 (E.D.N.Y. 1974); Loeb v. Whittaker Corp., 333 F. Supp. 484, 489-90 (S.D.N.Y. 1971).

We do not think that this discretion was in any sense abused here. The causes of action and relief requested are different in the state and federal suits, and the questions of New York law involved are not unsettled ones, as to which deference by the federal courts to the state courts would be more appropriate. See County of Allegheny v. Frank Mashuda Co., 360 U.S. 185, 188-90, 196-97, 3 L. Ed. 2d 1163, 79 S. Ct. 1060 (1959). We see no way in which this federal proceeding, relating solely to the records of the two bankrupt companies, could be thought to be an interference with the state court proceeding, in which damages are being sought for an alleged conspiracy and in which an injunction was unsuccessfully sought against the bankruptcy proceedings. Nor is there a particular res already being administered by a state court, so as to implicate the specialized doctrine of Princess Lida v. Thompson, 305 U.S. 456, 466, 83 L. Ed. 285, 59 S. Ct. 275 (1939). Related claims have been made in state court, but corporate records are in issue only in federal court. See generally Currie, The Federal Courts and the American Law Institute (Ill), 36 U.Chi.L.Rev. 268, 335 (1969). III. Comity.

Having decided that the district court properly exercised its discretion not to abstain, we reach the central issue in this case: whether the Canadian bankruptcy proceeding may be collaterally attacked in this court. The doctrine of comity, Hilton v. Guyot, 159 U.S. 113, 163-64, 40 L. Ed. 95, 16 S. Ct. 139 (1895), applies in the state of New York, see, e.g., Watts v. Swiss Bank Corp., 27 N.Y.2d 270, 279, 265 N.E.2d 739, 744, 317 N.Y.S.2d 315, 322 (1970); International Firearms Co. v. Kingston Trust Co., 6 N.Y.2d 406, 411, 160 N.E.2d 656, 658, 189 N.Y.S.2d 911, 913-14 (1959). Under it, New York courts recognize the statutory title of an alien trustee in bankruptcy, as long as the foreign court had jurisdiction over the bankrupt and the foreign proceeding has not resulted in injustice to New York citizens, prejudice to creditors' New York statutory remedies, or violation of the laws or public policy of the state. Cole v. Cunningham, 133 U.S. 107, 122-23, 33 L. Ed. 538, 10 S. Ct. 269 (1890). These exceptions are construed especially narrowly when the alien jurisdiction is, like Canada, a sister common law jurisdiction with procedures akin to our own. Canadian trustees in bankruptcy with appropriate authority have been held entitled to recognition, Waxman v. Kealoha, supra; cf. Oakes v. Lake, 290 U.S. 59, 61-63, 78 L. Ed. 168, 54 S. Ct. 13 (1933) (receiver with statutory or court authority should be recognized in foreign jurisdictions), and Canadian judgments have been held entitled to credit, International Firearms Co. v. Kingston Trust Co., supra. New York courts have given foreign trustees injunctive or related relief to obtain possession of property, see, e.g., Fincham v. Income from Certain Trust Funds of Cobham, 193 Misc. 363, 81 N.Y.S.2d 356 (Sup. Ct. 1948); Union Guardian Trust Co. v. Broadway National Bank & Trust Co., 138 Misc. 16, 245 N.Y.S. 2 (Sup. Ct. 1930), and Canadian courts have also given this form of relief to a trustee appointed in the United States, Willaims v. Rice, [1926] 3 Dom. L.R. 225.

Appellants do not argue that the Newfoundland court lacked jurisdiction over the bankrupts or that there is any conflict between the alien trustee and domestic creditors. The assert, however, that comity should not be given the Newfoundland court's designation of appellee as trustee both because it was "tainted with fraud" and therefore was not cognizable as a foreign judgment in New York,*fn8 and because the public policies of New York in favor of forum selection clauses ...


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