Duggan v. Sansberry National Aircraft Corporation/Opinion of the Court

These cases involve, as the Circuit Court of Appeals said, 7 Cir., 149 F.2d 548, 'a clash of jurisdiction' between two District Courts. They raise important questions as to the construction of certain sections of Chapter X of the Bankruptcy Act, 11 U.S.C. § 501 et seq., 11 U.S.C.A. § 501 et seq. Two corporations, Christopher Engineering Company and National Aircraft Corporation, are concerned, as is the question of their relationship as parent and subsidiary corporations.

On December 27, 1943, Christopher Engineering Company filed a petition for reorganization under Chapter X in the District Court for the Eastern Division of the Eastern Judicial District of Missouri. On the same day the petition was approved as properly filed and petitioner Duggan was appointed trustee. Approximately a month later, January 21, 1944, an involuntary petition in ordinary bankruptcy was filed by its creditors against National Aircraft Corporation, which petitioner Duggan claims was a subsidiary of Christopher, in the District Court for the Southern District of Indiana. A petition for the appointment o a receiver in bankruptcy for National was filed and referred to a referee who took the matter under advisement after holding a hearing at which Duggan, as trustee of Christopher, appeared by his attorney. On February 7, 1944, the involuntary petition being unopposed, the referee entered an order of adjudication, and the following day appointed respondent Sansberry as receiver. On March 7, 1944, the first meeting of National's creditors was held. At that meeting Brown, its secretary-treasurer, testified that in December, 1942, he and A. B. Christopher had purchased all the capital stock of National and that, although the certificates had been turned over to Duggan, 'there is no reason that he (Brown) knows of why such capital stock should be considered the property of Christopher Engineering Company, instead of the property of himself and Christopher, individually.' At this meeting also the receiver Sansberry was selected as trustee in bankruptcy for National.

On March 21, 1944, Sansberry, acting as trustee, filed a petition for an order authorizing him to offer for sale and to sell the tangible personal property and the real estate belonging to National. The referee ordered that a meeting of creditors be held to consider this petition. Notice of the meeting was sent to Duggan and also to the attorneys for Brown. The meeting was held on April 4, 1944. Neither Duggan nor Brown appeared. No objection to the proposed sale was made except by the United States Army Air Force, which claimed certain personal property. But it was expressly stated on its behalf that there was no objection to the entering of an order for the sale covering any other property of National. On April 6 the referee entered an order directing that the real and personal property of National, with certain exceptions, be offered for public sale on April 20, 1944. Notice of the sale was sent to Duggan and Brown among others.

On April 19, the day prior to the sale, a petition was filed on behalf of National in the reorganization proceedings of Christopher in the Missouri District Court. On the same day that court issued an injunction against holding the sale of National's property. The decree contained a finding that National is a wholly owned subsidiary of the Christopher Engineering Company.

Immediately preceding the sale on April 20, copies of the injunction order were served upon Sansberry and the auctioneer; but they proceeded with the sale. On May 3, after the trustee had filed his report to the effect that the sale had been advantageous and atter a hearing had been held, the referee approved and confirmed the sale. He then granted petitions for review of this order which were filed by Duggan and by the National Aircraft Corporation per Brown. The District Court affirmed the referee's order, as did the Circuit Court of Appeals, one judge concurring specially and one dissenting. 7 Cir., 149 F.2d 548. We granted certiorari. 326 U.S. 709, 66 S.Ct. 141.

The Circuit Court of Appeals held, in the first place, that for the District Court in Missouri to obtain jurisdiction over National and its assets, it had to be established as a 'jurisdictional fact' that 'National was a subsidiary of Christopher, not only on April 19, 1944, but on December 27, 1943, when Christopher filed its petition for reorganization, and also on January 21, 1944, when the involuntary petition in bankruptcy was filed (in the District Court) in Indiana.' This fact, the court found, had not been established; for the order of the Missouri court did not state that Christopher owned any stock of National prior to April 19, 1944; and, as April 19 was the date as of which the Missouri court's determination was effective, 'we must presume that there was no evidence before it that the relationship existed earlier.' 149 F.2d at page 550.

In the second place, the Court of Appeals held that under Chapter X, when a subsidiary corporation has been adjudicated a bankrupt in one District Court and its property is transferred to a trustee, it may not file a petition for reorganization in another District Court where the reorganization proceeding of its parent is pending. And finally the court held that the petition for reorganization was improperly filed in any case, since it was not shown that Brown was authorized to file it.

We come to different conclusions. Regardless of whether National's petition for reorganization in the Missouri proceedings was properly filed on April 19, the Indiana Court, on being notified that the petition had been filed and approved and that an injunction had issued, should have stayed immediately the sale of National's assets. Section 113, 11 U.S.C. § 513, 11 U.S.C.A. § 513, provides with respect to reorganization proceedings: 'Prior to the approval of a petition, the judge may upon cause shown grant a temporary stay, until the petition is approved or dismissed, of a prior pending bankruptcy, mortgage foreclosure or equity receivership proceeding and of any act or other proceeding to enforce a lien against a debtor's property, and may upon cause shown enjoin or stay until the petition is approved or dismissed the commencement or continuation of a suit against a debtor.' Bankr.Act §§ 113, 141, 144, 148, 11 U.S.C.A. §§ 513, 541, 544, 548. It was on the authority of this section, we may assume, that the injunction staying the sale of National's property was issued. As interpreted the section declares that when a petition for reorganization has been filed by a corporation, the judge may stay pending proceedings. It does not differentiate between petitions filed by parent corporations and petitions filed by subsidiaries nor does it distinguish petitions which have been filed correctly from those which have been filed erroneously with the reorganization court. It thus applies to National, whose petition for reorganization had been filed and against which a bankruptcy proceeding was pending.

Opportunity was afforded to interested parties to come into the reorganization proceeding in order to show that National's petition should not have been approved. See s 137, 11 U.S.C. § 537, 11 U.S.C.A. § 537, which provides: 'Prior to the first date set for the hearing provided in section 561 of this title, an answer controverting the allegations of a petition by or against a debtor may be filed by any creditor or indenture trustee or, if the debtor is not insolvent, by any stockholder of the debtor.' And § 144, 11 U.S.C. § 544, 11 U.S.C.A. § 544 provides, 'If an answer filed by any creditor, indenture trustee, or stockholder shall controvert any of the material allegations of the petition, the judge shall, as soon as may be, determine, without the intervention of a jury, the issues presented by the pleadings and enter an order approving the petition, if satisfied that it complies with the requirements of this chapter and has been filed in good faith and that the material allegations are sustained by the proofs, or dismissing it if not so satisfied.' Thus, under §§ 137 and 144, an answer could be filed to National's petition denying that National was a subsidiary of Christopher, and asking that the petition be dismissed. The judge would then be obliged to hold at least a summary hearing, see In re Cheney Bros., D.C., 12 F.Supp. 609, 611, a material allegation being controverted, and to decide the disputed issue on its merits.

In as much as the interested parties thus had an opportunity in the reorganization proceeding to dispute the allegations of National's petition that a parent-subsidiary relationship existed between it and Christopher and by doing so to have that issue determined on the facts, we think it plain that Congress intended that the same issue should not be tried collaterally in the bankruptcy proceeding.

But respondent relies especially upon § 149, 11 U.S.C. § 549, 11 U.S.C.A. § 549, as allowing a collateral attack in the bankruptcy court upon the reorganization proceedings initiated by National. This section reads: 'An order, which has become final, approving a petition filed under this chapter shall be a conclusive determination of the jurisdiction of the court.' Respondent's position is that the Missouri District Court's approval of the petition upon its filing was not an order which had become final and that as a result the reorganization proceedings thereby initiated by National were subject to question in the bankruptcy forum.

Assuming arguendo that the ex parte order of approval, made upon the day the petition for reorganization was filed, was not a final order and assuming also that, as respondent argues, 'jurisdiction' within the meaning of this section does not have the limited meaning of 'venue,' the section nevertheless does not support the position taken. Congress in § 113, 11 U.S.C. § 513, 11 U.S.C.A. § 513, explicitly provided that a reorganization court, upon the filing of a petition, could stay pending bankruptcy proceedings. In the light of this provision it is scarcely possible that Congress also intended that a collateral attack could be made in the bankruptcy forum, the proceedings in which had been stayed, upon the proceedings in the reorganization forum.

But it is said that if this be the case, then § 149 has no meaning at all. We do not think this conclusion follows. Although, as we construe the Act, no collateral attack may be brought against the reorganization proceeding, at least in a bankruptcy forum the proceedings in which the reorganization court has stayed, this does not mean that under other circumstances, where an order of approval is not final, § 149 would not allow the reorganization proceeding to be attacked collaterally in some other forum, in particular where 'a prior * *  * bankruptcy, mortgage foreclosure or equity receivership proceeding (or) *  *  * any act or other proceeding to enforce a lien against a debtor's property,' § 113, 11 U.S.C. § 513, 11 U.S.C.A. § 513, is not pending. Moreover, had the Missouri District Court not enjoined the bankruptcy proceeding, we may assume that the bankruptcy court would have been correct in not ordering the sale of the assets of National halted.

The problem involves, of course, not the ordinary power of one court of general jurisdiction to question the jurisdiction of another court of general jurisdiction. The jurisdiction of both the bankruptcy forum and the reorganization forum is derived from and is limited by the Bankruptcy Act, enacted in accordance with the congressional power 'to establish * *  * uniform Laws on the subject of Bankruptcies throughout the United States.' Constitution, Article 1, § 8. It was within the power of Congress to provide that a bankruptcy court could not permit an attack, even on the usual grounds, to be made upon proceedings initiated in a reorganization court. This power Co gress exercised by permitting the reorganization court to stay, as it did, the bankruptcy proceedings.

The exercise of this power, taken in relation to the facts at bar, was in pursuance of the congressional intention ordinarily to allow parent and subsidiary to be reorganized in a single proceeding, thereby effectuating its general policy that the entire administration of an estate should be centralized in a single reorganization court. If the reorganization forum lacked the power to stay the bankruptcy proceeding and thereby to prevent a collateral inquiry into its own jurisdiction, this policy of Congress would be frustrated; for instead of one court's having 'exclusive jurisdiction of the debtor and its property, wherever located,' there would be two courts each with a claim to jurisdiction and each denying the other's jurisdiction. We may not construe the Bankruptcy Act as permitting such a state of affairs.

In view of the disposition we make of the cause it is unnecessary to take specific action concerning petitioners' motion, submitted in their reply brief, relating to certain matters affecting the state of the record.

The judgments are reversed and the causes are remanded for further proceedings in conformity with this opinion.

Reversed and remanded.

Mr. Justice JACKSON took no part in the consideration or decision of these cases.