Hager v. Gibson

PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

HARRY G. HAGER,

Plaintiff-Appellant,

v.

No. 95-2574

RUTH A. GIBSON, Trustee for

Preference, Ltd.,

Defendant-Appellee.

Appeal from the United States District Court

for the Eastern District of Virginia, at Newport News.

Henry C. Morgan Jr., District Judge.

(CA-95-46, BK-93-40914)

Argued: September 25, 1996

Decided: February 28, 1997

Before LUTTIG and MICHAEL, Circuit Judges, and

PHILLIPS, Senior Circuit Judge.

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Affirmed by published opinion. Senior Judge Phillips wrote the opin-

ion, in which Judge Luttig and Judge Michael joined.

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COUNSEL

ARGUED: Frank James Santoro, MARCUS, SANTORO &

KOZAK, P.C., Portsmouth, Virginia, for Appellant. Alvin Powers

Anderson, ANDERSON, FRANCK & DAVIS, P.C., Williamsburg,

Virginia, for Appellee. ON BRIEF: Karen M. Crowley, MARCUS,

SANTORO & KOZAK, P.C., Portsmouth, Virginia, for Appellant.

Ruth A. Gibson, Norge, Virginia, for Appellee.

OPINION

PHILLIPS, Senior Circuit Judge:

Harry Hager appeals from the denial of his motion to dismiss a

bankruptcy proceeding for lack of subject matter jurisdiction. He con-

tends that the filing in behalf of the corporate debtor was not properly

authorized. We agree with the district court that the filing, though ini-

tially deficient, was authorized by later ratification which validated it

for jurisdictional purposes. We therefore affirm.

I.

In 1987, Donald J. Roop and his wife, Sandra Roop, incorporated

Preference, Ltd. (Preference) under Virginia law for the purpose of

operating an Orvis retail establishment in Colonial Williamsburg;

each owned fifty percent of the corporation's stock at incorporation.

The Roops divorced after the incorporation, and Hager purchased

Mrs. Roop's shares in the corporation for $150,000. At all relevant

times since, Hager was a fifty percent shareholder in Preference and

a director of the corporation; Roop, a fifty percent shareholder, presi-

dent and a director; and Hager's son Christian, a director and secre-

tary/treasurer of the corporation. When Hager purchased Mrs. Roop's

stock, Crestar Bank (Crestar), which had extended a running line of

credit to Preference, required Hager to personally guarantee the credit

line, as had Roop.

Hager's personal relationship with Roop declined along with the

financial fortunes of the corporation, and by late 1992 Roop and

Hager communicated only through their attorneys, though Roop con-

tinued to operate the Orvis retail establishment. Learning of Prefer-

ence's troubled financial status and the tension between Hager and

Roop, Crestar demanded immediate payment of the balance due on

the Preference note. According to Hager, Crestar pressured him per-

sonally by invoking the personal guarantee and demanding payment

either from Preference's account or Hager's personal funds. Hager

then purchased the note and Crestar assigned its rights under the note

to Hager in his own name, on December 30, 1992. Hager then closed

the Orvis establishment and retained the services of a liquidation firm

to liquidate its inventory.

2

In March 1993 Roop set about filing for bankruptcy on behalf of

Preference. He prepared a notice to be distributed to Hager as the only

other shareholder. The notice, dated March 11, 1993, read in part:

"You are hereby notified that a special meeting of all stockholders is

called for . . . March 29, 1993 . . . . The purpose of this meeting is

to consider a resolution authorizing and directing the officers and

directors of the corporation to file on behalf of the corporation a Peti-

tion in Bankruptcy . . . ." JA at 25-26. Roop sent the notice through

certified mail to Hager personally, and Hager refused the letter. Roop

also forwarded the notice to Hager's attorney, Troy Titus. Titus

responded to the notice by writing Roop's attorney,"I am in receipt

of the letter dated March 15, 1993. I have reviewed the papers with

my client. However, my client does not wish to sign them." JA at 34.

Roop hired one Stephen D. Harris to act as independent counsel for

Preference at the special meeting. Harris and Roop met on March 29

at the designated location, but neither Hager nor Titus attended. Roop,

as the only shareholder present, voted to place the company in bank-

ruptcy. To memorialize his vote, Roop executed a resolution that

stated, "[Harris] has advised [Preference] that Harry G. Hager is pre-

cluded from voting on this particular resolution because of his claim

of the status of a secured creditor." JA at 44-45. Because he was the

only shareholder present and able to vote on the matter, the resolution

stated that Roop had the authority to place Preference in bankruptcy

with his vote alone. There is no evidence that Hager or Titus ever

received a copy of the resolution.

Roop filed a voluntary petition on behalf of Preference under

Chapter Seven of the Bankruptcy Code on April 26, 1993. The Bank-

ruptcy Court appointed Ruth Gibson to act as trustee (hereafter, the

Trustee). On December 14, 1993, the Trustee demanded by letter that

Hager turn over certain funds that she alleged properly belonged to

the debtor. Hager acknowledged receipt of the letter but did not other-

wise respond to the demand. The Trustee then responded to Hager's

inaction by filing an adversary proceeding against Hager on August

18, 1994, expanding on the allegations made in the earlier letter but

demanding the same relief.

On December 20, 1994, Hager filed a Motion to Determine Com-

pliance with Local Rule 203 and to Dismiss the Case and all Related

3

Adversary Proceedings.1 In his motion, Hager claimed that Roop

improperly called the special meeting of shareholders and incorrectly

assumed that Hager was precluded from voting. Hager contended that

Roop did not have the authority to place Preference in bankruptcy by

himself and therefore had improperly filed for bankruptcy on behalf

of Preference. Because of Preference's allegedly improper filing,

Hager claimed the bankruptcy court did not have subject matter juris-

diction over the proceeding and that the court should therefore dis-

miss the proceeding.

The bankruptcy court denied Hager's motion, holding that the doc-

trine of laches prevented Hager from raising his jurisdictional argu-

ment twenty months after Preference had filed for bankruptcy. JA at

128. Alternatively, the bankruptcy court ruled that notice to Hager of

Preference's special meeting was sufficient and that Hager's failure

to participate in that meeting constituted a waiver of any claim that

Roop lacked authority to file for bankruptcy on behalf of Preference.

JA at 129. Hager then timely appealed the order of the bankruptcy

court to the district court.

The district court ruled that the doctrine of laches did not prevent

a court from considering Hager's subject matter jurisdiction objection

because either a party or the court sua sponte could raise the issue of

subject matter jurisdiction at any time during a proceeding. JA at 228.

Addressing the jurisdictional issue, the court first held that Roop's

notice to Hager of the special meeting was sufficient. JA at 230. And,

with regard to the validity of the resolution authorizing Roop to file

for bankruptcy on behalf of Preference, the court held that although

Hager was not barred from voting at the special meeting by virtue of

his status as a secured creditor of the corporation, his delay of more

than a year in complaining of Roop's action constituted a ratification

by Hager of Roop's action which under Virginia corporate law vali-

dated, by relation back, the filing for jurisdictional purposes. JA at

231, 232. On this basis, the court denied Hager's motion to dismiss

for lack of subject matter jurisdiction.

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1 Rule 203 provides that "A voluntary petition . . . filed by a corpora-

tion shall be signed by an attorney and accompanied by a copy of the

corporate resolution or other appropriate authorization, duly attested to,

authorizing such filing." Loc. R. 203 (Bankr. E.D. Va.).

4

This appeal by Hager followed.

II.

The parties do not dispute the facts upon which the district court

relied in making its jurisdictional ruling. The only issues on appeal,

therefore, are issues of law that are reviewed de novo. See, e.g.,

Schatz v. Rosenberg, 943 F.2d 485, 489 (4th Cir. 1991). Specifically,

our "review of subject matter jurisdiction is plenary." Sea "B" Mining

Co. v. Director, OWCP, 45 F.3d 851, 854 (4th Cir. 1995) (citing

Tazco, Inc. v. Director, OWCP, 895 F.2d 949, 950-51 (4th Cir.

1990)).

Hager's contention is simple. His basic point is that under Price v.

Gurney, 324 U.S. 100 (1945), a federal bankruptcy court has no

power to entertain a voluntary petition for bankruptcy filed in behalf

of a corporation by one then without authority under state corporate

law to file for the corporation. Here, he says that--as the district court

properly held--Roop lacked authority under Virginia law to file for

Preference at the time of filing. And, he concludes, the bankruptcy

court therefore never acquired jurisdiction to entertain the proceeding

so that upon Hager's objection, the petition should have been dis-

missed.

The Trustee, in response, does not challenge the district court's

determination that Roop was without authority under state law at the

time of filing. But, she contends that--as the district court held--

under Virginia corporate law Hager's long delay in raising any objec-

tion to the filing constituted ratification by him, as holder of all the

other corporate stock, of the filing by Roop in behalf of the corpora-

tion. And, she concludes, under Virginia law this ratification operated

by relation back to validate the filing, hence to supply jurisdiction in

the bankruptcy court to entertain the proceeding as of the time of fil-

ing.

Hager then counters that the district court erred in holding that his

conduct constituted ratification under Virginia law, and alternatively,

that ratification doctrine could not, in any event, be applied to correct

a jurisdictional defect existing at the time of filing, because to do so

would violate both the principle that subject matter jurisdiction cannot

5

be supplied by waiver or consent and the rule that subject matter juris-

diction is determined as of the time of commencement of an action.

We take these counter-contentions in order.

A.

Hager's reliance on Price v. Gurney is valid to a point, but the case

does not take him as far as he needs and claims it to do. It does stand

for the proposition that where a voluntary petition for bankruptcy is

filed in behalf of a corporation, the bankruptcy court does not acquire

jurisdiction unless those purporting to act for the corporation have

authority under local law "to institute the proceedings." Id. at 106.

And, for the corollary that where authority under local law is found

lacking, the court "has no alternative but to dismiss the petition." Ibid.

Price routinely has been interpreted and applied to that effect by

bankruptcy courts. See, e.g., In re Globus Corp., 195 B.R. 263, 265

(Bankr. S.D.N.Y. 1996); In re Giggles Restaurant, Inc., 103 B.R. 549,

553 (Bankr. D.N.J. 1989); In re Stavola/Manson Elec. Co., Inc., 94

B.R. 21, 24 (Bankr. D. Conn. 1988); see also Keenihan v. Heritage

Press, Inc., 19 F.3d 1255, 1258 (8th Cir. 1994).

Critically, however, Price did not address whether the required

authorization under local law could be found in ratification/relation

back doctrine. It therefore does not foreclose that possibility. And, as

indicated, it is upon that doctrine that the Trustee, who does not now

challenge the district court's determination that Roop was without

authority at the time of filing, now relies.

We therefore turn to that contention.

B.

Virginia of course recognizes and applies the general rule, as

expressed in Restatement (Second) of Agency § 82 (1958), that

Ratification is the affirmance by a person of a prior act

which did not bind him but which was done or professedly

done on his account, whereby the act, as to some or all per-

sons, is given effect as if originally authorized by him.

6

See, e.g., Kilby v. Pickurel, 396 S.E.2d 666, 668 (Va. 1990) (holding

that one may ratify an unauthorized act by "accepting its benefits with

full knowledge of the relevant facts, or, if upon learning of the act,

he fails promptly to disavow it"); Brewer v. First Nat'l Bank of

Danville, 120 S.E.2d 273, 279 (Va. 1961) (applying the principle,

with relation-back effect, to validate ultra vires act of corporation).

We are aware of no Virginia case applying the ratification principle

to validate unauthorized acts essential to judicial jurisdiction, but are

satisfied that it would be so applied by the Virginia courts. No Vir-

ginia case of which we are aware suggests that it would not be, and

other courts readily have applied ratification to validate by relation-

back a jurisdiction originally lacking in the very way here in issue.

See In re Martin-Trigona, 760 F.2d 1334, 1341 (2d Cir. 1985) (hold-

ing, on assumption of initial lack of authority to file voluntary petition

in behalf of corporation, that corporation and sole stockholder "acqui-

esced in and ratified" filing by their ensuing participatory conduct);

Boyce v. Chemical Plastics, Inc., 175 F.2d 839, 842-44 (8th Cir.

1949) (finding unauthorized filing ratified and jurisdiction thereby

validated by later board of directors' resolution); In re I.D. Craig Ser-

vice Corp., 118 B.R. 335, 337-38 (Bankr. W.D. Pa. 1990) (finding

unauthorized filing by corporation president ratified by ensuing con-

duct of board of directors); In re Hawaii Times Ltd., 53 B.R. 560, 563

(Bankr. D. Haw. 1985) (recognizing potential for ratification of unau-

thorized filing by formal action of board); see also In re Atlas Supply

Corp., 857 F.2d 1061, 1064 (5th Cir. 1988) (treating failure of fifty

percent shareholder to object for over a year to allegedly unauthorized

filing while participating in proceeding properly as"acquiescence" in

bankruptcy proceeding); Globus, 195 B.R. at 265-66 (finding "acqui-

escence" by thirty percent shareholder in unauthorized filing by sev-

enty percent shareholder without required unanimous shareholder

consent).

We therefore conclude that under Virginia law, the unauthorized

filing of a voluntary petition in bankruptcy in behalf of a corporation

might be ratified in appropriate circumstances by ensuing conduct of

persons with power to have authorized it originally. 2 Under such cir-

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2 Which may be the corporation itself, through the conduct or formal

action of its board of directors, see Martin-Trigona, 760 F.2d at 1341

7

cumstances, it could therefore serve as the local law source of the

authority required by Price v. Gurney for a voluntary bankruptcy fil-

ing in behalf of a corporation.

As indicated, however, Hager challenges ratification's availability

for that purpose in this case, both on factual and legal grounds. We

take these in order.

1.

Hager first challenges the district court's legal/factual finding of

ratification, claiming that the evidence does not support it. We dis-

agree.

Hager points out that though he indisputably was aware in March,

1993, of Roop's intention to file for bankruptcy in behalf of the cor-

poration, neither he nor his attorney received a copy of the March 29

resolution purportedly authorizing the filing. Hence, he says, an

essential element of ratification--full knowledge on his part of the

relevant facts--was not proven. This, however, disregards the undis-

puted evidence that as a creditor of the corporation he received notice

from the Trustee of the ongoing bankruptcy proceeding in November,

1993, and that he received a turnover demand from the Trustee in

December, 1993. The evidence therefore conclusively showed that

Hager necessarily knew of the ongoing bankruptcy proceeding by no

later than November of 1993. It further showed, without dispute, that

Hager was properly served in an adversary proceeding brought by the

Trustee in August, 1994, and that despite his obvious awareness of

the proceeding's existence from November 1993 at the latest and his

formal participation as a party to it from August, 1994, he raised no

objection to its validity until December 20, 1994, more than a year

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(conduct of corporation and sole shareholder); Boyce, 175 F.2d at 842-44

(formal resolution of board); Craig, 118 B.R. at 337-38 (conduct of

board), or, particularly in the case of small closely-held corporations,

shareholders with voting power sufficient to have provided original

authorization for the filing, see Atlas Supply , 857 F.2d at 1064

("acquiescence" in filing by holder of remaining fifty percent of shares);

Globus, 195 B.R. at 265-66 ("acquiescence" in filing by conduct of

holder of remaining thirty percent of shares).

8

after his first undisputed awareness that it had been filed and four

months after he had been made a formal party to it. During all this

period Hager as a fifty percent shareholder in this closely held corpo-

ration received the benefits of the protection against the claims of

creditors that was provided his equity interest by the automatic stay

provisions invoked by the bankruptcy filing. During all this period,

Hager took no step through available corporate governance proce-

dures to attempt withdrawal of the corporation from the voluntary

proceeding.

On this evidence, and under applicable local law, the district

court's finding of Hager's ratification of Roop's filing was not clearly

erroneous.

2.

Hager also contends, alternatively, that ratification, even if factu-

ally provable under local law, could not, as a matter of law, serve to

supply the subject matter jurisdiction that was lacking in the bank-

ruptcy court when the petition was filed. Two related reasons are

advanced: (1) that this would constitute the forbidden creation of sub-

ject matter jurisdiction by party consent, and (2) that it would violate

the rule that a federal court's jurisdiction is determined as of the date

of an action's commencement. We disagree as to both.

The jurisdiction-by-consent contention simply misconceives the

basis of the rule that subject matter jurisdiction cannot be so created.

That rule is concerned with litigation conduct aimed at, or urged as

having created, subject matter jurisdiction that does not as an objec-

tive matter exist. Thus, parties cannot by formally waiving the com-

plete diversity requirement or failing to object to its absence create a

diversity jurisdiction not otherwise present. See generally 5 A Charles

Alan Wright & Arthur R. Miller, Fed. Prac. and Proc. § 1350, at 204-

05 (2d ed. 1990).

Ratification conduct is not of this sort, but involves extra-judicial

primary conduct by parties that does not purport to waive jurisdic-

tional requirements nor to forego objection to their absence as inci-

dents of a litigation process in which they may then or later be

involved. Though its substantive effect may be, as in this case, the

9

supplying by relation-back of a necessary jurisdictional fact, the result

is a court then proceeding with an objectively grounded jurisdiction

rather than--as the no-jurisdiction-by-consent rule is intended to

prevent--without it.

Hager's jurisdiction-determined-as-of-time-of-commencement con-

tention also fails. It ascribes to and depends upon a greater rigidity in

the rule than is warranted. As we pointed out in Rowland v. Patterson,

882 F.2d 97, 98 (4th Cir. 1989) (en banc), this rule is not one of statu-

tory or constitutional limitation upon the jurisdiction of federal courts,

but exists simply as "one of federal interstitial common law, judicially

created, grounded in policy and necessity"--the necessity to have a

generally applicable and easily administered rule. As such, it is not

absolute but is subject to exceptions based upon countervailing policy

concerns of efficiency, finality and fairness. For example, it has long

been settled that a basis for diversity jurisdiction not present at the

time of commencement of an action may be supplied by later volun-

tary acts of a plaintiff, though not of a defendant. Powers v. Chesa-

peake & Ohio Ry. Co., 169 U.S. 92, 101 (1898); Higgins v. E.I.

DuPont de Nemours & Co., 863 F.2d 1162, 1166 (4th Cir. 1988); see

generally 14 A Charles Alan Wright et al., Fed. Prac. & Proc.

§ 3732, at 519-23 (2d ed. 1985). In such a situation, there is the anom-

aly also present in the instant case that the existence of jurisdiction

can depend upon the timing of a jurisdictional objection, but that is

simply an inescapable timing aspect of the adversarial process under

which jurisdictional as well as merits issues are presented for resolu-

tion in our litigation system.

The relation-back principle, though a legal fiction, is a well estab-

lished substantive one having wide application. See e.g., Caplin &

Drysdale, Chtd. v. United States, 491 U.S. 617, 627 (1989) (applying

relation-back principle to vest a government's right in forfeited prop-

erty "at the time of the criminal act giving rise to forfeiture"). Its

effect here, as an incident of the proven ratification of Roop's act, was

to supply, as of the date of filing, the necessary authorization for that

filing. The jurisdiction-as-of-commencement-of-action rule does not

prevent that result. See Martin-Trigona, 760 F.2d at 1341 (so holding,

assuming filing unauthorized at time); Boyce, 175 F.2d at 842-44

(same, where filing was unauthorized at time); Craig, 118 B.R. at

337-38 (same); Hawaii Times, 53 B.R. at 563 (same).

10

III.

Because we conclude that Roop's filing was ratified by Hager's

ensuing conduct as holder of all other shares in Preference, we affirm

the district court's denial of Hager's motion to dismiss for lack of

subject matter jurisdiction in the bankruptcy court.

AFFIRMED

11