Petition — Redington v. Touche Ross

Supreme Court, U. S,

FILED

SEP 22 1978

IN THE

Supreme Court of the United

BL _RODAK, JR., CLERK

OCTOBER TERM, 1978 —~

No 78-493

Epwarp 8. Reprneton, as Trustee for the liquidation of

the business of Weis Securities, Inc.,

Petitioner,

—against—

Toucue Ross & Co., and Securities INvestor

PRoTECTION CORPORATION,

Respondents.

CROSS-PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

James B. Kopak, Jr.

Attorney for Petitioner

Edward 8. Redington, as Trus-

tee for the liquidation of the

business of Weis Securities, Inc.

One Wall Street

New York, New York 10005

Of Counsel:

Joon 8. ALLEE

Joun W. Scuwartz

Hucues Hussaxp & REED

One Wall Street

New York, New York 10005

TABLE OF CONTENTS

Sa a emectemenllaonmenine

EET SE SC ee

Jurisdiction a TS RS

SESE

Statutes and Rules Involved .........22.........20...--:ceeseeeeee0-s

a seeensninantionsncenncen

Court of Bankruptcy Jurisdiction and Touche

A

The District Court’s Treatment of the Jurisdic-

I ccncsisnnbentnenior

The Court of Appeals’ Failure to Reach the

LLL

Reasons For Granting The Writ -.....................------.---.-2--

I.

IT.

Conclusion

The Extent Of A Claimant’s Consent To The

Jurisdiction Of A Court Of Bankruptcy Under

Section 23 Of The Bankruptey Act Is An Impor-

tant And Recurring Question Of Law That Has

Not Been, But Should Be, Decided By This Court

This Court Should Exercise Its Power Of Super-

vision To Determine The Extent Of The Juris-

diction Conferred On District Courts Under The

1970 Act, Or Remand To The Court Of Appeals

For Consideration Of That Issue

TABLE OF AUTHORITIES

Cases:

Associate Funding, Inc. v. Phipps, 464 F.2d 1136 (9th

Cir.), cert. denied, 409 U.S. 1064 (1972) ~......0........

Beldock v. Faberge, Inc., 4 Bank. Ct. Dec. 432 (1978)

13

15

12

11

ii

Chase National Bank v. Lyford, 147 F.2d 273 (2d Cir.

SEC vy. Albert € Maguire Securities Corp., 560 F.2d

569 (3d Cir. 1977)

PAGE

|. EE ‘siePadsiiaainnisaisssbigaiiaaiolaniana 11

Conway v. Union Bank of Switzerland, 204 F.2d 603

Ce Oe SII enccetictteenpiieiccitindiseqaicdicnsieneminens 10

Dwyer v. Franklin, 227 F.2d 152 (7th Cir. 1955), cert.

qemied, SHO UES. SOG. CLGGG) acces ncn seccecssersntncccveresereees 12

In re Beasley-Gilbert’s, Inc., 285 F. Supp. 359 (S.D.

aN R NE Nee RIA RET ON SINE Benin OR 12

In re Farrel Publishing Corp., 130 F. Supp. 449

(Pe | RSE nere) Mn en Pe... RE inn enr 11

In re Ira Haupt & Co., 289 F. Supp. 966 (S.D.N.Y

Pe - stiiadas Cae |

Katchen v. Landy, 382 U.S. 323 (1966) ..8, 9, 10

Kendall v. Stokes, 37 U.S. (12 Pet.) 524 (1838) ........ 13

Liberty Mutual Insurance Co. v. Mann, 73 F.R.D. 295

CANE IN: LUPO ubildsspnnctninsicicccbsneteisiliedbessialealekabeit gnats 12

Liman v. United Kingdom Mutual Steamship Assur-

ance Association, 297 F. Supp. 577 (S.D.N.Y.),

appeal dismissed, 418 F.2d 9 (2d Cir. 1969) 0.0.0.0... 11

Masterson v. Valley National Bank, 424 F.2d 296 (3d

RRR PN ee PON Ar ORE Am AE OD 12

Moore v. New York Cotton Exchenge, 270 U.S. 593

CRIED: cocciskdbacieestenesasbidiahiobisiielstiedeninlitinclicneialende oot t. 11

Nissho American Corp. v. Humphreys, 445 F.2d 1096

(5th Cir.), cert. denied, 404 U.S. 991 (1971) 0000... 12

Nortex Trading Corp. v. New oo 311 F.2d 163 ote

Cae, SS sietadedcebeees 11

Peters v. Lines, 275 F.2d 919 (9th Cir. 1960) 0.0... 12

Riehle v. Margolies, 279 U.S. 218 (1929) 14n.

Rudick v. Laird, 412 F.2d 16 (2d Cir.), cert. denied,

PO. Estes CR sted ttabennterabidgemie as 13

Schwartz v. Levine & Malin, Inc., 111 F.2d 81 (2d Cir.

IPED | necpnipeiccotasesistetendabionnanelicmentinuion 10

13n.

iii

PAGE

United Artists Corp. v. Masterpiece Productions, Inc.,

- AB Be Fv chp. | SeReeneeneemnsecre ee era 11

United Mine Workers v. Gibbs, 383 U.S. 715 (1966) 13

United States v. Heyward-Robinson Co., 480 F.2d

1077 (2d Cir. 1970), cert. denied, 400 U.S. 1021

SN Nees liter tahihcteaie einen thatched saieibietnimeesitivinesirsataneis 11

United States v. Roth, 164 F.2d 575 (2d Cir. 1948) 10, 11n.

Williams v. Austrian, 331 U.S. 642 (1947) -...........-..-..... 13, 14

Statutes, Rules and Regulations:

Bankruptey Act (11 U.S.C. $§ 1 et seq.)

I i i scicecndedinnen 14

Section 2a(7), 11 U.S.C. § 11a(7) ................ 7n., 13, 14

Bestion Se, 32 UG. 6 Ob etn 14&n.

Section 23b, 11 U.B.C-§$ SGD -...non..........eccnseceeee 7,9

Bbmtnces Bim, TE UT. FBO nna innccssc cece 9

Section 68a, 11 U.S.C. § 108a .......00 ne. 10 &n.

eS ERS 8 oY - SR een 13

Dt 1h Oe | |. ne 13, 14n.

Securities Investor Protection Act of 1970 (15

U.S.C. §§ 78aaa et seq.) as in effect prior to the

Securities Investor Protection Act Amendments

of 1978, Pub. L. No. 95-283, 92 Stat. 249 (1978) ....13-15

Bootie GS, 15 USC. 9 TOOCO 2 accccecccsccennccivncinesnees 13

Section 5(b) (2), 15 U.S.C. § 78eee(b) (2) 13 & n., 15n.

EE RE NOR , , xen eec emer 13

Section 6(b)(1), 15 U.S.C. § 78fff(b) (1) -..-... 13 & n.

Section 6(c) (1), 15 U.S.C. § 78fff(e) (1) ..14 & n., 15n.

28 U.S.C. § 1254(1) a 2

U.S. Const. Art. III ............... 14

iv

PAGE

Books and Treatises:

3 W. Collier, Bankruptcy, J 60.85[2] (14th ed. 1977) 13n.

4 W. Collier, Bankruptcy, {| 68.04[2.1] (14th ed.

BDCG) .~nvennissiiviinsinidibdlisiaiiieaacidiniaaa ane ER 1ln.

4 W. Collier, Bankruptcy, { 68.20[4] (14th ed. 1978) 10

3 Moore’s Federal Practice, $ 13.19[1] (1978) ........ 10

Congressional Materials:

Report of the House Comm. on the Judiciary on

Bankruptcy Law Revision, H.R. Rep. No. 95-595,

95th Cong. Ist Sess. (1977) ..... 8

Report of the Commission on the Bankruptcy Laws

of the United States, H.R. Doc. No. 93-137, Part I

(1973) .. 8

IN THE

Supreme Court of the United States

OCTOBER TERM, 1978

No.

Epwarp §. Reprneton, as Trustee for the liquidation of

the business of Weis Securities, Ine.

Petitioner,

— against —

ToucHe Ross & Co., and Securities INvEsTOR

PROTECTION CORPORATION,

Respondents.

——EE

CROSS-PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Petitioner Edward S. Redington (the “Trustee”) hereby

requests that a writ of certiorari issue to review the deci-

sion of the Court of Appeals for the Second Circuit,

entered on April 21, 1978.

The Trustee was appointed by order of the United

States District Court for the Southern District of New

York to liquidate the business of Weis Securities, Inc.,

(“Weis”) pursuant to the Securities Investor Protection

Act of 1970, 15 U.S.C. §§ 78aaa et seg. (“SIPA” or the “1970

Act”).! Prior to its liquidation Weis had been a broker-

dealer in securities and a member of the New York Stock

Exchange, Inc. (“the Exchange”).

1. After this action was commenced, the Securities Investor

Protection Act was amended in certain respects in 1978. Pub. L.

No. 95-283, 92 Stat. 249 (1978). Where reference is made to

the act as it existed before the amendments it will be called the

“1970 Act.”

2

A petition for certiorari, dated August 23, 1978, has pre-

viously been filed in this case by Touche Ross & Co.

(“Touche Ross”), the defendant-appellee below. The

Trustee is submitting a brief in opposition to Touche Ross’

petition contemporaneously herewith.

Opinions Below

The opinion of the Court of Appeals (1a-35a)? is unoffi-

cially reported at [Current] Fed. See. L. Rep. (CCH)

1 96,404. The opinion of the United States District Court

for the Southern District of New York (40a-58a) is re-

ported at 428 F. Supp. 483,

Jurisdiction

The judgment of the Court of Appeals was entered on

April 21, 1978 (36a-37a). On July 7, 1978, the Court of

Appeals denied Touche Ross’ timely petition for rehearing

(38a-39a). This Court’s jurisdiction is invoked under 28

U.S.C. § 1254(1).

Questions Presented

1. Whether, by filing regular and priority proofs of

claim in a bankruptey or SIPA liquidation proceeding, a

claimant subjects himself to the summary risdiction of the

district court as a Court of Bankruptcy (a) as to any

adverse claim by a Trustee that is reasonably related to the

ereditor’s claim or involves overlapping proof, or (b) as to

any adverse claim by a Trustee that would be considered

“mutual” under Section 68a of the Bankruptey Act, or (c)

only as to adverse claims by a Trustee that arise from the

same transaction or occurrence as the creditor’s claim?

2. Whether Congress conferred on a district court

supervising a SIPA liquidation under the 1970 Act the full

2. Numerals followed by the letter “a” refer to pages of the

Appendix attached to Touche Ross’ petition.

3

plenary jurisdiction of a Chapter X or federal equity

receivership court, rather than the more limited plenary

jurisdiction of a district court supervising a bankruptcy

under Chapters I-VII of the Bankruptcy Act?

Statutes And Rules Involved

Sections 2a(7), 23, 102 and 115 of the Bankruptcy Act,

11 U.S.C. §§ 11a(7), 46, 502 and 515, and sections 5(b) (2),

6(b)(1) and 6(c)(1) of the 1970 Act, 15 U.S.C. §§ 78eee(b)

(2), fff(b) (1) and fff(¢) (1) as in force when this action was

commenced are set forth in relevant part in the Appendix

hereto.

Statement Of The Case

The facts underlying this action are more fully set forth

in the Trustee’s brief in opposition to Touche Ross’ peti-

tion and in the brief in opposition submitted by the

Trustee’s co-respondent and co-plaintiff below, the Securi-

ties Investor Protection Corporation (“SIPC”). Only cer-

tain salient facts need be highlighted herein.

In 1972 Touche Ross, a firm of certified public aeccount-

tants, audited Weis and certified the adequacy of Weis’

financial statements “as at May 26, 1972” under Section 17

of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78a

et seq. (the “Exchange Act”), and the rules and regulations

thereunder; the audit failed to detect false and fraudulent

entries in Weis’ books and records, substantial overstate-

ments of Weis’ profitability and net worth and serious

misstatements of its net capital ratio. The audit is alleged

to have been at least negligent, if not grossly negligent and

reckless, and to have been the proximate cause of a SIPA

4

liquidation in which the Trustee has not been able to make

all of Weis’ customers and creditors whole.

In the complaint (reproduced in the Appendix to SIPC’s

brief in opposition to Touche Ross’ petition), the Trustee

asserted six separate claims for relief against Touche

Ross.’ One of these claims was predicated on Section 17

of the Exchange Act and is the subject of Touche Ross’

petition.

The Trustee’s other five claims for relief involve causes

of action under state ard common law principles of negli-

gence, breach of contract and breach of warranty. The

Trustee asserted these claims in his derivative capacity as

representative of Weis and as bailee of the property

entrusted to Weis by its customers. Jurisdiction over these

non-federal claims was based on principles of pendent

jurisdiction and on the jurisdiction of the District Court

as a Court of Bankruptcy under the 1970 Act and the pro-

visions of the Bankruptey Act incorporated into that Act.

Court of Bankruptcy Jurisdiction and

Touche Ross’ Consent

The Trustee had two grounds for invoking the jurisdic-

tion of the District Court as a Court of Bankruptcy. First,

the 1970 Act specifically gave the District Court the

“powers” of a Chapter X court and a federal equity receiv-

ership court as well as a court supervising an ordinary

bankruptey. A Chapter X or federal equity receivership

court would of course have plenary jurisdiction over any

action commenced by the Trustee in his home court.

Second, Touche Ross had consented to the summary juris-

diction of the District Court as a Court of Bankruptcy by

submitting two proofs of claim in the Weis liquidation. One

3. Eight claims are also asserted by SIPC. SIPC, however,

asserted different jurisdictional bases for its non-federal claims.

5

claim sought $67,972 for coramencing work on Weis’ 1973

audit as well as a smaller amount ($7,471) for services per-

formed by Touche Ross at Weis’ London and Paris offices.

The other claim sought $11,664 for services allegedly ren-

dered in connection with the investigation of Weis’ books and

records conducted in late April and May of 1973 by the

Securities and Exchange Commission and the New York

Stock Exchange. The bulk of this claim is attributable to

meetings with the SEC and the Exchange and “[s]ubstan-

tiation and documentation of alleged fraudulent bookkeep-

ing practices and entries.” These are the very practices

and entries which prevented Weis from being saved as a

going concern and for which the complaint alleges that

Touche Ross was responsible.

The District Court’s Treatment of

the Jurisdictional Issues

The District Court dismissed the complaint in its

entirety. Stating that “[t]he arguments for the Trus-

tee have been considered but cannot be accepted” (56a),

the Court held that it had only the plenary jurisdiction of

a court supervising a bankruptcy rather than the broader

jurisdiction of a Chapter X or federal equity receivership

court (56a). The Court also held that Touche Ross did not

consent to the summary jurisdiction of the Court for the

Trustee’s claims because the claims of Touche Ross and the

Trustee were not “mutual” within the meaning of Section 68

of the Bankruptey Act. (Id.)

The Court’s discussion of Touche Ross’ claims was

extremely perfunctory. The Court ignored the claim that

sought recovery for substantiation of the fraud and book-

keeping irregularities underlying the 1972 audit. Instead,

the Court emphasized only the small portion of one of the

6

claims which involved the services rendered by Touche

Ross at Weis’ London and Paris branch offices. The

Court’s analysis of the issue is contained in the following

two sentences:

“(T]he claim filed by Touche in the Weis liquida-

tion was for accounting work in European offices of

Weis in late 1972 and early 1973, as well as for a

Stock Exchange audit as of April 27, 1973. The

claim by the Trustee against Touche does not arise

out of any work done for Weis by Touche and for

which Touche filed a claim in the Weis liquidation.

The claims are not ‘mutual’ therefore but are

unrelated and the consent of Touche cannot be

found. * * *” (Citation omitted; emphasis in

original.) (56a.)

The Court of Appeals’ Failure to

Reach the Jurisdictional Issues

The question of the District Court’s plenary and sum-

mary jurisdiction as a Court of Bankruptcy was briefed

extensively by both the Trustee and Touche Ross in the

Court of Appeals.‘ However, the Court of Appeals, in

sustaining federal jurisdiction over the Trustee’s Section

17 claim, stated that “[b]ecause of the view we take of the

case, we need express no opinion as to the scope of bank-

ruptey jurisdiction in SIPA-receivership cases...” (3a

n. 3.) The court also did not decide the question of pendent

jurisdiction but remanded the case to the District Court

for further proceedings including a determination of that

issue. (15a.)

The Court of Appeals’ refusal to decide the extent of the

District Court’s jurisdiction as a Court of Bankruptcy has

4. The Trustee devoted approximately fifteen pages of his main

brief and ten pages of his reply brief to these issues; Touche Ross,

approximately thirty-two pages of its brief in opposition.

7

left this action in a peculiar posture. As matters now stand,

if the District Court on remand were to refuse to exercise

pendent jurisdiction (or if: this Court were to accept

certiorari and reverse on the Section 17 question) the

Trustee could find that he is out of federal court on his non-

Section 17 claims for relief, without ever having had a

resolution of the question of jurisdiction over these claims.

Even aside from the national importance of the jurisdic-

tional question (which is discussed more fully below at

pp. 7-12), this Court should grant certiorari at least for

the purpose of remanding for orderly consideration of the

jurisdictional issues by the Court of Appeals.

Reasons for Granting the Writ

The Extent Of A Claimant’s Consent To The Juris-

diction Of A Court Of Bankruptcy Under Section 23

Of The Bankruptcy Act Is An Important And Recur-

ring Question Of Law That Has Not Been, But Should

Be, Decided By This Court.

Section 23b of the Bankruptey Act (11 U.S.C. § 46b) ex-

pressly provides for the granting of summary jurisdiction

by consent as follows:

“Suits by the receiver and the trustee shall be

brought or prosecuted only in the courts where the

bankrupt might have brought or prosecuted them

if proceedings under this Act had not been insti-

tuted, wnless by consent of the defendant * * *”

(Emphasis added.)°

5. Section 23b is a limitation on the broad jurisdiction conferred

on district courts as courts of bankruptcy by Congress in Section

2a(7) of the Bankruptcy Act. There is no dispute that a district

court supervising a SIPA liquidation has at least the jurisdiction

conferred by Section 23b. As explained in Point II below, Touche

Ross does dispute whether the 1970 Act contained a broader grant of

jurisdiction to the district court.

8

A claimant who files a proof of claim in a bankruptcy or

SIPA liquidation consents to the jurisdiction of a Court

of Bankruptcy with respect to issues involved in deter-

mining that claim and certain counterclaims. See Kaichen

v. Landy, 382 U.S. 323, 326 n.1 (1966). Section 23b does

not, however, provide any guidance on the issue of what

adverse claims a claimant consents to have adjudicated

by a Court of Bankruptcy by filing a proof of claim. This

Court has never ruled on the issue apart from the context

of an adverse claim by a trustee to recover a preferential

transfer.

Resolution of the question of what other adverse claims a

creditor consents to have adjudicated by a Court of Bank-

ruptcy when he files a proof of claim is important to the ad-

ministration of both the Bankruptcy Act and SIPA and

would have a significant impact on the conduct of bank-

ruptey proceedings throughout the federal courts. As the

House Judiciary Committee has noted in reporting on the

need for revision of the bankruptcy laws:

“Under the current bankruptcy law, the juris-

diction of the bankruptcy [court] is limited by the _

concept of possession, either actual or constructive,

or consent, either express or implied. An enormous

ease law has developed around this provision.

Volumes have been written on what constitutes ade-

quate possession to give the bankruptcy court juris-

diction, and on what constitutes adequate consent.

* * * In an area of law in which time is of the essence,

the delay attendant upon litigation over jurisdic-

tion is needless and expensive.” (Footnotes

omitted.)

Report of the House Comm. on the Judiciary on Bank-

ruptey Law Revision, H.R. Rep. No. 95-595, 95th Cong.

Ist Sess. 43 (1977). See also Report of the Commission

on the Bankruptcy Laws of the United States, H.R. Doe.

No. 93-137, Part 1, 89-90 (1973).

9

Although issues concerning the scope of the jurisdiction

conferred on the bankruptcy courts by “consent of the

defendant” under Section 23b arise frequently in bank-

ruptey and liquidation proceedings, no uniform standard

is followed by the lower federal courts for determining

this issue; instead, a number of different approaches are

used which make it difficult, if not impossible, for litigants

to predict the extent to which a Court of Bankruptcy

may choose to exercise its summary jurisdiction. A deci-

sion by this court resolving this confusion would not only

permit courts of bankruptcy to decide uniformly issues

pertaining to their own summary jurisdiction but, perhaps

even more importantly, it would clarify for claimants and

litigants in bankruptcy proceedings throughout the coun-

try their rights and liabilities in subjecting themselves to

the jurisdiction of a Court of Bankruptcy.

More than a decade ago in Katchen v. Landy, 382 U.S.

323 (1966), this court accepted certiorari to decide a

related question because of its importance to the adminis-

tration of the Bankruptey Act. Id. at 326. The Court

there held that where a creditor submits a claim in bank-

ruptey summary jurisdiction exists in the Court of Bank-

ruptey to order the return of a voidable preference because

the determination of whether a claimant has received a

voidable preference is a prerequisite to determining the

size and allowability of his claim under Section 57g of

the Bankruptcy Act (11 U.S.C. § 93g). The Court reasoned

that, the determination that there had been a preference

would be res judicata in any later plenary suit brought by

the Trustee to recover the preference, and therefore con-

cluded that “it can hardly be doubted that there is also:

summary jurisdiction to order the return of the prefer-

ence.” 382 U.S. at 334. Katchen did not decide whether

the same rule applied to other types of claims by a Trustee

because the petition for certiorari in that case had been

limited to the preferential transfer question. Id. at 326.

10

The rationale applied by this Court in Katchen logically

applies to any “mutual debts” since, under Section 68a of

the Bankruptey Act (11 U.S.C. §108a) such mutual debts

must be set off and “the balance only . . . allowed o« paid.’”®

As with preferences, such claims seemingly must be de-

termined in order to determine the size and allowability of

the ereditor’s claim. Thus, once a claimant files its proof of

claim, summary jurisdiction should exist to adjudicate the

merits of any mutual claim, even a wholly unrelated claim,

as a set-off which would diminish or defeat the creditor’s

claims. See Conway v. Union Bank of Switzerland, 204

F.2d 603, 607 (2d Cir. 1953); United States v. Roth, 164

F.2d 575, 578 (2d Cir. 1948); 4 W. Collier, Bankruptcy

§ 68.20[4] at 946 (14th ed. 1978). See 3 Moore’s Federal

Practice § 13.19[1] at 482-83 (1978). And, as in Katchen,

once the merits of the adverse claim have been adjudicated

between the parties in a Court of Bankruptcy, that adjudi-

cation should be res judicata in any later action brought

to recover the balance by which a Trustee’s counter-

claim exceeds the ereditor’s original claim. Conway v.

Union Bank of Switzerland, supra, 204 F.2d at 607;

Schwartz v. Levine & Malin, Inc.,111 F.2d 81 (2d Cir. 1940).

Accordingly, the principle of Katchen v. Landy should

logically extend not only to preferences but to any mutual

claim capable of being set-off under Section 68.

However, the lower federal courts have not applied the

same rational as Katchen. Instead, they have applied a

6. Section 68 provides in pertinent part as follows:

“Section 68. Set-Offs and Counterclaims.

a. In all cases of mutual debts or mutual credits between

the estate of a bankrupt and a creditor the account shall be

stated and one debt shall be set off against the other, and

the balance only shall be allowed or paid.”

The District Court apparently believed that mutuality under Section

68 should be the controlling standard but erred in its consideration

11

number of different standards which makes it difficult, if

not impossible, to predict the extent to which a particular

Court of Bankruptcy may choose to exercise its summary

jurisdiction. |

In the Second Circuit, for example, a party is

deemed to consent to the court’s jurisdiction and volun-

tarily submits to the federal court not only in regard to

securing his own relief, but to any claim which the Trustee

might reasonably raise against him in the same proceeding

pursuant to his duty to collect the estate. Nortex Trading

Corp. v. Newfield, 311 F.2d 163, 164 (2d Cir. 1962) ; Chase

National Bank v. Lyford, 147 F.2d 273, 277 (2d Cir. 1945) ;

Liman vy. United Kingdom Mutual Steamship Asswrance

Association, 297 F. Supp. 577, 579-81 (S.D.N.Y.), appeal

dismissed, 418 F.2d 9 (2d Cir. 1969) ; In re Ira Haupt & Co.,

289 F. Supp. 966, 970-71 (S.D.N.Y. 1968); see Beldock v.

Faberge Inc., 4 Bankr. Ct. Dee. 432 (1978) (decision of Bank-

ruptey Judge Galgay). All that appears to be required is a

logical relationship between the respective claims, or over-

lapping proof. EF.q., In re Farrel Publishing Corp., 130 F.

Supp. 449, 452 (S.D.N.Y. 1955) (“In effect the [Bank-

ruptey] Act declares a statutory policy to settle all related

claims.”); Liman v. United Kingdom Mutual Steamship

Assurance Association, supra; In re Ira Haupt & Co.,

supra. See generally, Moore v. New York Cotton

Exchange, 270 U.S. 593, 609-10 (1926); United States v.

Heyward-Robinson Co., 430 F.2d 1077 (2d Cir. 1970), cert.

denied, 400 U.S. 1021 (1972); United Artists Corp. v. Mas-

terpiece Productions, Inc., 221 F.2d 213, 216 (2d Cir. 1955).

of that standard. (56a.) Claims are “mutual” within the meaning of

Section 68 if they are “in the same right and between the same par-

ties, standing in the same capacity.” 4 W. Collier, Bankruptcy J 68.04

2-1] at 867 (14th ed. 1978); United States v. Roth, 164 F.2d 575,

78 (2d Cir. 1948).

12

Other courts, though also recognizing the principle of

consent to the jurisdiction of a Court of Bankruptcy,

appear to apply a somewhat stricter standard. These cases

suggest that the consent to jurisdiction to be implied from

the invocation of the jurisdiction of a Court of Bankruptcy

is limited to “closely related” claims or claims in the nature

of “compulsory counterclaims”. Peters v. Lines, 275 F.2d

| 919, 925 (9th Cir. 1960); Nissho American Corp. v. Hum-

phreys, 445 F.2d 1096, 1098-99 (5th Cir. 1971), cert. denied,

404 U.S. 991 (1971); Masterson v. Valley National Bank,

424 F.2d 296, 298-99 (3d Cir. 1970) ; Associate Funding, Inc.

v. Phipps, 464 F.2d 1136, 1138-39 (9th Cir.), cert. denied,

409 U.S. 1064 (1972); Dwyer v. Franklin, 227 F.2d 152,

156 (7th Cir. 1955), cert. denied, 350 U.S. 995 (1956) ; Lib-

erty Mutual Insurance Co. v. Mann, 73 F.R.D. 295, 296

(E.D. Mo. 1976) ; In re Beasley-Gilbert’s, Inc., 285 F. Supp.

359, 361 (S.D. Ohio 1968).

Here, the Trustee’s claims arose out of Touche Ross’ on-

going role as Weis’ accountants preceding the commence-

ment of the Weis liquidation; the evidence relevant to

Touche Ross’ claims will overlap the evidence necessary to

support the Trustee’s claims; and some of Touche Ross’

claims involve work done with respect to the very false

entries which the Trustee alleges Touche Ross failed to

detect in its 1972 audit. Accordingly, both mere mutuality

and logical relationship exist between the Trustee’s and

Touche Ross’ claims, although they may not be closely

related enough to satisfy a strict compulsory counterclaim

standard. At a time when the need to clarify the jurisdic-

tion of Courts of Bankruptcy is widely recognized, this

case presents a uniquely appropriate factual opportunity

for this Court to resolve the question of what standard

should be applied under Section 23b.

13

This Court Should Exercise Its Powers Of Supervi-

sion To Determine The Extent Of The Jurisdiction

Conferred On District Courts Under The 1970 Act, Or

Remand To The Court Of Appeals For Consideration

Of That Issue.

Under the 1970 Act, jurisdiction of SIPA courts is de-

termined by reference to Sections 5 and 6 of that Act (15

U.S.C. §§ 78eee and 78fff) and Sections 2a(7), 102 and 115

of the Bankruptcy Act (11 U.S.C. §§ 11(a) (7), 502 and 515),

as made applicable by the 1970 Act. These provisions con-

fer on the district courts supervising SIPA liquidations

the “powers” of a court supervising a Chapter X proceed-

ing (the 1970 Act §§ 5(b) (2), 6(b)(1)) as well as the power

of a district court supervising an equity receivership

under Section 115 of the Bankruptcy Act.

In Section 5(b)(2) of the 1970 Act Congress expressly

provided that a court in which a SIPA proceeding is initi-

ated shall have the “powers ... of a court of bankruptcy

and of a court in a proceeding under Chapter X of the

Bankruptcy Act.” (Emphasis added.)’ Under the deci-

sions of this Court, this grant of “power” to a federal court

is a jurisdictional grant. United Mine Workers v. Gibbs,

383-U.S. 715, 725 (1966) ; Kendall v. Stokes, 37 U.S. (12 Pet)

524, 622-23 (1838); Rudick v. Laird, 412 F.2d 16, 20 (2d

Cir.), cert. denied, 396 U.S. 918 (1969). In Williams v. Aus-

trian, 331 U.S. 642, 659-60 n.45 (1947), this Court noted

that the “powers” provision in Section 115 of the Bank-

ruptey Act “has been interpreted as jurisdictional” by the

7. In Section 6(b)(1) of the 1970 Act Congress augmented and

reinforced the grant of “power” to the District Courts contained in

Section 5(b) (2) by providing a SIPA Trustee with all the powers of

both a bankruptcy and a Chapter X Trustee. See SEC v. Albert &

Maguire Securities Co., 560 F.2d 569, 574 (3d Cir. 1977); 3 W.

Collier, Bankruptcy { 60.85[2] at 1247 (14 ed. 1977).

14

federal courts. Article III of the Constitution itself uses

the word “power” in this jurisdictional sense.

By providing the SIPA court with the “power” of a

Chapter X court, Congress conferred on SIPA courts the

full range of “power” conferred on district courts under the

bankruptcy clause in Section 2b of the Bankruptcy Act (11

U.S.C. § 11b). This grant includes the plenary jurisdictional

“power” conferred by Section 2a(7) and exercised in actions

brought by Chapter X trustees. See Williams v. Austrian,

331 U.S. 642, 646 (1947). This grant of jurisdiction to

SIPA courts is more than ample to support non-federal

claims such as the Trustee’s in this case.

The District Court, however, rejected the application

of these provisions to the issue of jurisdiction and instead

focused improperly on Section 6(c)(1) of the 1970 Act.

Relying on that section—which deals with the conduct of

liquidation proceedings, not the jurisdiction of the district

court—the Court erroneously concluded that its jurisdic-

tion was limited by Section 23 of the Bankruptcy Act to that

of a court supervising bankruptcy proceedings under Chap-

ters I-VIT of the Bankruptey Act. (55a-56a.)°

8. The grant also includes the jurisdictional Section 115 (11

U.S.C. § 515) which gives the federal court of the trustee’s appoint-

ment all the ancillary jurisdiction of the “home court” in federal

equity receiverships. That jurisdiction entitles the Court which

appointed such a receiver to adjudicate any action instituted by its

receiver (here the Trustee) regardless of the existence of inde-

pendent jurisdictional grounds. See Riehle v. Margolies, 279 U.S.

218, 223 (1929).

9. Section 23 is not referred to anywhere in the 1970 Act, but

Section 6(c)(1) does refer to sections referred to in Section 102 of

the Bankruptcy Act. Section 23 is one such section. Except in cases

of consent, and in actions involving preferential or fraudulent trans-

fers, Section 23 limits the district court’s jurisdiction over an action

between a trustce and an adverse party to that which would have

existed in an action between the bankrupt and the adverse pao |

before the bankruptcy. Section 6(c)(1) states, however, that suc

provisions of the Bankruptcy Act as it may incorporate apply to the

conduct of liquidation proceedings only to the extent that they are

15

Although the recent amendments to SIPA have altered

some of the language of the 1970 Act, the extent of a SIPA

court’s jurisdiction remains an important, unresolved issue.

Moreover, as explained at pages 6-7 supra, review or

remand on the plenary jurisdictional question as well as the

consent question is necessary to cure the Second Circuit’s

error in failing to reach the jurisdictional issues.

Conclusion

For the foregoing reasons, the Trustee’s cross-petition

for a writ of certiorari should in all respects be granted.

Dated: September 22, 1978

Respectfully submitted,

James B. Kosak, Jr.

Attorney for Petitioner

Edward S. Redington, as Trus-

tee for the liquidation of the

business of Weis Securities, Ine.

One Wall Street

New York, New York 10005

Of Counsel:

JoHNn S. ALLEE

JoHn W. ScHWARTZ

Hvuaurs Husparp & REep

One Wall Street

New York, New York 10005

consistent with the other provisions of the 1970 Act. Were Section

6(c)(1) interpreted as jurisdictional and its indirect reference to

Section 23 interpreted to determine the jurisdiction of SIPA courts,

the section would be rendered inconsistent with Section 5(b)(2).

APPENDIX

nee ee

la

Securities Investor Protection Act of 1970, as in effect prior

to the Securities Investor Protection Act Amendments of

1978,

Pub. L. No. 95-283, 92 Stat. 249 (1978).

See. 5(b) (2) (15 U.S.C. § 78eee(b) (2)).

See.

Sec.

“(2) EXCLUSIVE JURISDICTION OVER DEBTOR.—Upon

the filing of an application pursuant to subsection

(a) (2), the court to which application is made shall

have exclusive jurisdiction of the debtor involved

and its property wherever located with the powers,

to the extent consistent with the purposes of this

Act, of a court of bankruptcy and of a court in a pro-

ceeding under chapter X of the Bankruptcy Act.”

6(b) (1) (15 U.S.C. § 78fff(b) (1)).

(1) Trustee powers.—A trustee appointed under

section 5(b) (3) (hereinafter referred to as “trustee”)

shall be vested with the same powers and title with

respect to the debtor and the property of the debtor,

and the same rights to avoid preferences, as a trustee

in bankruptcy and a trustee under chapter X of the

Bankruptcy Act have with respect to a bankrupt and

a chapter X debtor.”

6(c)(1) (15 U.S.C. § 78f££(c) (1)).

“(1) GENERAL PROVISIONS APPLICABLE.—Except as

inconsistent with the provisions of this Act and

except that in no event shall a plan of reorganization

be formulated, a liquidation proceeding shall be con-

ducted in accordance with, and as though it were

being conducted under, the provision of chapter X

and such of the provisions (other than section 60e)

of chapters I to VII, inclusive, of the Bankruptcy

Act as section 102 of chapter X would make appli-

cable if an order of the court had been entered direct-

ing that bankruptcy be proceeded with pursuant to

the provisions of such chapters I to VII, inclu-

sive ** id

Bankruptcy Act

Sec.

Sec.

2a(7) (11 U.S.C. § 11(a)(7)).

“a. The courts of the United States hereinbefore

defined as courts of bankruptcy are hereby created

courts of bankruptcy and are hereby invested, within

their respective territorial limits as now established

or as they may be hereafter changed, with such juris-

diction at law and in equity as will enable them to

exercise original jurisdiction in proceedings under

this Act, in vacation, in chambers, and during their

respective terms, as they are now or may be here-

after held, to—

* * * (7) Cause the estates of bankrupts to be col-

lected, reduced to money, and distributed, and deter-

mine controversies in relation thereto, except as

herein otherwise provided * * *.”

23 (11 U.S.C. § 46).

“a. The United States district courts shall have

jurisdiction of all controversies at law and in equity,

as distinguished from proceedings under this Act,

between receivers and trustees as such and adverse

claimants, concerning the property acquired or

claimed by the receivers or trustees, in the same

manner and to the same extent as though such pro-

ceedings had not been instituted and such contro-

versies had been between the bankrupts and such

adverse claimants.

b. Suits by the receiver and the trustee shall be

brought or prosecuted only in the courts where the

bankrupt might have brought or prosecuted them if

proceedings under this Act had not been instituted,

unless by consent of the defendant, except as pro-

vided in sections 60, 67, and 70 of this Act.”

3a

See. 68a (11 U.S.C. § 108a).

§ 68. Sets-Offs and Counterclaims. a. In all cases

of mutual debts or mutual credits between the estate

of a bankrupt and a creditor the account shall be stated

and one debt shall be set off against the other, and the

balance only shall be allowed or paid.

See. 102 (11 U.S.C. $502).

“The provisions of chapters I to VII, inclusive, of

this Act shall, insofar as they are not inconsistent or

in conflict with the provisions of this chapter, apply

in proceedings under this chapter: Provided, how-

ever, That section 23, subdivisions h and n of section

57, section 64, and subdivision f of section 70, shall

not apply in such proceedings unless an order shall

be entered directing that bankruptcy be proceeded

with pursuant to the provisions of chapters I to VII,

inclusive.”

See. 115 (11 U.S.C. $515).

“Upon the approval of a petition, the court shall

have and may, in addition to the jurisdiction, powers,

and duties hereinabove and elsewhere in this chapter

conferred and imposed upon it, exercise all the

powers, not inconsistent with the provisions of this

chapter, which a court of the United States would

have if it had appointed a receiver in equity of the

property of the debtor on the ground of insolvency

or inability to meet its debts as they mature.”