Petition — Sullivan v. Robinson, 103 S. Ct. 1191 (1983) (No. 82-1004)

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82-1004 piper Coun, US

VEC 13 1962

No. 2 ALEXANDER L. STEVAS,

CLERK

In the

Supreme Court of the United States.

Ocroser Term, 1982.

DANIEL SULLIVAN,

PETITIONER,

v~.

ROBERT ROBINSON, TrusTEE IN BANKRUPTCY OF

D.C. SULLIVAN & CO., INC.,

RESPONDENT.

Petition for a Writ of Certiorari to the

United States Court of Appeals for the First Circuit.

LAWRENCE R, ConHeEN,

Counsel of Record,

33 Mt. Vernon Street,

Boston, Massachusetts 02108.

(617) 742-5878

JaMEs F, FREELEY, Jr.

GERALD T. ANGLIN,

Freeney & FREELEY,

183 State Street,

Boston, Massachusetts 02109.

(617) 423-5010

BATEMAN & SLADE, INC. BOSTON, MASSACHUSETTS

Questions Presented for Review.

1. Does Article III of the United States Constitution permit

the pending of parties over whom there exists no independent

basis for exercising jurisdiction?

2. Did Congress in enacting the Bankruptcy Act and the

Bankruptcy Code intend to preclude federal courts from exer-

cising jurisdiction over state created breach of fiduciary duty

claims?

3. Whether district courts are precluded from assuming

jurisdiction over parties pended to federal question claims ab-

sent interpretation of Article III and statute under which fed-

eral question jurisdiction arises.

Table of Contents.

Opinions below 2

Jurisdiction 2

Statutory provisions involved 2

Statement of the case 2

Reasons for the writ 5

I. The court below erred fundamentally by failing

to undertake required analysis involving congres-

sional intention in bankruptcy statutes and the

limits of Article III jurisdiction 5

II. The First Circuit decision violates the require-

ments of the Bankruptcy Act and Code 6

III. The First Circuit decision creates conflict in

the circuits 8

IV. The decision below will upset the distribution of

powers between the federal government and the

states 9

Conclusion 10

Appendix follows p. 10

Table of Authorities Cited.

CASES.

Aldinger v. Howard, 427 U.S. 1 (1976) 6, 8,9

Ayala v. United States, 550 F.2d 1196 (9th Cir. 1977) 8

Elliott v. Glushon, 390 F.2d 514 (9th Cir. 1967) 7

Mine Workers v. Gibbs, 383 U.S. 715 (1966) 8

ii TABLE OF AUTHORITIES CITED.

Moor v. County of Alameda, 411 U.S. 693 (1973) 9

Transok Pipeline Co. v. Darks, 565 F.2d 1150 (10th

Cir. 1977) 5

STATUTES,

United States Constitution

Article III 8,9, 10

11 U.S.C. § 107d(2)(a) (repealed 1978) (Bankruptcy

Act, § 67d(2)(a)) 2,3

11 U.S.C. § 107d(2)(d) (Bankruptcy Act § 67d(2)(d) ) 2,3

11 U.S.C. § 110(a)(4) 7

28 U.S.C. § 1254(1) 2

28 U.S.C. § 1331 2

Bankruptcy Act

§ 67 7

§ 67d 5,7

§ 67e 5

§ 70 7

Federal Tort Claims Act 8

No. - ,

In the

Supreme Court of the United States.

Ocroser Term, 1982.

DANIEL SULLIVAN,

PETITIONER,

v~.

ROBERT ROBINSON, Trustee in BANKRUPTCY OF

D.C. SULLIVAN & CO., INC.,

RESPONDENT.

Petition for a Writ of Certiorari to the

United States Court of Appeals for the First Circuit.

The petitioner, Daniel Sullivan, respectfully prays that a

writ of certiorari issue to review the judgment and opinion of

the United States Court of Appeals for the First Circuit en-

tered in this proceeding on July 19, 1982.

Opinions Below.

The opinion of the Court of Appeals is reported at 685 F.2d

729 (1st Cir. 1982). Relevant excerpts are appended. The full

opinion is reproduced in the petition for certiorari filed by co-

defendants.

Jurisdiction,

Denial of petition for rehearing by the Court of Appeals for

the First Circuit was entered on September 14, 1982. This

petition for certiorari was filed within ninety (90) days of that

date. This Court’s jurisdiction is invoked under 28 U.S.C.

§ 1254(1).

Statutory Provisions Involved.

The Bankruptcy Act, 11 U.S.C. § 107d(2)(a) (repealed

1978); 11 U.S.C. § 107d(2)(d); and 28 U.S.C. § 1331.

Statement of the Case.

This was an action by the trustee in bankruptcy of D.C. Sul-

livan & Co., Inc, against the defendants, Christopher Recklitis,

Watts Detective Agency, Consolidated Service Corporation,

Billy R. Otte, and Daniel Sullivan to avoid and recover an

alleged fraudulent transfer of assets and for damages for un-

lawful diversion of corporate assets in breach of the defend-

ants’ fiduciary duty towards the company. Count One of the

plaintiff’s complaint was brought pursuant to the Bankruptcy

Act, § 67d(2)(a) (formerly 11 U.S.C. § 107d(2)(a)) (the

Bankruptcy Code contains a similar provision 11 U.S.C. § 548

(1979)) and alleges that within the year, prior to the filing of

the bankruptcy petition and while the Sullivan Company was

insolvent, the defendants transferred assets of the debtor to

Watts for less than fair consideration. Count Two, brought

under § 67d(2)(d), also alleged fraudulent transfer, but added

the element that the defendants actually intended to hinder, de-

lay or defraud either existing or future creditors. Count Three,

a pendent state claim, alleged that the defendants transferred

assets of the Sullivan Company in violation of their fiduciary

duty to the corporation. The defendants never alleged that de-

fendant Sullivan received any transferred assets.

The defendants each duly filed answers. After several years

in which extensive discovery was obtained, the court issued a

pre-trial order, setting forth the admitted facts, disputed facts,

issues of fact and issues of law. Review of the pre-trial order

demonstrates conclusively that there was no allegation that

Sullivan received transferred assets (pp. 12a-13a, infra).' The

defendants’ motions for summary judgment were denied. The

trial was held from March 11, 1980 until March 17, 1980.

Prior to the jury’s verdict, the defendant, Daniel Sullivan,

moved for a directed verdict, which motion the court denied.

The jury entered judgment in favor of the plaintiff against all

defendants on Count One, in favor of the defendants on Count

Two and on Count Three in favor of the plaintiff as against

Daniel Sullivan and Billy R. Otte. On March 20, 1980, the

court entered judgment.

Each defendant filed various post-trial motions. The de-

fendant, Daniel Sullivan, filed a motion for judgment not-

withstanding the verdict and a motion for a new trial, which

were denied by the court on August 28, 1981.

' References to the appendix are to the selected portions reproduced at the

end of this brief.

The defendant Sullivan appealed from the denial of his mo-

tion for a directed verdict, from the judgment entered in the

jury verdict and from the denial of his motion for a new trial

and from judgment notwithstanding the verdict.

The United States Court of Appeals reversed the decision of

the United States District Court of Massachusetts in so far as

the district court decision imposed liability under Count One

of the plaintiff’s complaint, which count had been predicated

upon an alleged violation of the Federal Bankruptcy Act by

defendant Sullivan. In addition, the United States Court of

Appeals affirmed the decision of the United States District

Court imposing liability on D.C. Sullivan for breaching a

Massachusetts created fiduciary duty to D.C. Sullivan & Co.,

Inc.

Daniel Sullivan petitioned the United States Court of Ap-

peals for rehearing, setting forth as grounds (1) that the dis-

trict court lacked jurisdiction to entertain state law claims

against the appellant, and (2) that reconsideration and reversal

were warranted as the jury determination had been based on

irrelevant “director mistakes,” tenuous “abandonment” offer-

ings, confusing jury instructions and an absence of damages

evidence.

On September 14, 1982, the United States Court of Appeals

denied the plaintiff’s petition for rehearing. The Appeals

Court stated: “The facts as to whether Sullivan or Otte re-

ceived any of the transferred property could not be determined

until after trial.” (See order denying rehearing (pp. 10a-1la,

infra).) In fact, however, as the record makes indisputably

clear (see pre-trial order (pp. 12a-13a, infra)) it was known

and understood by all parties at all times that defendant Sulli-

van never received any transferred assets. Moreover, it was

known and understood that receipt of property by Sullivan

would not be an issue at trial.

Reasons for the Writ.

I. THe Court BELow Errep FUNDAMENTALLY BY FAILING TO

UNDERTAKE REQUIRED ANALYSIS INVOLVING CONGRESSIONAL

INTENTION IN BANKRUPTCY STATUTES AND THE LIMITS OF

ARTICLE III JurispicTion.

The issue presented for the Court is whether, absent analysis

and opinion, a federal court can expand the concept of pend-

ent jurisdiction by enabling a plaintiff to pend both parties

and state law claims to Bankruptcy Act claims brought against

a co-defendant. In this case, the plaintiff alleged that defend-

ants Sullivan, Otte and Recklitis violated §§ 67d and 67e of the

Bankruptcy Act and that they breached their state law duties

to D.C. Sullivan & Co., Inc. The United States Court of Ap-

peals reversed the finding of the jury that Sullivan and Otte

had violated 67d and 67e. In reversing, the court indicated

that since 1967 it has been an “open and shut question of law”

that actions under 67d and 67e cannot be sustained against a

defendant unless that person has been the recipient of fraudu-

lently transferred property (pp. 2a-4a, infra).

Notwithstanding its conclusion that plaintiff's 67d and 67e

contentions were facially defective, the court, in denying

plaintiff’s petition for rehearing, held that jurisdiction existed

to hear the state law breach of fiduciary duty claims. In so

holding, the court, without the benefit of analysis or argument

by either the district court or the Court of Appeals endorsed an

expansion of pendent jurisdiction that enabled the piaintiff to

pend defendant Sullivan and the state law breach of fiduciary

duty claims to the 67d and 67e claims brought against the co-

defendants Watts Detective Agency and James Recklitis. In

its denial of petition for rehearing, the Court of Appeals stated

that trial was necessary to determine whether facts existed

supporting a receipt of fraudulent property by Sullivan (pp.

10a-lla, infra). In truth, however, as the record makes indis-

putably clear (see pre-trial order at (pp. 12a-13a, infra)), all

parties recognized from the outset of litigation that there

would not even be an allegation that Sullivan received fraudu-

lently transferred property.

The United States Court of Appeals’ treatment of the juris-

dictional question represents either a flouting of established

principles governing pendent jurisdiction or an extension of

the concept of pendent jurisdiction as most recently defined in

Aldinger v. Howard, 427 U.S. 1, 18 (1976). In a proceeding

such as the one at hand, before a court can permit a plaintiff to

pend a state law claim against a defendant to a bankruptcy

claim against defendant (over whom there exists no independ-

ent basis for jurisdiction), the court must examine whether the

Bankruptcy Act by negative implication precludes such claims.

Second, if a court can satisfy itself that the Bankruptcy Act per-

mits such claims, the court must then satisfy itself that Article

III permits the exercise of jurisdiction. Id.

Given that the two analyses required by Aldinger were not

undertaken, and given that recurring, far reaching and com-

plex questions of law inhere in this appeal, justification exists

for granting a writ of certiorari.

II. Tue First Circuit Decision VIOLATES THE REQUIREMENTS

OF THE BANKRUPTCY ACT AND Cope.

The issue presented for the Court is whether in passing the

Bankruptcy Act, Congress intended to preclude the pending of

state law claims against non-recipients of fraudulently trans-

ferred property to Bankruptcy Act claims against recipients of

fraudulently transferred property.

In passing the Bankruptcy Act, Congress specifically and by

negative implication indicated that it did not want Bankruptcy

Act plaintiffs pending state law breach of fiduciary obligation

claims against corporate directors to Bankruptcy Act claims

against non-director recipients of transferred property.

The Bankruptcy Act “suggest[s] with some certainty that re-

covery may be had only against persons who have received the

property in question.” Elliott v. Glushon, 390 F.2d 514, 515

(9th Cir. 1967).

Title 11 of the United States Code, § 110(a)(4) gave the trus-

tee his procedural rights to enforce section 67d and provided

that if a transfer is made which is fraudulent under any appli-

cable federal or state law, “the trustee shall reclaim and recov-

er such property or collect its value from and avoid such trans-

fer . . . against whoever may hold or have received it... .

(Emphasis added.)” Elliott v. Glushon, supra, at 515.

The court in Elliott v. Glushon, supra, noted that the pur-

pose of §§ 67d and 70 of the Act

is clearly to preserve the assets of the bankrupt; they are

not intended to render civilly liable all persons who may

have contributed in some way to the dissipation of those

assets. The Act carefully speaks of conveyances of prop-

erty as being “null and void,” and authorizes suit by the

trustee to “reclaim and recover such property or collect its

value”. The actions legislated against are not “prohibit-

ed”; those persons whose actions are rendered “null and

void” are not made “liable”; and terms such as “dam-

ages” are not used. The legislative theory is cancellation,

not the creation of liability for the consequences of a

wrongful act. (Footnote omitted.)

Id. at 516.

In view of the limited remedy created by Congress in the

Bankruptcy Act, it seems beyond dispute that Congress did not

wish to have the federal courts being used to entertain state

law claims against co-defendants of defendants in Bankruptcy

Act proceedings.

In view of the failure to comply with Aldinger, and in view

of the significance of the questions involving Congressional in-

tentions in the Bankruptcy Act, justifications exist to issue a

writ of certiorari.

III. Tue First Circuit Decision Creates ConFLicr

IN THE CIRCUITS.

In the action at hand, the United States Court of Appeals for

the First Circuit has effectively assumed that Article III of the

United States Constitution permits the pending of defendant

parties (over whom no independent jurisdictional basis exists)

to federal question claims brought against co-defendants. The

First Circuit result in this action accords with the approach

adopted by the Tenth Circuit Court of Appeals in Transok

Pipeline Co. v. Darks, 565 F.2d 1150 (10th Cir. 1977). In

Transok, the Tenth Circuit concluded that Mine Workers v.

Gibbs, 383 U.S. 715 (1966), Aldinger v. Howard, supra, and

several pre-Aldinger cases supported its holding that power

exists to exercise pendent party jurisdiction. Id.

The approach to pendent party jurisdiction apparently en-

dorsed by the First and Tenth Circuits stands diametrically

opposed to the holding of the Ninth Circuit Court of Appeals.

In Ayala v. United States, 550 F.2d 1196 (9th Cir. 1977), the

Ninth Circuit Court expressly reaffirmed its earlier rejection of

the doctrine of pendent party jurisdiction. Id. at 1198, 1200.

In that case, the court held that the doctrine of pendent party

jurisdiction stands beyond the constitutional parameters of

Article III and cannot be used to add a defendant to a claim

brought against the United States under the Federal Tort

Claims Act. Id. at 1197-1200.

The conflict between the First Circuit and the Ninth Circuit

justifies the issuance of a writ of certiorari.

IV. Tue Decision BELOw WiLL Upset THE DISTRIBUTION OF

Powers BETWEEN THE FEDERAL GOVERNMENT AND THE STATES.

Article III of the United States Constitution sets forth the

parameters of the jurisdictional latitude allowed federal

courts. Any extra-Article III exercise of jurisdiction by federal

courts constitutes an invasion of the powers reserved to the

states.

In the action at hand, by permitting the pending of defend-

ant Sullivan to plaintiff’s claims against defendants Consoli-

dated Service Corporation, Recklitis and Otte, the Court of

Appeals has effectively assumed answers to recurring, complex

questions with far reaching constitutional implications. In

numerous cases, the United States Supreme Court and courts

below have avoided answering the questions whether Article

III permits the pending of parties and claims in the circum-

stances here present. See Aldinger v. Howard, 427 U.S. 1, 14,

15 (1976); Moor v. County of Alameda, 411 U.S. 693, 712-715

(1973). In so doing, the Court has noted the tremendous sig-

nificance of the questions involved. The action at hand pre-

sents an ideal opportunity for the Court to set forth answers to

threshold questions present in the issue of whether Article III

permits the pending of parties over whom there exists no inde-

pendent jurisdictional basis. Guidance at this point from the

Court would be especially appropriate in that federal courts

appear to be involving themselves without authority in state

law decisions. Avoiding the issue of whether parties can be

pended, in itself, may be viewed as a derogation of the status

afforded the fifty states in our constitutional scheme.

The action at hand also presents numerous examples of the

necessity for being parsimonious in defining the outlines of

Article III. Relying on generalized fiduciary concepts estab-

lished by the Massachusetts Supreme Judicial Court in 1933

and 1941, the district court below, upon cursory examination,

concluded that the jury could properly find a breach of fiduci-

ary duty by corporate director Sullivan. In so doing, the dis-

trict court established a standard for Massachusetts corporate

directors in an area beset with complex considerations about

(a) the extent to which, if any, a corporate director must pos-

sess expertise in bankruptcy, and (b) the extent to which, if

any, a corporate director must attempt to prevent key employ-

ees from joining competitor corporations.

In sum, in order to protect the delicate relationship between

the United States and ‘vie fifty states, a writ of certiorari should

issue.

Conclusion.

For the reasons stated above, a writ of certiorari should issue

to review the judgment and opinion of the United States Court

of Appeals for the First Circuit.

Respectfully submitted,

LAWRENCE R. COHEN,