United States v. Kallen

444 F. Supp. 399, 1978 U.S. Dist. LEXIS 20351
CourtDistrict Court, N.D. Illinois
DecidedJanuary 4, 1978
DocketNo. 75 B 994
StatusPublished
Cited by3 cases

This text of 444 F. Supp. 399 (United States v. Kallen) is published on Counsel Stack Legal Research, covering District Court, N.D. Illinois primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
United States v. Kallen, 444 F. Supp. 399, 1978 U.S. Dist. LEXIS 20351 (N.D. Ill. 1978).

Opinion

MEMORANDUM OPINION

MARSHALL, District Judge.

In this appeal from the order of the bankruptcy judge in a Chapter XI arrangement [401]*401proceeding, the Government challenges the denial of its motion to dismiss the amended counterclaim filed by the trustee in bankruptcy.

On February 4, 1975, Oxford Marketing, Ltd. petitioned for an arrangement under Chapter XI of the Bankruptcy Act, 11 U.S.C. § 701 et seq. On November 19,1975, the bankruptcy court appointed Laurence H. Kallen as receiver of Oxford’s property and adjudicated Oxford to be bankrupt. One month later, on December 24,1975, the United States of America filed a complaint for reclamation on behalf of the Small Business Administration (SBA) against Kallen in his capacity as receiver and as trustee in bankruptcy. The trustee’s answer admits most of the allegations of the complaint, but raises certain affirmative defenses and asserts a counterclaim against the SBA.

According to the undisputed allegations of the complaint, Oxford received a loan in 1973 from the Michigan Avenue National Bank of Chicago. In return, Oxford gave the bank a security interest in its equipment, inventory and accounts receivable. The bank then assigned the note and security agreement to the SBA. The note is now due and unpaid. To satisfy the outstanding indebtedness, the SBA seeks to foreclose its security interest and gain possession of the collateral.

In his amended counterclaim, the trustee alleges that about two months after Oxford filed its bankruptcy petition, the SBA wrongfully received $2,558 by garnishing Oxford’s bank account at Michigan Avenue National Bank. The trustee claims that because the bank account belonged to the trustee as soon as Oxford’s bankruptcy petition was filed, the SBA’s receipt of these funds constituted the tort of conversion under Illinois law and therefore violated the Federal Tort Claims Act which incorporates state tort law by reference, 28 U.S.C. § 1346(b). In his prayer for relief, the trustee requests a money judgment against the SBA for $2,558 plus costs.

The Government moved to dismiss the amended counterclaim for lack of jurisdiction. It argued that the counterclaim was barred by principles of sovereign immunity, that it lacked a proper jurisdictional basis under either the Tucker Act, 28 U.S.C. § 1346(a)(2), or the Tort Claims Act, and that it raised issues unrelated to the SBA’s reclamation petition and therefore was a permissive counterclaim falling outside the summary jurisdiction of the bankruptcy court. In its analysis of the Tort Claims Act, the Government asserted that the counterclaim failed to allege the requisite exhaustion of administrative remedies under 28 U.S.C. § 2675(a), failed to state a derivative cause of action under Illinois tort law, failed to allege a requisite act of negligence by an identifiable Government employee, and was based on theories of strict liability which are beyond the scope of the Act.

The bankruptcy judge denied the motion without an opinion. Although the basis for the court’s decision was not expressly delineated in the written order, the grounds are vaguely discernible in the judge’s remarks during the oral argument on the motion. The judge stated that the Federal Tort Claims Act afforded- a jurisdictional basis for the counterclaim, even though he did not specify the applicable tort under state law. He also intimated that the counterclaim and the complaint contained a sufficient identity of issues to make it a compulsory counterclaim. By this analysis, both pleadings rested on the validity and nature of the SBA’s rights as assignee of the security agreement. The complaint posited that the SBA’s rights under the agreement had matured into a right to immediate possession of the collateral. The counterclaim posited that the bank improperly set-off $2,558 from Oxford’s account and gave it to the SBA. The SBA succeeded to the bank’s right to seti-off the money when it became the assignee of the security agreement. In the judge’s view, the SBA should raise its assigned right to set-off as an affirmative defense to the counterclaim rather than by a motion to dismiss. Therefore he denied the motion and ordered the Government to file an answer to the counterclaim.

[402]*402On appeal, the Government contends that the bankruptcy court erred in finding jurisdiction under the Tort Claims Act, and that in any event the court lacked summary jurisdiction since the counterclaim was unrelated to the subject matter of its complaint for reclamation. We agree that the trustee’s counterclaim was permissive in character. That finding by itself is sufficient to oust the jurisdiction of the bankruptcy court, since permissive counterclaims 1) are outside the scope of the court’s summary jurisdiction and 2) are barred by principles of sovereign immunity. To understand how the concepts of summary jurisdiction and sovereign immunity converge to exclude permissive counterclaims, we must briefly review the theoretical foundations of these concepts. The unifying idea is that the filing of a lawsuit can only be construed as a limited consent to the presentation of counterclaims by the opposing party.

The jurisdictional boundaries of the bankruptcy court are defined by the interaction of Sections 2a(7) and 23 of the Bankruptcy Act, 11 U.S.C. §§ lla(7) and 46. In describing those boundaries, courts have classified jurisdictional problems as falling within the “summary jurisdiction” of the bankruptcy court under § 2a(7) or within the “plenary jurisdiction” of state or federal courts under § 23. See 2 Collier on Bankruptcy, ¶ 23.02 (14th ed. 1976). If the controversy involves property in the actual or constructive possession of the bankruptcy court, that court has summary jurisdiction over claims pertaining to the property. If the controversy involves property in the actual or constructive possession of a third person asserting a substantial adverse claim, however, the bankruptcy court has no summary jurisdiction to adjudicate that person’s claim upon a petition by the trustee, unless the claimant consents to jurisdiction. Absent such consent, the trustee must assert his rights against the creditor in a plenary action in state or federal court. In re Warren, 387 F.Supp. 1395, 1400 (S.D. Ohio 1975); Katchen v. Landy, 382 U.S. 323, 327, 86 S.Ct. 467, 15 L.Ed.2d 391 (1966); 2 Collier on Bankruptcy, ¶ 23.04 (14th ed. 1976).

The distinction between summary and plenary actions becomes significant when a creditor files a proof of claim or a petition for reclamation with the bankruptcy court. In these circumstances, the creditor is deemed to have consented to the summary jurisdiction of the bankruptcy court to adjudicate his claim. But there is some doubt whether the creditor also impliedly consents to summary jurisdiction of any counterclaim asserted by the trustee, or whether those counterclaims must be heard in a separate plenary proceeding brought by the trustee.

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Related

Securities Fund Services Inc. v. American National Bank
542 F. Supp. 323 (N.D. Illinois, 1982)
SECURITIES FUND, ETC. v. Am. Nat. Bank & Trust Co.
542 F. Supp. 323 (N.D. Illinois, 1982)
In Re Oxford Marketing, Ltd.
444 F. Supp. 399 (N.D. Illinois, 1978)

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Bluebook (online)
444 F. Supp. 399, 1978 U.S. Dist. LEXIS 20351, Counsel Stack Legal Research, https://law.counselstack.com/opinion/united-states-v-kallen-ilnd-1978.