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CALLAWAY V. BENTON, 336 U. S. 132 (1949)

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U.S. Supreme Court

Callaway v. Benton, 336 U.S. 132 (1949)

Callaway v. Benton

No. 21

Argued October 19, 1948

Decided February 7, 1949

336 U.S. 132


A railroad in reorganization under § 77 of the Bankruptcy Act had for many years leased and operated the property of another railroad, which was solvent and not in reorganization. Under the plan of reorganization approved by the Interstate Commerce Commission and the bankruptcy court, the lessor was given the alternative of selling all of its property to the reorganized company on specified terms or having its lease disaffirmed and its property returned. A majority of the lessor's stockholders voted to accept the offer, but a substantial minority voted to reject it. In a suit brought by minority stockholders, a state court issued a temporary injunction restraining the officers and directors from selling the property or certifying the company's acceptance of the offer to the Commission, on the ground that state law required unanimous consent of the stockholders to such a sale. The bankruptcy court enjoined further prosecution of the state action and declared the state court's temporary injunction null and void as in excess of its jurisdiction.

Held: under the narrow facts presented here, the bankruptcy court erred in enjoining the state court suit leading to a determination of the requirements of state law with respect to the sale of the entire assets of the lessor. Pp. 336 U. S. 134-151.

1. Since the lessor was not being reorganized along with the lessee, and the plan of reorganization gave the lessor the unfettered right to accept or reject the offer to purchase all its property, the question whether the offer could be accepted by less than a unanimous vote of the lessor's shareholders was a question of state, not federal, law. Pp. 336 U. S. 136-141.

(a) The Bankruptcy Act gives no clue as to what proportion of the lessor's stockholders must vote to accept the offer if state law is not controlling. P. 336 U. S. 139.

(b) The majority vote provision of § 5(11) of the Interstate Commerce Act is not applicable in this case, since this is not a proceeding under that Act. Pp. 336 U. S. 139-140.

(c) The Bankruptcy Act does not give the Commission or the court the right to require acceptance by a lessor not in reorganization chanroblesvirtualawlibrary

Page 336 U. S. 133

of an offer for the purchase of its property, and no such power was asserted by the Commission in this case. P. 336 U. S. 141.

2. The bankruptcy court did not have exclusive jurisdiction to decide this question of state law. Pp. 336 U. S. 141-149.

(a) While § 77(a) of the Bankruptcy Act gives the bankruptcy court exclusive jurisdiction of the debtor and its property, it does not give the bankruptcy court exclusive jurisdiction over all controversies that in some way affect the debtor's estate. P. 336 U. S. 142.

(b) The interest here involved was not a part of the property of the debtor, but the lessor's reversion in fee, and the issue concerned the rights of the lessor's stockholders inter sese to sell their reversionary interest in the property. Pp. 336 U. S. 142-143.

(c) The lessor not being in reorganization, its internal management was not subject to the control of the bankruptcy court. Pp. 336 U. S. 144-146.

(d) The purchase of formerly leased properties does not involve rights asserted by the lessor against the debtor; it is a creditor in the proceedings only by virtue of its claims against the debtor under the lease and for breach of the lease. Pp. 336 U. S. 146-147.

(e) The jurisdiction asserted by the district court over a solvent lessor not in reorganization was not justified by any provision of § 77. Pp. 336 U. S. 146-148.

3. In the circumstances of this case, Continental Illinois Bank v. Chicago, R.I. & P. R. Co., 294 U. S. 648, and other cases dealing with the power of an equity court to prevent the defeat or impairment of its jurisdiction do not support the bankruptcy court's injunction against the state court action and its determination of the issue there involved. Pp. 336 U. S. 149-151.

165 F.2d 877, affirmed.

A federal district court having jurisdiction of a proceeding to reorganize a railroad under § 77 of the Bankruptcy Act enjoined further proceedings in a state court to determine the rights inter sese under state law of stockholders of another railroad not in reorganization to sell to the railroad being reorganized certain property leased to and operated by the latter. The Court of Appeals reversed. 165 F.2d 877. This Court granted certiorari. 333 U.S. 853. Affirmed, p. 336 U. S. 151. chanroblesvirtualawlibrary

Page 336 U. S. 134

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