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.
_________________________________________________________________
Affirmed by published opinion. Senior Judge Phillips wrote the opin-
ion, in which Judge Luttig and Judge Michael joined.
_________________________________________________________________
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-
_________________________________________________________________
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
_________________________________________________________________
(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