Libby, McNeill, and Libby v. City Nat. Bank

• Decision Date: 28 November 1978
• Docket Number: No. 75-3218,75-3218
• Citation: 592 F.2d 504
• Parties: LIBBY, McNEILL, AND LIBBY, a Maine Corporation, Plaintiff-Appellee, v. CITY NATIONAL BANK et al., Defendants-Appellants. City National Bank, a national banking association, Defendant and Third Party Plaintiff-Appellant, Dorothy W. Chu and David C. Chu, Third Party Defendants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 504

592 F.2d 504

LIBBY, McNEILL, AND LIBBY, a Maine Corporation, Plaintiff-Appellee, v. CITY NATIONAL BANK et al., Defendants-Appellants City National Bank, a national banking association Defendant and Third Party Plaintiff-Appellant Dorothy W. Chu and David C. Chu, Third Party Defendants-Appellants.

No. 75-3218.

United States Court of Appeals Ninth Circuit.

Nov. 28, 1978.

Rehearing Denied March 19, 1979.

Morris Lavine (argued), Los Angeles, Cal., for defendants-appellants.

Richard S. Berger (argued), of Gendel, Raskoff, Shapiro & Quittner, Los Angeles, Cal., for plaintiff-appellee.

Appeal from the United States District Court for the Central District of California.

Before TRASK and WALLACE, Circuit Judges, and HOFFMAN, ^* District Judge.

WALLACE, Circuit Judge:

City National Bank (CNB) and the Chus appeal from a judgment of the district court which found Libby, McNeill and Libby (Libby) liable to various other parties, but which allowed Libby to offset that liability against what otherwise would have been an obligation to CNB. The district court also found the Chus liable to CNB, a judgment from which they lodge a somewhat halfhearted appeal. We vacate in part, affirm in part, reverse in part, and remand. We also dismiss a portion of the appeal for lack of jurisdiction.

I

On November 30, 1971, Libby entered into a "Packing Agreement" with Shanghai Instant Foods, Inc. (Shanghai), a corporation of which David Chu was the majority shareholder. The Agreement, similar to those that Libby had entered into with other companies, required Shanghai to produce packaged frozen meals for Libby according to Libby's specifications.

Libby obligated itself under the Agreement to pay Shanghai $1.09 plus "actual costs" in the form of an adjustable base price. The Agreement also contained provisions regulating Shanghai's purchase of ingredients and packaging materials that were to be utilized in production of the meals. Generally these gave Libby significant control over the prices and sources of the ingredients and materials to be purchased.

Shanghai's purchases of these supplies were often made under "blanket purchase orders" ¹ and telephone authorizations that Libby placed with a variety of other companies. Libby required Shanghai to make its purchases from vendors that Libby recommended unless Shanghai could find a better price and Libby approved. Shanghai in fact placed specific orders pursuant to Libby's blanket orders, and was invoiced directly for supplies delivered to it.

On May 20, 1971, prior to the establishment of the Packing Agreement between Libby and Shanghai, Shanghai obtained financing from CNB. Under the lending agreement, Shanghai gave CNB a security interest in all of Shanghai's accounts receivable. This security interest was evidenced by a properly perfected financing statement, and the Chus personally guaranteed the loan.

In July of 1972, various companies that were supplying Shanghai in accordance with Libby blanket purchase orders complained to Libby that Shanghai had ceased to make payments to them. When these suppliers advised that they were going to look to Libby for payment, Libby stopped making payments to Shanghai. At this time Libby owed Shanghai.$138,271.73 for dinners delivered, and Shanghai owed Libby $11,812.41 for delivery of corn. The net obligation of Libby to Shanghai was thus $126,459.32.

In March 1973, Shanghai filed a voluntary petition in bankruptcy, and a trustee was appointed. In August 1973, while the bankruptcy proceedings, which have since closed, were still pending, Libby commenced this action by filing its complaint in interpleader and for declaratory relief in the United States District Court. Libby interpleaded the net sum it owed to Shanghai, and named as defendants the trustee in bankruptcy, CNB, and the various suppliers who had not been paid by Shanghai. Libby asked for a declaratory judgment freeing it from claims of the suppliers, or alternatively, relieving it from any debt to Shanghai to the extent that it was required to pay the suppliers.

The trustee disclaimed any interest in the fund because he believed that the money belonged to CNB, pursuant to Shanghai's assignment of its accounts receivable. In fact, CNB was the only defendant to allege any interest in the funds. Several suppliers did not answer and defaults were entered against them, while those who did answer disclaimed any interest in the fund and counterclaimed, alleging Libby's direct and independent liability to them for supplies provided to Shanghai. One supplier, Kaiser Aluminum & Chemical Sales, Inc. (Kaiser), had filed an action in state court which was later transferred to the district court and consolidated for trial with the rest of this action.

The district court found that it had jurisdiction over the counterclaims, as well as the interpleader and declaratory judgment actions, and that the bankruptcy proceedings did not preclude such jurisdiction. The district judge granted the suppliers' relief pursuant to their counterclaims, and relief to Kaiser in its consolidated action. ² He allowed Libby the offset that it requested against its obligation to Shanghai, and thus its obligation to CNB, as the latter's assignee. In addition, the court found that the Chus were indebted to CNB pursuant to their guarantee of Shanghai's obligation to CNB.

From this judgment, CNB and the Chus appeal. Numerous errors are alleged, many merely repetitions or restatements of others. We deal only with those that merit discussion, beginning with challenges to the district court's jurisdiction.

II

CNB argues that the district court did not have jurisdiction of the interpleader action because it was the only defendant that claimed any interest in the fund. Of course, a basic jurisdictional requirement of a statutory interpleader action ³ is that there be "adverse claimants" to a particular fund. 28 U.S.C. § 1335 (1976); Gaines v. Sunray Oil Co., 539 F.2d 1136, 1141 (8th Cir. 1976). Thus, CNB argues, an interpleader defendant who disclaims any interest in the "fund" cannot be called an "adverse party." While this argument seems simple enough on its face, it is actually somewhat complicated.

In the earlier, equitable interpleader practice, if a claimant alleged any independent liability of the stakeholder to the claimant in addition to a claim against the interpleaded fund, interpleader would not lie. See, e. g., C. Wright, Handbook of the Law of Federal Courts § 74, at 364 (3d ed. 1976). The modern trend has been to the contrary, and it "now seems to be settled that (Fed.R.Civ.P.) Rule 13 which provides for compulsory and permissive counterclaims is applicable to interpleader suits." Dakota Livestock Co. v. Keim, 552 F.2d 1302, 1307 (8th Cir. 1977). Thus, the mere potentiality of independent stakeholder liability, separate from liability for the interpleaded fund, will not defeat interpleader jurisdiction. Yet, the defendant in an interpleader action who also counterclaims must still make Some claim against the interpleaded fund. See Hebel v. Ebersole, 543 F.2d 14 (7th Cir. 1976); Gaines v. Sunray Oil Co., supra, 539 F.2d at 1141-42; Provident Mut. Life Ins. Co. v. Ehrlich, 374 F.Supp. 1134, 1136, 1138-39 (E.D.Pa.1973), Aff'd in part and vacated and remanded in part on other grounds, 508 F.2d 129 (3d Cir. 1975); Trowbridge v. Prudential Ins. Co. of America, 322 F.Supp. 190, 192-93 (S.D.N.Y.1971). Here, only one party made a claim against the fund and that is insufficient. ⁴

It is true that some cases have appeared to hold or indicate that the mere potentiality of double liability on the part of the stakeholder may be sufficient to sustain an interpleader action, even absent true claimant adversity as to the particular fund proffered by the interpleader plaintiff. See Dakota Livestock Co. v. Keim, supra, 552 F.2d at 1304-07; Royal School Labs., Inc. v. Town of Watertown, 358 F.2d 813, 814-15 (2d Cir. 1966); Stuyvesant Ins. Co. v. Dean Constr. Co., 254 F.Supp. 102, 105-09 (S.D.N.Y.1966), Aff'd sub nom. Stuyvesant Ins. Co. v. Kelly, 382 F.2d 991 (2d Cir. 1967) (per curiam). In Dakota Livestock Co., one of the plaintiff auctioneers of livestock, Dakota, sought to interplead, among others, the former owner of certain cattle, one Zurcher, and the bank which had consigned the cattle to Dakota. The bank had taken over the cattle from the lot of the bankrupt buyers pursuant to the terms of a financing agreement. Although Zurcher had never been paid for the cattle, he alleged that he had no interest in the interpleaded proceeds of the cattle sales, since his claim was that Dakota was liable to him as a converter. In response, the Eighth Circuit stated:

Zurcher is seeking compensation for the loss of his cattle which loss resulted ultimately from the sale of the cattle by Dakota at the instigation of the Bank. That Zurcher is not seeking to be paid out of the particular fund in the registry of the district court is beside the point. The money that was deposited in court represents the proceeds of Dakota's sale of the cattle and in a sense stands in place of the cattle. We do not think that Zurcher can in effect surrender that fund to the Bank or to the Trustee and thus avoid controversy with them while at the same time reserving his claim against Dakota by the simple device of turning his back on that particular fund. It is obvious that Zurcher can afford to take that action only because he feels that he can safely rely on the general assets of Dakota to satisfy any judgment that he may ultimately obtain against it. If Zurcher can thus avoid the jurisdiction of the interpleader court, so perhaps can any other defendant who has an independent claim against a solvent stakeholder.

Dakota Livestock Co. v. Keim, supra, 552 F.2d at 1307. In Royal School Labs., Inc., claims against the town by both an unpaid materialman and the assignee of the insolvent contractor for work performed were, in the court's...