596 F.2d 211 (7th Cir. 1979), 78-1664, American Invs-Co Countryside, Inc. v. Riverdale Bank

Docket Nº:78-1664.
Citation:596 F.2d 211
Party Name:AMERICAN INVS-CO COUNTRYSIDE, INC., an Illinois Corporation, et al., Plaintiffs-Appellants, v. RIVERDALE BANK, an Illinois Banking Corporation, et al., Defendants-Appellees.
Case Date:March 29, 1979
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit

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596 F.2d 211 (7th Cir. 1979)

AMERICAN INVS-CO COUNTRYSIDE, INC., an Illinois Corporation,

et al., Plaintiffs-Appellants,


RIVERDALE BANK, an Illinois Banking Corporation, et al.,


No. 78-1664.

United States Court of Appeals, Seventh Circuit

March 29, 1979

Argued Jan. 22, 1979.

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[Copyrighted Material Omitted]

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Stephen Novack, Chicago, Ill., for plaintiffs-appellants.

Charles M. Shea, Chicago, Ill., for defendants-appellees.

Before PELL, Circuit Judge, MARKEY, Chief Judge, [*] and WOOD, Circuit Judge.

HARLINGTON WOOD, Jr., Circuit Judge.

The plaintiff-appellant, American Invs-Co Countryside, Inc. (American), appeals from the district court's dismissal of its second amended complaint for lack of subject matter jurisdiction. The appellant maintains that jurisdiction is conferred over the action by 28 U.S.C. §§ 1331 and 1337. 1 We affirm.


The facts alleged in American's complaint, which we accept as true for purposes of determining whether subject matter jurisdiction exists, are as follows: K.K. & Co., a limited partnership under the laws of Illinois (KK), was the sole legal owner of a certain parcel of Illinois land on which it intended to construct multifamily housing. The housing was to be financed with a mortgage insured by the United States Department of Housing and Urban Development, Federal Housing Administration (FHA). In September 1970, apparently as part of the structuring of the financing, KK changed the form in which it held the property. It conveyed the realty to LaSalle National Bank and created an Illinois land trust with itself as the sole beneficiary. 2 The trust agreement between KK and the Bank recited the rights and duties of the parties and contained additional provisions apparently required by the FHA as a condition to granting mortgage insurance.

The terms of the trust agreement made clear that it was to be construed in conformity with a yet to be executed regulatory agreement between KK, the Bank, and the FHA. 3 The provisions of the trust and regulatory agreements restricted assignments of the beneficial interest in the property. The trust agreement provides, in pertinent part:

(N)o assignment shall be accepted by the Trustee or be valid until ten (10) days after the Commissioner has been advised

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by the beneficiary of any proposed assignment of beneficial interest and until the assignee of such beneficial interest shall have joined in any Regulatory Agreement which the Trustee may have entered into with the Commissioner. . . .

The corresponding provision of the FHA regulatory agreement provides:

Owners shall not without prior approval of the Secretary:

(a) Convey, transfer or encumber any of the mortgaged property. . . .

(c) Convey, assign, or transfer any beneficial interest in any trust holding title to the property, or the interest of any general partner in a partnership owning the property . . . or the right to receive the rents and profits from the mortgaged property.

Early the following year, KK, the Bank, and the FHA, as anticipated, executed the regulatory agreement.

In August 1971, KK entered into a limited partnership agreement with several individual investors. KK agreed to become the sole general partner in the new venture, Countryside Apartment Associates (Countryside), and assigned its entire beneficial interest in the Illinois land trust to Countryside as a capital contribution. Countryside agreed to be bound by the FHA regulatory agreement and the requisite FHA approval of the assignment was later obtained.

According to the appellant's allegations, less than a year after KK assigned its beneficial interest in the land trust to Countryside, KK conveyed one-half of that same interest to the appellee Riverdale Bank, as collateral for a loan transaction for its own benefit. This collateral assignment was not submitted to the FHA for approval and Riverdale did not join in the regulatory agreement. KK later defaulted on the loan, and Riverdale, pursuant to Article 9 of the Uniform Commercial Code, held a public sale at which it sold to itself the one-half interest in the land trust. 4 This transaction also was without the consent of the FHA.

After the collateral assignment to Riverdale, but before Riverdale's foreclosure on the beneficial interest, the appellant, American, became a general partner in Countryside. Joining with the other general partners, it instituted this action naming Riverdale and the Secretary of the Department of Housing and Urban Development, among others, as defendants. American seeks a declaratory judgment that Riverdale's claim to one-half of the beneficial interest is void.


The gist of American's claim in Count I is that Countryside is the owner of the disputed one-half interest in the land trust because the restrictions contained in the trust agreement and the FHA regulatory agreement render Riverdale's claimed interest void. 5 Plaintiff argues that the resolution of its claim requires a determination of the meaning and effect of the FHA regulatory agreement and that the federal court must apply federal common law in making that determination. All parties agree that federal common law is sufficient to evoke the jurisdiction of the federal court under 28 U.S.C. § 1331. See Illinois v. Milwaukee, 406 U.S. 91, 98-100, 92 S.Ct. 1385, 31 L.Ed.2d 712 (1972).

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Whatever else Count I may be, it is not a statement of a cause of action created by federal law. American Well Works Co. v. Layne & Bowler Co., 241 U.S. 257, 36 S.Ct. 585, 60 L.Ed. 987 (1916). The beneficial interest in the land trust is a creation of Illinois law, and Countryside's ownership, if any, of that interest and the right to protect it against the claims of other private persons are controlled by state law. See Butner v. United States, --- U.S. ----, ----, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979) ("Property interests are created and defined by state law"); Cf. Oneida Indian Nation v. County of Oneida, 414 U.S. 661, 94 S.Ct. 772, 39 L.Ed.2d 73 (1974) (Indian tribe's right to possession of lands may be a right protected by federal law). No federal statute guarantees Countryside's ownership rights against the actions of other private persons and no distinctive federal policy warrants the creation by the federal courts of remedies to vindicate those rights.

The fact that federal law does not create the cause of action, however, does not necessarily mean that the case does not "arise under" federal law under 28 U.S.C. § 1331. "(A) single old Supreme Court decision," 13 C. Wright, A. Miller & E. Cooper, Federal Practice and Procedure § 3562 at 412 (1975), holds that jurisdiction under section 1331 attaches if the complaint, although stating a state-created cause of action, necessarily raises a question of federal law. See Smith v. Kansas City Title & Trust Co., 255 U.S. 180, 41 S.Ct. 243, 65 L.Ed. 577 (1921). 6 Thus, "it has been found sufficient that some aspect of federal law is essential to plaintiff's success. The litigation-provoking problem has been the degree to which federal law must be in the forefront of the case, and not be remote, collateral or peripheral." Association of Westinghouse Salaried Employees v. Westinghouse Electric Corp., 348 U.S. 437, 450, 75 S.Ct. 489, 495, 99 L.Ed. 510 (1955) (plurality opinion of Frankfurter, J.).

The district court, relying on a passage from Gully v. First National Bank, 299 U.S. 109, 57 S.Ct. 96, 81 L.Ed. 70 (1936), 7 held

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that the plaintiff failed to demonstrate that a construction of the FHA regulatory agreement was "basic and necessary to the decision of the case." The district court assumed that plaintiff could prevail on state law theories alone without the need for construing the FHA regulatory agreement, and therefore reasoned that the case did not directly raise the need to construe the agreement.

The problem with the district court's approach is, as we see it, that it depends not upon an analysis of the four corners of the complaint...

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