Barancik v. Investors Funding Corp. of New York, 73-1302.

• Decision Date: 05 November 1973
• Docket Number: No. 73-1302.,73-1302.
• Citation: 489 F.2d 933
• Parties: Richard M. BARANCIK et al., Plaintiffs-Appellees, v. INVESTORS FUNDING CORPORATION OF NEW YORK, a New York corporation, and Invesco Holding Corporation, a New York corporation, Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

489 F.2d 933 (1973)

Richard M. BARANCIK et al., Plaintiffs-Appellees, v. INVESTORS FUNDING CORPORATION OF NEW YORK, a New York corporation, and Invesco Holding Corporation, a New York corporation, Defendants-Appellants.

No. 73-1302.

United States Court of Appeals, Seventh Circuit.

Argued September 17, 1973.

Decided November 5, 1973.

Granvil I. Specks, Chicago, Ill., Raymond Shack, New York City, for defendants-appellants.

Jerome H. Torshen, Chicago, Ill., for plaintiffs-appellees.

Before PELL and STEVENS, Circuit Judges, and CHRISTENSEN,^* Senior District Judge.

STEVENS, Circuit Judge.

The question presented by this appeal is whether the anti-injunction statute, 28 U.S.C. § 2283,¹ prohibits a federal court from staying proceedings in a state court which were not commenced until after a motion to enjoin the institution of such proceedings was filed. We hold that § 2283 does not apply.

I.

To understand the issue on appeal we need only briefly describe the basic transaction between the parties, the matters in dispute between them, and the chronology of court proceedings that led to the entry of the preliminary injunction.

In 1969 plaintiffs were the beneficial owners of real estate at 100 East Bellevue Place in Chicago which they intended to improve by constructing a high rise residential building. They retained defendant Dwinn-Shaffer and Company, a mortgage broker, to arrange financing of approximately $7,300,000. Of this amount, $6,100,000 was provided in the form of a loan from the Prudential Life Insurance Company secured by a first mortgage, and $1,000,000 was provided by defendant Investors Funding Corporation of New York (IFC) as the purchaser-lessor in a so-called sale and lease back transaction. At the closing in 1971, title to the premises was conveyed to IFC in exchange for the purchase price of $1,000,000 and the execution of a 99-year lease.² Thus, plaintiffs' right to possession, which derived from their status as beneficial owners prior to the closing, thereafter depended on their performance as tenants of the terms and conditions of the lease.

In due course disputes arose relating to plaintiffs' obligation to make monthly deposits for real estate taxes, to remit portions of security deposits by sublessees, and to discharge mechanic's and materialman's liens. Moreover, plaintiffs allegedly became aware of the fact, unknown prior to the closing, that defendant IFC owned an 8% interest in defendant Dwinn-Shaffer.

On April 25, 1972, plaintiffs filed suit in the federal court. In Count I they alleged that the failure to disclose the affiliation between IFC and Dwinn-Shaffer, the mortgage banker they had retained as their agent, was a violation of Rule 10b-5 promulgated pursuant to the Securities Exchange Act of 1934.³ Plaintiffs' complaint stated that the proceeds of the sale-lease back transaction were being tendered to defendant's escrowee, and prayed for a rescission of that transaction, a judgment for interest on certain funds held by or at the direction of defendants, and for costs. In Counts II and III of the complaint, plaintiffs based federal jurisdiction on diversity of citizenship, raised the state law issues in dispute, and prayed for damages and a declaratory judgment.

On June 23, 1972, before responding to the complaint, defendants served a formal notice of default on plaintiffs, stating that unless deposits totaling $131,054.88 were remitted within seven days and all liens discharged, defendants would proceed to exercise all of their rights under the law and as set forth in the lease.

On June 30, 1972, defendants filed a motion to dismiss the complaint. The motion was supported by affidavits and gave rise to various filings by both parties directed to the merits. The motion was ultimately denied.

On July 27, 1972, plaintiffs filed the motion which eventuated in the entry of the injunction before us. In that motion plaintiffs recited the matters claimed by defendants to constitute defaults, denied that any default existed, asserted that the issues raised by the claims of default had also been raised by the federal complaint and the defendants' motion to dismiss, and requested the court to restrain defendants from commencing any separate legal action arising out of the subject matter of the pending case, or taking any other action to the detriment of the reputation of the 100 East Bellevue building as a luxury high rise apartment.

During the period between July 27, 1972, and January 5, 1973, both parties filed various papers relating to the pending motions, and, at the direction of the court, endeavored to resolve as many of their differences informally as possible. The trial judge was engaged in a protracted criminal trial at this time and postponed ruling on the outstanding motions while settlement discussions were held. On January 5, 1973, he entered an order directing the parties to make a report on January 16, 1973, on the status of the questions raised by the request for interlocutory relief.

On January 11, 1973, defendants filed a forcible entry and detainer action in the Municipal Court of Chicago,⁴ alleging that plaintiffs were in default under the lease and seeking possession of the premises. Trial of that peremptory action was set for January 25, 1973.

On January 16, 1973, the parties appeared in the federal district court, advised the judge of the new development, and were ordered to file additional memoranda by January 19, 1973.

On January 25, 1973, the day before the state trial was to commence, the district court enjoined defendants from prosecuting any proceeding to adjudicate the interests of the parties in the real estate at 100 East Bellevue or from selling or otherwise disposing of any interest in that land until further order of court.

The district court filed a memorandum explaining the reasons for the issuance of the injunction. The court held that § 2283 was not applicable to a state court proceeding which was not commenced until after the federal action.⁵ Moreover, since the federal action sought to adjudicate rights and interests in land, the court found that it was necessary to maintain the status quo in order to preserve the court's ability to grant effective relief; accordingly, it held in the alternative that the statute permitted the federal court to grant an injunction which was "necessary in aid of its jurisdiction."⁶

II.

The timing of a litigant's resort to the state court is significant. Timing may affect the exercise of a federal judge's discretion; it may also affect his power.

As a matter of discretion, if a litigant, to no avail, has used his best efforts to obtain a ruling on an issue pending in federal court, his initiation of state proceedings may demonstrate nothing more than appropriate diligence. On the other hand, if a defendant has endeavored to delay proceedings or to forestall decision on issues pending in the federal court, a similar act may represent an attempt to obtain a more favorable forum. It may tend to fragment litigation which is best decided as a single matter; it may even evidence disrespect for the federal tribunal.

In this case we have no occasion to consider whether defendants' timing was a factor that militated in favor of, or against, the entry of the injunction. For we are not asked to review the exercise of the Chancellor's discretion. It is sufficient to note that plaintiffs' status quo motion was ripe for decision by the federal court when defendants invoked the jurisdiction of the Municipal Court of Chicago, that neither party charges the other or the court with improper delay while the motion was pending, and that the court was aware of the pendency of the state action and weighed its significance before it acted. Neither the record nor the argument advanced by defendants provides any basis for concluding that the district judge abused his discretion.

Defendants' appeal challenges the power of the federal district court. They argue that unless this case falls within one of the three narrowly defined exceptions to the Anti-Injunction Act, 28 U.S.C. § 2283, the trial court had no authority to stay the state proceedings and we have no alternative but to reverse. Quite clearly, the injunction was not "expressly authorized by Act of Congress"; there was no judgment to "protect or effectuate"; and we assume with defendants that the injunction was not "necessary in aid of the federal court's jurisdiction" (emphasis added). Nevertheless, the applicability of the statute may be avoided by the timing of defendants' resort to the state forum.

The mere fact that the federal complaint was filed before the state proceeding was commenced is not sufficient to avoid the statutory bar.⁷ On the other hand, it is equally clear that since no state action was pending on July 27, 1972, when plaintiffs filed their motion, the statute would not have prevented the federal court from entering an injunction forthwith.⁸ The question presented by this record is whether defendants may obtain the benefit of the statute by commencing state proceeeings while a motion to enjoin such action is pending in the federal court.

The answer to the question, in our view, turns on the mandatory character of the statute. If the statute merely identified a factor for a court to weigh in the exercise of its discretion, that factor would be appropriately evaluated as of the time of the entry of the injunction.⁹ But since the statute imposes an absolute ban, circumscribing the federal court's power to act unless a case falls within one of the explicit exceptions from its command,¹⁰ we believe its applicability must be determined as of the time when the federal court's injunctive powers are invoked.

Unless the applicability of the statutory bar is determined by the state of the record at the time the motion for an injunction is made, a litigant would have an absolute right to defeat a well-founded motion by taking the very step the ...