Blackhawk Heating & Plumbing Co., Inc. v. Geeslin

• Court: U.S. Court of Appeals — Seventh Circuit
• Writing for the Court: CASTLE
• Citation: Blackhawk Heating & Plumbing Co., Inc. v. Geeslin, 530 F.2d 154 (7th Cir. 1976)
• Decision Date: 15 March 1976
• Docket Number: No. 75--1080,75--1080
• Parties: BLACKHAWK HEATING & PLUMBING COMPANY INC., Plaintiff and Counterdefendant-Appellee, v. Joseph D. GEESLIN, Jr., Special Deputy Insurance Commissioner of the State of Indiana for the Liquidation of United Bonding Insurance Company, Defendant and Counterplaintiff-Appellant, v. BLACKHAWK HEATING & PLUMBING COMPANY, INC., and Harris Trust & Savings Bank, an Illinois Corporation, Counterdefendants, and Robert D. Wilcox, Special Deputy Liquidator of Prudence Mutual Casualty Company, Counterdefendant-Appellant.

Page 154

530 F.2d 154

BLACKHAWK HEATING & PLUMBING COMPANY INC., Plaintiff and Counterdefendant-Appellee, v. Joseph D. GEESLIN, Jr., Special Deputy Insurance

Commissioner of the State of Indiana for the

Liquidation of United Bonding Insurance

Company, Defendant and Counterplaintiff-Appellant, v. BLACKHAWK HEATING & PLUMBING COMPANY, INC., and Harris Trust

& Savings Bank, an Illinois Corporation, Counterdefendants,

and

Robert D. Wilcox, Special Deputy Liquidator of Prudence

Mutual Casualty Company, Counterdefendant-Appellant.

No. 75--1080.

United States Court of Appeals Seventh Circuit.

Argued Oct. 20, 1975.

Decided Feb. 6, 1976.

Rehearing and Rehearing En Banc

Denied March 15, 1976.

Victor G. Savikas, Karon, Morrison & Savikas, Chicago, Ill., for appellant.

Brian A. Loftus, Richard J. Brennan, Harry P. Lamberson, Chicago, Ill., for appellee.

Before CLARK, Associate Justice, ^< CASTLE, Senior Circuit Judge, and SWYGERT, Circuit Judge.

CASTLE, Senior Circuit Judge.

The state court-appointed liquidators of two insurance companies appeal from a district court order that a bank turn over certain assets of one of the insurance companies, held by the bank pursuant to an escrow agreement between the two companies, to the appellee Blackhawk Heating & Plumbing Company, Inc. (hereinafter 'Blackhawk'). The appellants are Joseph D. Geeslin, Jr., Special Deputy Insurance Commissioner of the State of Indiana and the liquidator of United Bonding Insurance Company (hereinafter 'United'); and Robert D. Wilcox, Director of Insurance for the State of Illinois and liquidator of Prudence Mutual Casualty Company (hereinafter 'Prudence').

I.

During the years of 1964, 1965, and 1966, Prudence and United entered into a series of reinsurance agreements. Under the terms of these agreements, United agreed to cede to Prudence a percentage of certain insurance bonds on which it became obligated and to pay Prudence a percentage of the premiums received. In order to secure United for monies due from Prudence on these agreements, the two entered into an escrow agreement whereby Prudence deposited securities with the Harris Trust & Savings Bank in Chicago, Illinois. The face value of these securities owned by Prudence was $296,000.00. The escrow agreement provided that the securities were to remain in escrow until such time as all losses on the insurance bonds subject to the reinsurance agreement were determined and discharged. ¹

In March of 1967, Blackhawk filed suit in federal district court against United to recover $400,000.00 on a performance bond issued by United to secure the performance of one of Blackhawk's subcontractors. ² In August of 1969, Blackhawk amended its complaint by adding a second count seeking $600,000.00 in damages for United's violation of federal wiretap statutes. See 18 U.S.C. §§ 2510--2520 (1970).

While this litigation was pending, Prudence was ordered into conservatorship by the Circuit Court of Cook County, Illinois. On February 6, 1970, Prudence was placed into liquidation by the same court.

On December 2, 1970 Blackhawk and United entered into a settlement agreement concerning their litigation. The agreement provided that United would consent to the entering of a judgment against it in the amount of $360,000.00. The agreement further provided that this amount was to be satisfied by United's delivery of certain securities and cash, and assignment of its interest in $130,000.00 of the Prudence securities in the Harris escrow account. The district court entered judgment in the amount of $360,000.00. ³ United subsequently fulfilled its part of the agreement by delivering the cash and securities, and also by assigning its interest in $130,000.00 of the Harris escrow. Soon thereafter, on February 8, 1971, United was placed into liquidation by order of the Superior Court of Marion County, Indiana.

In order to recover the $130,000.00 in securities in the Harris escrow account which it claimed was due it because of Prudence's alleged default on its reinsurance agreements with United, Blackhawk filed a petition to turn over assets in federal district court. In this petition, Blackhawk asked the district court to order Harris to pay it $130,000.00 from the escrow plus a proportionate share of any appreciation in the fund.

United's liquidator, Geeslin, intervened on the ground that the escrow securities were still the property of Prudence and therefore subject only to the jurisdiction of the Illinois court overseeing Prudence's liquidation. Geeslin and Prudence's liquidator, Wilcox, moved to dismiss Blackhawk's petition for lack of jurisdiction over the subject matter of the action. The district court denied the motion. Geeslin and Wilcox thereupon filed answers to Blackhawk's petition contending that the assignment by United of its security interest in the Prudence securities constituted a voidable preference under Indiana law. Geeslin also contended that his rights to Prudence's securities as lien creditor of United were superior to Blackhawk's rights as assignee of United's security interest in the securities. In addition Geeslin counterclaimed for the return of the securities and cash which United had previously transferred to Blackhawk pursuant to the settlement agreement. He argued that these transfers also constituted voidable preferences under Indiana law.

After a lengthy trial, the district court decided the preference issue in favor of Blackhawk and held its rights to the escrow superior to Geeslin's. The court ordered Harris to pay Blackhawk $130,000.00 plus appreciation from the escrow account.

Geeslin and Wilcox appeal the district court's denial of their motion to dismiss and the court's determination that Blackhawk's rights to the escrow are superior to theirs. Since we are of the opinion that the district court lacked jurisdiction to entertain Blackhawk's turnover petition, we vacate the court's judgment and remand the case with instructions that the petition be dismissed.

II.

This case presents a confrontation which is the natural by-product of our federal form of government. Two courts, one state and one federal, seek to exercise power over the same piece of property and order its final disposition. State liquidation proceedings against Prudence are pending in an Illinois court. In these proceedings, a state official has been appointed to oversee the winding up of Prudence's affairs and the final disposition of its assets. The state court vested title to all of Prudence's assets in this official pursuant to state law in order to facilitate the termination and settlement of Rpudence's business. ⁴ Rather than file a claim in these proceedings, Blackhawk, as assignee of United's rights in certain of Prudence's property, chose instead to file a petition in federal court to have that property turned over to it. A conflict thus arose between the jurisdiction of these two courts over control of this particular property.

Because such conflicts occur from time to time, the Supreme Court long ago fashioned jurisdictional rules to resolve them. In Penn General Casualty Company v. Pennsylvania, 294 U.S. 189, 55 S.Ct. 386, 79 L.Ed. 850 (1935), the Court stated:

(I)f the two suits are in rem or quasi in rem, requiring that the court or its officer have possession or control of the property which is the subject of the suit in order to proceed with the cause and to grant the relief sought, the jurisdiction of one court must of necessity yield to that of the other. To avoid unseemly and disastrous conflicts in the administration of our dual judicial system, and to protect the judicial processes of the court first assuming jurisdiction, the principle, applicable to both federal and state courts, is established that the court first assuming jurisdiction over the property may maintain and exercise that jurisdiction to the exclusion of the other. (Id. at 195, 55 S.Ct. at 389 (citations omitted).)

The Court has reaffirmed this principle on numerous subsequent occasions. See, e.g., Princess Lida of Thurn v. Thompson, 305 U.S. 456, 466, 59 S.Ct. 275, 83 L.Ed. 285 (1939); United States v. Bank of New York & Trust Company, 296 U.S. 463, 56 S.Ct. 343, 80 L.Ed. 331 (1936); Gordon v. Washington, 295 U.S. 30, 55 S.Ct. 584, 79 L.Ed. 1282 (1935). And this court has recognized and invoked the principle. See, e.g., Barrett v. International Underwriters, Inc., 346 F.2d 345 348 (7th Cir. 1965); Mills v. Smith, 113 F.2d 404, 409 (7th Cir. 1940).

It is clear that this jurisdictional rule is applicable to the situation presented by this case since the legal proceedings involved are both actions in rem. The appointment of a receiver and institution of liquidation proceedings in the Illinois court against Prudence constitutes an action in rem. Carter Oil Company v. McQuigg, 112 F.2d 275 (7th Cir. 1940); 1A J. Moore, Federal Practice P0.214, at 2502--03. The fact that the Illinois court does not have actual physical possession of all of Prudence's assets is of no consequence. The constructive possession by Prudence's liquidator is sufficient; his possession is the court's possession. ⁵ Goldfine v. United States, 300 F.2d 260, 263 (1st Cir. 1962); see also Drexler v. Walters,290 F.Supp. 150, 156 (D.Minn.1968); Safeway Trails, Inc. v. Stuyvesant Insurance Company, 211 F.Supp. 227 (M.D.N.C.1962). In rem jurisdiction attached when the liquidation proceedings were commenced against Prudence. 1A J. Moore, Federal Practice P0.215, at 2508--10. And Blackhawk's petition in federal court to turn over assets was also clearly an action in rem. ⁶ In order to grant the relief requested, the district court had to exercise control over a res: Prudence's securities held by Harris in escrow. ⁷ See Carney v. Sanders, 381 F.2d 300 (5th Cir. 1967).

It is equally clear from the record that the state court liquidation proceeding was instituted prior to Blackhawk's filing its petition in federal court. Prudence was placed into liquidation on ...