O'BRIEN v. Continental Illinois Nat. Bank & Trust Co.

• Decision Date: 28 November 1977
• Docket Number: 73 C 46,No. 72 C 2551,74 C 2899,73 C 772,73 C 660,73 C 3132 and 73 C 1755.,72 C 2551
• Citation: 443 F. Supp. 1131
• Parties: Harold G. O'BRIEN et al., Plaintiffs, v. CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO, Defendant. Edward T. HANLEY et al., Plaintiffs, v. CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO, Defendant. Benjamin A. LIPSON et al., Plaintiffs, v. CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO, Defendant. Edward F. BRABEC et al., Plaintiffs, v. CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO, Defendant. J. J. O'DONNELL et al., Plaintiffs, v. CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO, Defendant. Patrick E. GORMAN et al., Plaintiffs, v. CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO, Defendant. KENCO, INC., et al., Plaintiffs, v. CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO, Defendant.
• Court: U.S. District Court — Northern District of Illinois

443 F. Supp. 1131

Harold G. O'BRIEN et al., Plaintiffs, v. CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO, Defendant.

Edward T. HANLEY et al., Plaintiffs, v. CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO, Defendant.

Benjamin A. LIPSON et al., Plaintiffs, v. CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO, Defendant.

Edward F. BRABEC et al., Plaintiffs, v. CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO, Defendant.

J. J. O'DONNELL et al., Plaintiffs, v. CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO, Defendant.

Patrick E. GORMAN et al., Plaintiffs, v. CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO, Defendant.

KENCO, INC., et al., Plaintiffs, v. CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO, Defendant.

Nos. 72 C 2551, 73 C 46, 73 C 660, 74 C 2899, 73 C 772, 73 C 3132 and 73 C 1755.

United States District Court, N. D. Illinois, E. D.

November 28, 1977.

James S. Gordon, Chicago, Ill., for plaintiffs in 72 C 2251, 74 C 2899, 73 C 46 and 73 C 660.

A. Bradley Eben, Borovsky, Smetana, Ehrlich & Kronenberg, Chicago, Ill., for plaintiffs in 72 C 2251 and 74 C 2899.

Jerry Kronenberg, Chicago, Ill., for plaintiffs in 72 C 2251.

Mayer, Brown & Platt, Chicago, Ill., for defendant.

Herbert Borovsky, Sherman Carmell, Sheldon Charone, Chicago, Ill., for plaintiffs in 74 C 2899.

Cotton, Watt, Jones, King & Bowlus, Chicago, Ill., for plaintiffs in 73 C 772 and 73 C 3132.

Pope, Ballard, Shepard & Fowle, Chicago, Ill., for plaintiffs in 73 C 1755.

MEMORANDUM OPINION

FLAUM, District Judge:

These actions presently before the court were filed at various times during 1972 through 1974 and have been consolidated for various pretrial matters. All the cases are essentially similar in that they each allege violations by defendant of the Securities Exchange Act of 1934, § 10(b), 15 U.S.C. § 78j(b), and rule 10b-5, 17 C.F.R. § 240. 10b-5, promulgated thereunder, as well as Illinois common law. Basically,¹ plaintiffs allege that they are beneficiaries of various trusts of which defendant, Continental Illinois National Bank & Trust Co. of Chicago (Continental), is trustee. Plaintiffs contend that Continental made unlawful purchases and sales of various securities for the plaintiffs' trusts and Continental violated the aforementioned federal statutes and Illinois law.

In an order dated May 10, 1974,² Judge McGarr, to whom these cases³ were previously assigned, denied defendant Continental's motion to dismiss these cases holding that plaintiffs' complaints stated valid causes of action under section 10(b) and rule 10b-5. Thereafter the Supreme Court decided Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975), and Continental moved to reconsider Judge McGarr's May 10, 1974 ruling. This court, having been reassigned the case, took defendant's motion to reconsider under advisement and delayed its ruling until the Supreme Court rendered its decision in Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 97 S.Ct. 1292, 51 L.Ed.2d 480 (1977). This court then, in an order dated May 24, 1977, reconsidered the May 10, 1974 ruling and, relying primarily on Green, granted Continental's motion to dismiss the federal securities claims raised in plaintiffs' complaints.⁴ O'Brien v. Continental Illinois Nat'l Bank & Trust Co. of Chicago, 431 F.Supp. 292 (N.D.Ill.1977), appeal pending. Thus, this court held that although plaintiffs, as beneficiaries of trusts, had standing to sue Continental for violations of section 10(b) or rule 10b-5, id. at 295, plaintiffs had failed to allege that defendant made a material misstatement or omission to plaintiffs in connection with the purchase or sale of securities for plaintiffs' trusts. Id. at 296-97.⁵

Presently before the court is defendant's motion to dismiss the various state law claims alleged in plaintiffs' complaints on the ground of lack of subject matter jurisdiction.⁶ Plaintiffs contend that this court has jurisdiction over the state law claims pursuant to the doctrine of "pendent jurisdiction," and the plaintiffs in Lipson, 73 C 660, the plaintiff Credit Union Nat'l Ass'n in Brabec, 74 C 2899, and the plaintiffs in O'Donnell, 73 C 772, argue that this court has jurisdiction over their state claims pursuant to 28 U.S.C. § 1332 diversity jurisdiction.⁷ This court shall consider each issue raised seriatum.

A. Pendent Jurisdiction

As stated previously, all plaintiffs presently before the court argue that this court has jurisdiction over their state law claims pursuant to the doctrine of pendent jurisdiction. Although the doctrine of pendent jurisdiction has a long and torturous history, see generally 3A J. Moore, Federal Practice ¶ 18.071.-2, at 1921-32 (1974); C. Wright & A. Miller, Federal Practice and Procedure § 3567, at 439-62 (1975), the appropriate starting point in any modern discussion of pendent jurisdiction is United Mine Workers of America v. Gibbs, 383 U.S. 715, 86 S.Ct. 1130, 16 L.Ed.2d 218 (1966). As delineated by the Supreme Court in Moor v. County of Alameda, 411 U.S. 693, 93 S.Ct. 1785, 36 L.Ed.2d 596 (1973),

Gibbs involved a suit brought under both federal and state law by a contractor to recover damages allegedly suffered as a result of a secondary boycott imposed upon it by a union. There existed independent federal jurisdiction as to the federal claim, but there was no independent basis of jurisdiction to support the state law claim. Nevertheless, the Court concluded that federal courts could exercise pendent jurisdiction over the state law claim.

Id. at 711, 93 S.Ct. at 1796. The Supreme Court held that federal courts had the power to hear state law claims which arose from a "common nucleus of operative facts" with a substantial federal law claim. 383 U.S. at 725. Thus, the Court expanded and delineated the scope of an Article III constitutional "case" to encompass all matters, both federal and state, which a litigant would expect "to try . . in one judicial proceeding." Id.

In the cases at bar, plaintiffs contend that their state law claims all arise from the same common nucleus of operative facts out of which their federal claims arise. Although defendant does not dispute this contention, defendant argues that: (1) this court still lacks the power to hear plaintiffs' state law claims; and (2) if this court has power to hear the plaintiffs's state law claims it should exercise the discretion afforded by Gibbs to federal courts to decline to hear state law claims which lack an independent basis of federal jurisdiction.

1. Power to hear the state law claims

In support of its contention that this court lacks power to hear the plaintiffs' state law claims, Continental makes two arguments. First, defendant argues that in order for a court to consider state law claims, those claims must be pendent to "substantial" federal law claims. Defendant suggests that individuals with state law claims should not be allowed to foist those claims upon federal courts by the mere talismanic raising of federal laws. While this court agrees that defendant has accurately stated the abstract principle of law involved herein,⁸ in the cases at bar plaintiffs' state law claims were pendent to "substantial" federal claims.

As stated in Hagans v. Lavine, 415 U.S. 528, 94 S.Ct. 1372, 39 L.Ed.2d 577 (1974):

"`Constitutional insubstantiality' . . has been equated with such concepts as `essentially fictitious,' . . . `wholly insubstantial' . . . `obviously frivolous' . . . `and obviously without merit' . . .. The limiting words `wholly' and `obviously' have cogent legal significance. In the context of the effect of prior decisions upon the substantiality of constitutional claims, those words import that claims are constitutionally insubstantial only if the prior decisions inescapably render the claims frivolous; previous decisions that merely render claims of doubtful or questionable merit do not render them insubstantial . .. A claim is insubstantial only if "`its unsoundness so clearly results from the previous decisions of this court as to foreclose the subject and leave no room for the inference that the questions sought to be raised can be the subject of controversy.'"

Id. at 537-38, 94 S.Ct. at 1379, quoting Goosby v. Osser, 409 U.S. 512, 518, 93 S.Ct. 854, 35 L.Ed.2d 36 (1973) (citations omitted). See generally C. Wright & A. Miller, supra § 3564, at 426-30.

That plaintiffs' claims under section 10(b) were not "wholly insubstantial," "obviously frivolous" or "obviously without merit" is best demonstrated by the fact that Judge McGarr, after a thorough review of the then-existing law, upheld plaintiffs' securities laws claims. Moreover, although this court remains convinced that Santa Fe Indus., Inc. v. Green, supra, invalidates plaintiffs' section 10(b) and rule 10b-5 claims, those claims alleging defendant's omissions or misstatements concerning purchases or sales of securities for plaintiffs' trusts are not so lacking in merit that they were included in plaintiffs' complaints only to confer jurisdiction in this court over plaintiffs' state law claims.

Second, defendant takes the position that even if a federal district court had jurisdiction over pendent state law claims at the time the action was commenced, if the federal claims upon which pendent jurisdiction is based are dismissed prior to trial, the district court must dismiss the state law claims which lack an independent basis of federal court jurisdiction. This contention is premised on a statement in Gibbs which provides:

Certainly, if the federal claims are dismissed before trial, even though not insubstantial in a jurisdictional sense, the state claims should be dismissed as well.

383 U.S. at 726, 86 S.Ct. at 1139 (emphasis supplied). Thus, defendant would have this court read the words "should be" as mandatory language, and would have this court hold that once the federal law...