People ex rel. Cosentino v. Fed. Reserve Bank

• Decision Date: 03 January 1984
• Docket Number: No. 82 C 2714.,82 C 2714.
• Citation: 579 F. Supp. 1261
• Parties: PEOPLE of the State of Illinois on the relation of Jerome COSENTINO, Treasurer of the State of Illinois, Plaintiff, v. FEDERAL RESERVE BANK OF CHICAGO and Merchandise National Bank of Chicago, Defendants.
• Court: U.S. District Court — Northern District of Illinois

579 F. Supp. 1261

PEOPLE of the State of Illinois on the relation of Jerome COSENTINO, Treasurer of the State of Illinois, Plaintiff, v. FEDERAL RESERVE BANK OF CHICAGO and Merchandise National Bank of Chicago, Defendants.

No. 82 C 2714.

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

January 3, 1984.

Henry K.S. Borecki, Asst. Atty. Gen. of Illinois, Chicago, Ill., for plaintiff.

Richard J. Riordan, Robert K. Larson, Riordan, Larson, Bruckert & McCambridge, Chicago, Ill., for defendants.

MEMORANDUM AND ORDER

MORAN, District Judge.

The State of Illinois brought this action to collect $4,900 from the defendants, who had transferred and presented for payment fifteen checks drawn by the State but bearing forged endorsements by the payees. Essentially, checks with forged endorsements were cashed at currency exchanges, deposited at Merchandise National Bank of Chicago, transferred to the Federal Reserve Bank of Chicago, which in turn presented them to the State for payment. Both Merchandise National Bank and the Federal Reserve Bank endorsed the checks.

In counts 1 and 2 of the complaint the State charges that the Federal Reserve Bank and Merchandise National Bank violated their warranties of good title under the Uniform Commercial Code when presenting the checks with forged endorsements for payment. Ill.Rev.Stat., ch. 26, §§ 3-417(1)(a), 4-207(1)(a).¹ In count 3 the State charges Merchandise National Bank with violating an express guarantee of the genuineness of the prior endorsements on the checks. The State seeks the amount it paid on the checks, prejudgment interest and costs.

The State argues that this court has subject matter jurisdiction over the Federal Reserve Bank under 12 U.S.C. § 632, which reads in pertinent part:

Notwithstanding any other provision of law, all suits of a civil nature at common law or in equity to which any Federal Reserve bank shall be a party shall be deemed to arise under the laws of the United States, and the district courts of the United States shall have original jurisdiction of all such suits; and any Federal Reserve bank which is a defendant in any such suit may, at any time before the trial thereof, remove such suit from a State court into the district court of the United States for the proper district by following the procedure for the removal of causes otherwise provided by law. No attachment or execution shall be issued against any Federal Reserve bank or its property before final judgment in any suit, action, or proceeding in any State, county, municipal, or United States court.

We agree. The state also requests the court to exercise pendent party jurisdiction over Merchandise National Bank. This we decline to do.

I.

Defendants' argument that this court lacks subject matter jurisdiction over the claim against the Federal Reserve Bank can be disposed of quickly. Their position is that § 632 only confers jurisdiction over "civil" suits against or on behalf of federal reserve banks. An action under the U.C.C. is not a "civil" action they claim. Hence, the argument goes, this court has no subject matter jurisdiction.

Section 632 applies, however, to "all suits of a civil nature" to which a federal reserve bank is a party. Nothing in the U.C.C. suggests that cases under it are not "civil in nature." The U.C.C. was designed primarily to simplify, clarify and promote the uniformity of commercial law. Ill.Rev. Stat., ch. 26, § 1-102. The U.C.C. makes clear its intimate connection with the common law in Section 1-103:

Unless displaced by the particular provisions of this Act, the principles of law and equity, including the law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, or other validating or invalidating cause shall supplement its provisions.

Courts routinely look to the common law in U.C.C. cases. See e.g., Avco Delta Corp. Canada Ltd. v. United States, 459 F.2d 436 (7th Cir.1972); Northern Trust Co. v. Oxford Speaker Co., 109 Ill.App.3d 433, 65 Ill.Dec. 113, 440 N.E.2d 968 (1st Dist.1982); GNP Commodities Inc. v. Walsh Heffernan, Co., 95 Ill.App.3d 966, 51 Ill.Dec. 245, 420 N.E.2d 659 (1981).

In addition, § 632 was designed to give federal courts jurisdiction over actions involving federal reserve banks to the same extent they had prior to the passage of section 12 of the Act of February 13, 1925, c. 229, 43 Stat. 941 now at 28 U.S.C. § 1349. See pages 1264-1265 infra. During this earlier period federal courts exercised jurisdiction over claims against federal reserve banks much like the one at issue here. See Closter National Bank v. Federal Reserve Bank of New York, 285 F. 138 (2d Cir.1922).

II.

The more difficult issue is whether this court has pendent party jurisdiction over Merchandise National Bank. Pendent party jurisdiction is the joinder of a party who is not otherwise subject to federal jurisdiction. Pendent claim jurisdiction, which is more common, is the joinder of a non-federal claim against a party already subject to federal jurisdiction.

The starting point for pendent jurisdiction analysis is United Mine Workers of America v. Gibbs, 383 U.S. 715, 86 S.Ct. 1130, 16 L.Ed.2d 218 (1966). There, the Supreme Court set out a two-part test for the exercise of pendent claim jurisdiction. First, federal courts have power under Art. III, § 2 to exercise pendent jurisdiction where the pendent and federal claims "derive from a common nucleus of operative fact." Id. at 725, 86 S.Ct. at 1138. Second, judges have discretion to exercise pendent jurisdiction based on a "consideration of judicial economy, convenience and fairness to litigants." Id. at 726, 86 S.Ct. at 1139. Although Gibbs was addressed to pendent claim jurisdiction, it prompted most federal courts to exercise jurisdiction over pendent parties. See Bowers v. Moreno, 520 F.2d 843, 846-48 (1st Cir.1975); Curtis v. Everette, 489 F.2d 516, 519-20 (3d Cir.1973), cert. denied, 416 U.S. 995, 94 S.Ct. 2409, 40 L.Ed.2d 774 (1974); Almenares v. Wyman, 453 F.2d 1075, 1083 (2d Cir.1971), cert. denied, 405 U.S. 944, 92 S.Ct. 962, 30 L.Ed.2d 815 (1972); Leather's Best, Inc. v. S.S. Mormaclynx, 451 F.2d 800, 809-11 (2d Cir. 1971) (admiralty claim supported negligence claim against pendent party); Connecticut General Life Ins. Co. v. Craton, 405 F.2d 41, 48 (5th Cir.1968); State of North Dakota v. Merchants National Bank and Trust Co., 634 F.2d 368 (8th Cir.1980). The Seventh and Ninth circuits resisted this trend. Hampton v. City of Chicago, 484 F.2d 602 (7th Cir.1974); Hymer v. Chai, 407 F.2d 136 (9th Cir.1969).

The Supreme Court cautioned against the blanket exercise of pendent party jurisdiction in Aldinger v. Howard, 427 U.S. 1, 96 S.Ct. 2413, 49 L.Ed.2d 276 (1976). See also Owen Equipment & Erection Co. v. Kroger, 437 U.S. 365, 98 S.Ct. 2396, 57 L.Ed.2d 274 (1978). The Court emphasized that the joinder of a party not otherwise subject to federal jurisdiction presented a "more serious obstacle" to the exercise of pendent jurisdiction for both practical and legal reasons:

The situation with respect to the joining of a new party, however, strikes us as being both factually and legally different from the situation facing the Court in Gibbs and its predecessors. From a purely factual point of view, it is one thing to authorize two parties, already present in federal court by virtue of a case over which the court has jurisdiction, to litigate in addition to their federal claim a state-law claim over which there is no independent basis of federal jurisdiction. But it is quite another thing to permit a plaintiff, who has asserted a claim against one defendant with respect to which there is federal jurisdiction, to join an entirely different defendant on the basis of a state-law claim over which there is no independent basis of federal jurisdiction, simply because his claim against the first defendant and his claim against the second defendant "derive from a common nucleus of operative fact." True, the same considerations of judicial economy would be served insofar as plaintiff's claims "are such that he would ordinarily be expected to try them all in one judicial proceeding ...." But the addition of a completely new party would run counter to the well-established principle that federal courts, as opposed to state trial courts of general jurisdiction, are courts of limited jurisdiction marked out by Congress.

Aldinger, 427 U.S. at 14-15, 96 S.Ct. at 2420-2421 (Quoting from Gibbs, 383 U.S. at 725, 86 S.Ct. at 1138). Aldinger reaffirmed the need to examine constitutional and discretionary issues as outlined in Gibbs before extending pendent jurisdiction. It also added a requirement that the court closely scrutinize the statute conferring federal jurisdiction to determine if it explicitly or implicitly denied jurisdiction over pendent parties. Id. 427 U.S. at 18, 96 S.Ct. at 2422. See also United States ex rel. Hoover v. Franzen, 669 F.2d 433, 437-441 (7th Cir.1982). Far from precluding all pendent party jurisdiction, the Court urged a careful case-by-case analysis of each pendent party question. Aldinger, 427 U.S. at 18, 96 S.Ct. at 2422.

III.

The history of 12 U.S.C. § 632, which gives this court subject matter jurisdiction over the claim against the Federal Reserve Bank, begins with Osborn v. Bank of the United States, 9 Wheat. 738, 6 L.Ed. 204 (1824). There the Court, speaking through Chief Justice Marshall, held that Congress could vest the federal courts with jurisdiction over claims by and against the Bank of United States. Id. at 816-18. Fifty years later the Court expanded federal court jurisdiction to cover all actions against federally-incorporated institutions. Pacific Railroad Removal Cases, 115 U.S. 1, 5 S.Ct. 1113, 29 L.Ed. 319 (1885).

The Pacific Railroad decision apparently subjected federal courts to a flood of litigation. See generally Murphy v. Colonial Federal Savings & Loan...