Singletary v. Continental Illinois Nat. Bank and Trust Co. of Chicago

• Decision Date: 16 November 1993
• Docket Number: No. 93-1849,93-1849
• Parties: Tatum C. SINGLETARY, et al., Plaintiffs-Appellants, v. CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1236

9 F.3d 1236

Tatum C. SINGLETARY, et al., Plaintiffs-Appellants, v. CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO, et al., Defendants-Appellees.

No. 93-1849.

United States Court of Appeals Seventh Circuit.

Argued Oct. 1, 1993.

Decided Nov. 16, 1993.

Steven I. Brody, Charles L. Siemon (argued), Marcella Larsen, Siemon, Larsen & Marsh, Chicago, IL, for Tatum C. Singletary, etc.

Kenneth E. Wile, Charles F. Regan, Fern C. Bomchill (argued), Mayer, Brown & Platt, Chicago, IL, for Continental Illinois Nat. Bank and Trust Co. of Chicago and Continental Illinois Corp.

Francis J. McConnell, David O. Toolan, Chicago, IL, for John R. Lytle.

William G. Patterson, pro se.

Before POSNER, Chief Judge, MANION, Circuit Judge, and WOOD, JR., Senior Circuit Judge.

POSNER, Chief Judge.

From the wreck of the Penn Square Bank more than a decade ago, which nearly dragged the Continental Illinois National Bank down with it, still another case has found its way to this court, a diversity suit by Tatum Singletary and members of his family against Continental and others, charging fraud and other misconduct. The suit was filed in 1989, and dismissed, on the defendants' motion for summary judgment, as barred by the statute of limitations.

We consider at the outset a jurisdictional glitch unremarked by the parties and the district judge. (Diversity suits are full of jurisdictional traps.) Among the defendants are two individuals, William Patterson and John Lytle, who at the time the suit was filed were prison inmates. The complaint treated the state in which each of these men was imprisoned as the state of his citizenship for purposes of diversity jurisdiction. This is incorrect. It should be the state of which he was a citizen before he was sent to prison unless he plans to live elsewhere when he gets out, in which event it should be that state. Sullivan v. Freeman, 944 F.2d 334, 337 (7th Cir.1991); Jones v. Hadican, 552 F.2d 249 (8th Cir.1977) (per curiam); Flanagan v. Shively, 783 F.Supp. 922, 935 (M.D.Pa.), aff'd without opinion, 980 F.2d 722 (3d Cir.1992). The record does not reveal which states these men are citizens of, and since the plaintiffs are citizens of several different states the possibility that the requirement of "complete diversity" (meaning no citizens of the same state on both sides of the litigation, Strawbridge v. Curtiss, 7 U.S. (3 Cranch) 267, 2 L.Ed. 435 (1806); Fidelity & Deposit Co. v. City of Sheboygan Falls, 713 F.2d 1261, 1264-68 (7th Cir.1983)) is not satisfied is more than theoretical.

Newman-Green, Inc. v. Alfonzo-Larrain, 490 U.S. 826, 109 S.Ct. 2218, 104 L.Ed.2d 893 (1989), empowers us to dismiss nonindispensable defendants (and these defendants are not indispensable) if necessary to preserve federal jurisdiction. We do not know whether it is necessary, because we do not know what states they are citizens of. We can solve the problem by deciding the merits, then remanding for a determination of these defendants' citizenship. If they are found not to be citizens of any of the states of which the plaintiffs are citizens, no further order will be required. If their presence in the suit is found to be incompatible with complete diversity, the district judge should dismiss them.

Admittedly this case is different from Newman-Green, because there the plaintiff had asked the appellate court to dismiss a diversity-destroying defendant. There has been no such request here. If a plaintiff wants to retain a nondiverse defendant, it is no business of the court to tell him he can't; the court's job in such a case is to tell the plaintiff that he can't stay in federal court. But when a plaintiff having elected federal jurisdiction goes all through the trial and appeal of his case without breathing any jurisdictional doubts, we think he should be deemed to have consented to the dropping of nondiverse parties if necessary to preserve federal jurisdiction. Otherwise a plaintiff who loses on the merits in the court of appeals could file a petition for rehearing pointing out the presence of the nondiverse defendant and be able to start over in state court. Of course that sort of thing can and does happen in the case of a nonwaivable limitation on federal jurisdiction, but the presence of a nonindispensable nondiverse party is an obstacle to federal jurisdiction that a plaintiff can waive, and we think he should be required to do so when his own carelessness about the requirements of federal jurisdiction was responsible for the case having been allowed to proceed to judgment in the district court and full briefing and argument of the merits in the court of appeals.

We turn to the merits. Tatum Singletary was the president and principal shareholder of Heston Oil Company, a marketer of oil and gas limited partnerships; the other plaintiffs, all Singletarys, were the other shareholders. In August 1981, Heston made a deal with a company called Mahan-Rowsey to buy drilling leases from a third company, Shar-Alan. The purchase price was $4.5 million. Mahan-Rowsey made a down payment of $250,000. The second installment of the purchase price was to be $2 million, paid by Mahan-Rowsey and financed by a loan from Penn Square Bank, and the third installment was to be $2.25 million, paid by Heston and also financed by a loan from Penn Square. William Patterson, a vice-president of Penn Square, handled these loans. Because Mahan-Rowsey had poor credit, Singletary on behalf of Heston paid the second installment with the proceeds of a $2 million loan from Penn Square, a loan he repaid. This left Mahan-Rowsey owing Shar-Alan $2.25 million. Patterson was reluctant to lend money to Mahan-Rowsey without security, so he asked Singletary--but without disclosing his reason for doing so--to sign another promissory note to the bank, this one for $2.25 million. (Singletary had paid off his previous note to the bank, for $2 million, as we mentioned.) Patterson sent Singletary the note for his signature. The note bore a due date of January 5, 1982, and was not sent to Singletary until shortly afterward. Singletary thought the note secured a letter of credit which, like the note itself, had already expired, and that the only reason he was being asked to sign the note was to repair an omission in Penn Square's files. He neither believed nor had any reason to believe that the note would obligate him to pay anything to anyone. Patterson, however, "booked" a $2.25 million loan to Singletary (that is, recorded a loan for this amount on Penn Square's books), changed the date on the note from January 5 to July 6, disbursed $2.25 million to Shar-Alan, and sold a 100 percent participation in the "loan" to Continental; it was defendant John Lytle at Continental who authorized the purchase of the participation. The reason for Patterson's changing the date on the note was that Continental would not have bought a participation in a loan secured by a promissory note that had already expired.

We should point out that the purchase of a 100 percent participation in a loan is not quite the same thing as the purchase of the loan itself. First National Bank v. Clay-Hensley Commission Co., 170 Ill.App.3d 898, 121 Ill.Dec. 411, 525 N.E.2d 217 (1988). As the purchaser of a 100 percent participation in the Singletary "loan," Continental would of course (had it been a valid loan) be entitled to all the interest and, when the time for repayment arrived, to all the principal as well. But Penn Square, as the seller of a participation rather than an assignor of the loan, remained the lender and was obligated to service the loan.

Singletary first learned of the $2.25 million "loan" when he received a notice from Penn Square that it was due and payable; but in response to his inquiries he was assured that the notice was the result of a computer error. Penn Square collapsed on July 5, 1982, and later that month Singletary began meeting with officers of Penn Square, Continental, and the Federal Deposit Insurance Corporation, the receiver for Penn Square, in an effort to resolve the status of the so-called loan. Continental, while making no effort actually to collect the loan from Singletary, would not acknowledge that it was invalid. It had profound doubts about the loan's validity but did not voice them to Singletary. In 1983 the FDIC sold the Singletary "loan" to Continental, which thus became the lender as well as the 100 percent participant in the loan.

Also in 1983 Heston went bankrupt, a catastrophe that the plaintiffs attribute, a little implausibly (for they overlook the collapse of oil prices in 1982, which was the catalyst for the Penn Square debacle--and Heston was in the oil business), to their uncertainty over whether Singletary owed Continental $2.25 million. In 1984 Patterson and Lytle were indicted on a variety of charges, including misappropriation in connection with the Singletary "loan." Not until mid-1988 were the criminal proceedings against Patterson and Lytle resolved, when both pleaded guilty to various counts of bank fraud. Lytle admitted having caused Continental to make a $2.25 million loan to Singletary in violation of federal banking law, and Patterson admitted having aided and abetted Lytle in that offense. The reason that a fictitious loan caused a misappropriation of bank funds is that, as we mentioned earlier, the proceeds of the Singletary "loan" had been paid, to Shar-Alan. Continental argues that since the altered note facilitated the very transaction that Singletary wanted to consummate, he shouldn't complain. But obviously a bank is not permitted to lend money to a person without his knowledge, then try to enforce the terms of the loan by saying that he benefited from it. The benefit could affect the amount of damages to which the "borrower" was entitled, but it would not excuse the fraud. Anyway, it is unclear whether there was any benefit to Singletary. The bank had already agreed to lend the...