Tcherepnin v. Franz

• Decision Date: 27 July 1973
• Docket Number: 18952 and 18958.,No. 18933,18933
• Citation: 485 F.2d 1251
• Parties: Alexander TCHEREPNIN et al., Plaintiffs, v. Robert FRANZ et al., Defendants, Peerless Closure Company, Defendant-Appellant. Alexander TCHEREPNIN et al., Plaintiffs, v. Robert FRANZ et al., Defendants, Henry McGurren, Defendant-Appellant. Alexander TCHEREPNIN et al., Plaintiffs, v. Robert FRANZ et al., Defendants, Braewood Building Corporation, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

485 F.2d 1251 (1973)

Alexander TCHEREPNIN et al., Plaintiffs, v. Robert FRANZ et al., Defendants, Peerless Closure Company, Defendant-Appellant.

Alexander TCHEREPNIN et al., Plaintiffs, v. Robert FRANZ et al., Defendants, Henry McGurren, Defendant-Appellant.

Alexander TCHEREPNIN et al., Plaintiffs, v. Robert FRANZ et al., Defendants, Braewood Building Corporation, Defendant-Appellant.

Nos. 18933, 18952 and 18958.

United States Court of Appeals, Seventh Circuit.

Argued June 16, 1972.

Decided July 27, 1973.

Rehearing Denied September 12, 1973.

COPYRIGHT MATERIAL OMITTED

Don H. Reuben, Steven L. Bashwiner, Chicago, Ill., for cross-plaintiffs.

Zeamore A. Ader, Chicago, Ill., for Thelma Brynjolfsson, plaintiff.

Fred Weiszmann, Paul E. Hamer, North Brook, Ill., Richard F. McPartlin, Chicago, Ill., for cross-defendants-appellants.

Before FAIRCHILD, CUMMINGS and STEVENS, Circuit Judges.

FAIRCHILD, Circuit Judge.

These appeals represent still another aspect of the long and complex litigation occasioned by the insolvency of City Savings Association (hereinafter City Savings).¹

They follow from the district court's imposition of a constructive trust upon a number of tracts of land in the Chicago area for the benefit of City Savings. Appellants Braewood Building Corporation and Peerless Closure Company each claim title to particular parcels as bona fide purchasers and seek to overturn the district court's imposition of a constructive trust. Appellant McGurren, in whom title to a number of these properties was vested as trustee, contends the court erred in entering certain findings which reflect upon him individually.

I. Background.

The proceeding from which these appeals arise is ancillary to an action initiated by a group of shareholder-depositors of City Savings in 1964. The original plaintiffs alleged fraudulent solicitation of deposits by City Savings, a state chartered savings and loan association, and sought rescission of their purchases of withdrawable capital shares under the Securities and Exchange Act of 1934. After the Supreme Court confirmed the applicability of the 1934 Act and hence jurisdiction of the district court over their claim² the district court removed state appointed liquidators then having custody of City Savings' assets, appointed federal receivers,³ and instructed the receivers to litigate all claims of City Savings as ancillary to the principal action.

On April 4, 1969, the receivers, in the name of defendant City Savings, filed a four count second cross-complaint against officers and employees of City Savings, as well as other persons. The cross-complaint alleged, among other things, a conspiracy and land fraud scheme, pursuant to which excessive loans were made in violation of fiduciary duty and with intent to defraud, and cross-defendants acquired parcels of real estate for personal benefit in violation of duty to City Savings. Count II listed tracts which allegedly were so acquired, including the properties claimed by appellants Braewood and Peerless, and requested the imposition of a constructive trust.

On July 24, 1969, the district court granted the receivers' motion to amend the cross-complaint. This amendment added a fifth count and additional property to Count II of the cross-complaint.

On August 7, 1969, the district court ordered appellant Henry McGurren as trustee to show cause why title to the property claimed by Braewood should not be conveyed to City Savings. McGurren defended by alleging that Braewood acquired this property from Suburban Life Builders Corporation in good faith in return for services rendered. From September 29 to October 1, 1969, hearings were held on the issue of ownership of this property. By stipulation of the parties, these proceedings were consolidated for briefing and final order with the proceedings held in May, 1970 concerning title to the remaining parcels described in Count II.

On March 13, 1970, the court granted receivers' motion to file a second amendment to the cross-complaint. Inter alia, this amendment added appellant Henry McGurren, both individually and as trustee, as a cross-defendant in Counts II and III.

From May 4 through May 8, and on May 21, 1970, hearings on the issue of title were conducted. Appellant Peerless participated, contending it was a bona fide purchaser from Washington Capital Corporation of a parcel with respect to which the receivers sought to impose a constructive trust. Appellant McGurren was present, but the attorney who represented McGurren was not. Both had notice.

On August 6, 1970, the district court entered its "Findings of Fact, Conclusions of Law, Memorandum, Order and Judgment,"⁴ wherein a constructive trust was imposed upon all the properties listed in Count II, including those claimed by Peerless and Braewood. No judgment was entered against McGurren other than to require him to convey certain property. The court, however, in stating the basis upon which its relief was grounded, found that McGurren acted as a "conspirator" and "nominee" in the fraudulent scheme. McGurren, Braewood, and Peerless appealed.

II. Nature and Pattern of the Fraudulent Scheme.

City Savings fell into hopeless insolvency as a consequence of the fraudulent activity of its principal officers in concert with others. C. Oran Mensik, the president, chairman of the board, chairman of the executive committee and chief executive officer, apparently masterminded the scheme. Mensik was principally assisted by Robert M. Kramer, a vice-president of City Savings, a member of the executive committee, and a member of the board. Kramer's role was generally directed by Mensik and he often appeared as an officer in corporations controlled by Mensik.

While other persons had varying roles in the scheme, Mensik apparently preferred to manage a complex network of nominee corporations and their fraudulent transactions by himself. He was in custody after 1968 as a result of a conviction arising out of dealings in Maryland. His deposition was taken early in these proceedings. His present whereabouts are unknown. Consequently it has not been possible to obtain a wholly coherent picture of the scheme. Nevertheless, from the testimony, depositions and exhibits, one gains a fair understanding of both the pattern and the extent of the fraud.

With the assistance of the late attorney Alexander Pikiel, Mensik directed the creation of a large number of corporations. The ostensible officers and directors of these corporations would be elected or otherwise placed in their respective positions by Mensik and they, in turn, would respond to his direction and control. The controlling officers of City Savings, in accordance with Mensik's instructions, would then approve loans to these corporations secured by overvalued real estate. Indeed, the controlling officers along with other employees of City Savings often served as the nominal officers and directors of the corporations to which the loans were made.

While some of the money loaned might then be used to pay the purchase price of the land, the rest would be channelled to other Mensik-controlled corporations or partnerships, ostensibly for services rendered.

Frequently other Mensik-controlled corporations would acquire property from these nominees, the land being used as security for further inflated loans. And, because the amount of the loans usually far exceeded the fair market value of the property acquired, these corporations were sometimes able to acquire property without any encumbrances in favor of City Savings.

Beginning in 1959 and 1962 two land development projects in particular were used as a cover for depleting the assets of City Savings in this fashion: the Apple Orchard development in Bartlett, Illinois and the Howie-In-The-Hills project in Palatine, Illinois.

City Savings was seized by the state June 26, 1964 and turned over to liquidators September 20, 1964. The land development projects continued, some of the operations being carried out by nominee corporations among a rash of corporations first organized in 1964. Mensik remained active until imprisoned in late 1968. He aided in negotiation for loans made in 1966 by a Teamsters' pension fund.

The property claimed by Braewood, now known as Palatine Estates, is a portion of a tract acquired by Mensik-controlled Howie-In-The-Hills Building Corporation in 1962 and subdivided as Howie-In-The-Hills Unit 2. Braewood's claim is based on a deed dated March 1, 1966 from a later owner, Mensik-controlled Suburban Life Builders Corporation.

The property claimed by Peerless, usually referred to as the Mensik homesite, is a portion of a tract acquired by the Mensik group January 10, 1959. Title was taken in the name of Henry McGurren, trustee under a trust agreement dated January 10, 1959, as were other 1959 acquisitions. Although most of the tract was conveyed out by McGurren to a nominee corporation and subdivided, as were other tracts from time to time, the homesite continued until 1968 to be occupied by Mensik and was not subdivided. McGurren apparently continued to hold its title as trustee until he conveyed to Peerless in January, 1969. An interest which seems to have amounted to the beneficial interest in the homesite was transferred among Mensik nominees and to Washington Capital. Peerless' claim to the beneficial interest is based on a transaction with Washington Capital in May, 1967.

III. Jurisdiction.

Appellants have challenged the district court's subject matter jurisdiction over the proceedings. The district court considered its jurisdiction as ancillary to the principal action which occasioned the receivers' appointment. Appellants contend this was error and that facts constituting a basis for federal jurisdiction had to be pleaded in these actions before the court could take jurisdiction. We disagree.

The ancillary jurisdiction of federal courts over actions incident to a receivership established by a federal court has long...