Tcherepnin v. Franz

• Decision Date: 14 November 1977
• Docket Number: No. 64 C 1285.,64 C 1285.
• Citation: 439 F. Supp. 1340
• Parties: Alexander TCHEREPNIN et al., Plaintiffs, v. Robert FRANZ et al., Defendants.
• Court: U.S. District Court — Northern District of Illinois

439 F. Supp. 1340

Alexander TCHEREPNIN et al., Plaintiffs, v. Robert FRANZ et al., Defendants.

No. 64 C 1285.

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

November 14, 1977.

COPYRIGHT MATERIAL OMITTED

Don H. Reuben, James C. Munson, Kirkland & Ellis, Chicago, Ill., for plaintiffs.

Raymond F. McNally, Jr., St. Louis, Mo., J. Fred Schlafly, Schlafly, Godfrey & Fitzgerald, Alton, Ill., Edward Macie, Elward & Macie, L. Edward Bryant, Jr., Gardner, Carton & Douglas, Chicago, Ill., for defendants.

MEMORANDUM AND ORDER

ROBSON, Senior District Judge.

This cause is before the court on the motion of defendant First National Bank and Trust Company of Alton as Executor of the Joseph E. Knight Estate hereinafter Executor of the Knight Estate under Count IX of the Amended First Cross-Complaint of the City Savings Association, by its receiver Samuel Berke, to dismiss for failure to state a claim upon which relief can be granted. The third-party defendant First National Bank and Trust Company of Alton as Trustee of the Joseph E. Knight Trust hereinafter Trustee of the Knight Trust has moved to dismiss Count IX for lack of subject matter jurisdiction and for lack of proper venue. In addition, the other third-party defendants — the Jersey County Historical Society, Principia College of Elsah, Illinois, the Catholic Children's Home of Alton, and Rush Medical College of Chicago — as beneficiaries of the Joseph E. Knight Trust have moved to dismiss Count IX for lack of proper venue. For the reasons hereinafter stated, defendants' motions to dismiss will be denied.

On July 12, 1977, this court granted the receiver's motion for leave to file Count IX of its Amended First Cross-Complaint. This Count is a part of the protracted litigation¹ involving the events surrounding the collapse of the City Savings Association, a savings and loan association chartered by the State of Illinois and presently under the control of a federal receiver. Count IX is an action brought by defendant and cross-plaintiff, City Savings Association, by its receiver, to set aside fraudulent conveyances pursuant to Ill.Rev.Stat. ch. 59, § 4 (1977), and rule 18 of the Fed.R.Civ.P. Named and joined as defendants in this action are cross-defendant First National Bank and Trust Company of Alton as Executor of the Knight Estate; third-party defendant First National Bank and Trust Company of Alton as Trustee of the Knight Trust; and third-party defendants — the Jersey County Historical Society, Principia College of Elsah, Illinois, the Catholic Children's Home of Alton, and Rush Medical College of Chicago — as beneficiaries of the Joseph E. Knight Trust.

Prior to the filing of Count IX, this court granted the receiver's motion for summary judgment against the Executor of the Knight Estate,² on April 14, 1975, reported at 393 F.Supp. 1197 (N.D.Ill.1975), and entered judgment against the Estate on November 30, 1976, in the amount of $13,969,504, reported at 424 F.Supp. 778 (N.D.Ill. 1976). The Executor of the Knight Estate's appeal of the judgment is now pending in the Seventh Circuit Court of Appeals. In Count IX, the receiver alleges that the assets of the Estate of Knight are insufficient to satisfy its judgment, and thus, seeks to set aside the conveyance by a deed in trust of real estate in Jersey County, Illinois, executed by Joseph E. Knight in 1970 during the pendency of the City Savings Association receivership.

Cross-defendant Executor of the Knight Estate seeks to dismiss Count IX on the grounds that there is no relief sought against it in Count IX, no allegation is made that it is in any way a party to the trust sought to be set aside, and therefore, Count IX fails to state a claim against it upon which relief can be granted. Third-party defendant Trustee of the Knight Trust seeks to dismiss Count IX on the grounds of lack of subject matter jurisdiction and improper venue. The other third-party defendants — the Jersey County Historical Society, Principia College of Elsah, Illinois, the Catholic Children's Home of Alton, and Rush Medical College of Chicago — as beneficiaries of the Joseph E. Knight Trust seek to dismiss Count IX on the ground of improper venue in the Northern District of Illinois. The First National Bank and Trust Company of Alton as Executor of the Knight Estate and as Trustee of the Knight Trust has filed memoranda in support of its motion and in reply to the receiver's answering memorandum. The beneficiaries of the Knight Estate have not filed memoranda in support of their motion. The receiver has filed an answering memorandum to all of the motions.

Executor as a Necessary Party

Defendant Executor of the Knight Estate argues in its reply memorandum that it is not a necessary party to Count IX so that this action should be dismissed as to it. In an action such as Count IX to set aside a fraudulent conveyance pursuant to Illinois law all parties who may be interested or affected by the judgment of the court should be joined as parties. 20 Illinois Law and Practice, Fraudulent Conveyances § 262, at 215-16 (1956). As this court cannot state with certainty at this stage of the proceedings that the Executor of the Knight Estate will not be affected by the decree, the Executor cannot be dismissed from participation in the Count IX proceedings.

The Executor of the Knight Estate asserts in its reply memorandum that even if the trust attacked in Count IX is set aside as fraudulent, the assets will revert to Knight's residuary legatees as the assets involved are real estate with the Executor obtaining no title or interest. This court is of the opinion that the nature of the fraudulent conveyance proceeding necessitates the presence of the Executor of the Knight Estate in the Count IX action. It has been held that the successful setting aside of a fraudulent conveyance of real estate restores the property to the debtor, as the creditor's interest is derivative from that of the debtor. Redden v. Potter, 16 Ill.App. 265, 271 (4th Dist. 1885). See also Johnson v. La Grange State Bank, 50 Ill.App.3d 830, 8 Ill.Dec. 670, 365 N.E.2d 1056, 1065 (1st Dist. 1977). In other words, the setting aside of the conveyance as fraudulent would restore the property to the Executor of the Knight Estate as far as the receiver — a creditor of the Knight Estate by way of its previous judgment in this action against the estate — is concerned. This restoration of property to the Executor of the Knight Estate makes the Executor a necessary party, so that the court's decree, if any, will be binding upon it. 7 Wright & Miller, Federal Practice and Procedure § 1618, at 190 hereinafter Wright & Miller; Lux v. Lelija, 11 Ill.App.2d 33, 137 N.E.2d 280 (2d Dist. 1956).

Subject Matter Jurisdiction

Third-party defendant Trustee of the Knight Trust argues that this court lacks subject matter jurisdiction as diversity of citizenship does not exist between the parties and no federal question is presented for decision. The receiver states that this court has ancillary jurisdiction over Count IX as it is related to the original action.

A federal district court has ancillary jurisdiction over actions related to the appointment of a federal receivership. Tcherepnin v. Franz, 485 F.2d 1251, 1255 (7th Cir. 1973), cert. denied sub nom., McGurren v. Ettelson, 415 U.S. 918, 94 S.Ct. 1416, 39 L.Ed.2d 472 (1974); 12 Wright & Miller, § 1285, at 44. Thus, a federal receiver may sue in the court of its appointment through an ancillary proceeding "to accomplish the ends sought and directed by the suit in which the appointment was made." Pope v. Louisville, New Albany & Chicago Ry. Co., 173 U.S. 573, 577, 19 S.Ct. 500, 501, 43 L.Ed. 814 (1899). In this case, the end sought by the appointment of the receiver was to obtain and preserve assets belonging to the City Savings Association so as to create a fund from which the original plaintiffs in the principal action might be reimbursed. Tcherepnin v. Franz, supra, at 1256. Count IX, as an action to set aside a fraudulent conveyance by Joseph E. Knight, a defendant against whom judgment has previously been entered in the principal action, clearly is consonant with the end sought by the appointment of the receiver as an action to obtain funds for the benefit of the depositors of the City Savings Association. The court directed the receiver to litigate all claims of the City Savings Association as ancillary to the principal case. Tcherepnin v. Franz, 316 F.Supp. 714, 716 (N.D.Ill.1970), aff'd, 485 F.2d 1251 (7th Cir. 1973), cert. denied sub nom., McGurren v. Ettelson, 415 U.S. 918, 94 S.Ct. 1416, 39 L.Ed.2d 472 (1974). Clearly bringing Count IX as an ancillary proceeding is consistent with this end directed by the court, and affirmed by the Seventh Circuit in Tcherepnin v. Franz, supra, at 1256. Accordingly, an independent jurisdictional ground is not necessary for an ancillary action by a federal receiver so that the lack of diversity of citizenship or of a federal question does not prevent a federal court from exercising jurisdiction in an ancillary proceeding. United States v. Franklin National Bank, 512 F.2d 245, 249 (2d Cir. 1975); Kelley v. Queeney, 41 F.Supp. 1015, 1018 (W.D.N.Y.1941). Count IX as an ancillary proceeding to the continued litigation is proper.

Finally, the Trustee of the Knight Trust further argues in its reply memorandum that this court lacks subject matter jurisdiction because of the failure of the receiver to comply with the requirements of 28 U.S.C. § 754. Section 754 provides for the vesting of jurisdiction over property located in different districts in the district of the appointment of a receiver. Jurisdiction vests if the receiver within ten days after the entry of its order of appointment files copies of its complaint and order of appointment in every district where property subject to the proceedings is situated. The section further provides that failure to file copies of the complaint in a...