U.S. v. Franklin National Bank

• Decision Date: 24 February 1975
• Docket Number: D,487,Nos. 241,s. 241
• Citation: 512 F.2d 245
• Parties: UNITED STATES of America and Mortimer Todel, as Receiver of the funds, assets and property of Roosevelt Capital Corporation, Plaintiffs-Appellees, v. FRANKLIN NATIONAL BANK, Defendant-Appellant. ockets 74-1062, 74-1816.
• Court: U.S. Court of Appeals — Second Circuit

Page 245

512 F.2d 245

UNITED STATES of America and Mortimer Todel, as Receiver of

the funds, assets and property of Roosevelt

Capital Corporation, Plaintiffs-Appellees, v. FRANKLIN NATIONAL BANK, Defendant-Appellant.

Nos. 241, 487, Dockets 74-1062, 74-1816.

United States Court of Appeals, Second Circuit.

Argued Nov. 12, 1974.

Decided Feb. 24, 1975.

Julius Berman, New York City (Kaye, Scholer, Fierman, Hays & Handler, Sidney Kwestel, New York City, on the brief), for defendant-appellant.

Henry A. Brachtl, Asst. U. S. Atty. (David G. Trager, U. S. Atty., E. D. New York, on the brief), for plaintiffs-appellees.

Before FRIENDLY, FEINBERG and TIMBERS, Circuit Judges.

FEINBERG, Circuit Judge:

Franklin National Bank (Franklin) appeals from a decision of the United States District Court for the Eastern District of New York, Leonard P. Moore, Senior Circuit Judge, ¹ awarding the United States and Mortimer Todel, the Receiver of Roosevelt Capital Corporation (Roosevelt), summary judgment for approximately $160,000 plus interest. On the present record, as will be seen below, there was no proper basis for jurisdiction in the Eastern District, although appellees Todel and the United States have suggested that this defect can be remedied in the district court. Therefore, we remand the case to the district court for further proceedings consistent with this opinion.

I

Roosevelt went into receivership because an unsavory group took it over and proceeded to dissipate its assets. In May 1964, the first step in the process began. The looters ² met with the then owners of Roosevelt in a meeting room at a Franklin branch office, which the Bank had offered as an accommodation to Roosevelt, a Franklin depositor. During the course of the meeting, arranged to effect the sale of the corporation, one of the buyers asked a Franklin official ³ if he would draw two checks totalling $160,000 on the Roosevelt account payable to the attorney and representative of the then owners of the stock of Roosevelt, so that the sale could be completed. Assuming that everything was proper, Franklin provided the checks and the sale was completed. The looters had managed to buy the corporation with its own money.

The interest of the United States stems from the fact that Roosevelt was a "small business investment company" under 15 U.S.C. § 681 et seq., indebted to the United States for approximately $150,000. When it became clear that Roosevelt had breached the conditions of its loan, the United States brought suit against Roosevelt in the United States District Court for the Southern District of New York to recover on its loan, ⁴ and also asked that a receiver for Roosevelt be appointed pendente lite under 15 U.S.C. § 687c(b). ⁵ Mortimer Todel was so appointed in March 1965, and given broad powers to collect and preserve the assets of Roosevelt. In August 1966, the United States recovered a default judgment in the action against Roosevelt. Since the dispersion of assets was thorough, the judgment remains unsatisfied.

In his effort to collect assets of Roosevelt, the Receiver brought this action against Franklin in May 1967 to recover the money paid out by Franklin to the former owners of Roosevelt at the looters' behest. The United States joined as co-plaintiff. The suit was filed in the Eastern District of New York ⁶ and alleged as jurisdictional grounds 28 U.S.C. § 1345 and 15 U.S.C. § 687c for plaintiff United States and 28 U.S.C. § 1331 and the federal receivership appointment for plaintiff Todel. The complaint prayed alternatively for $160,000 for Todel as Receiver of the assets of Roosevelt or for $150,000 for the United States and $10,000 for Todel. After pre-trial discovery, including the deposition of the bank officer who approved drawing the checks, plaintiffs moved for summary judgment. Judge Moore granted the motion, and it is from this decision that Franklin appeals.

II

The parties did not raise the issue of jurisdiction in the district court, or in this appeal. ⁷ Franklin did question the presence of the United States as a co-plaintiff since the Receiver had already been appointed, but Judge Moore found that problem unnecessary to decide because the Receiver was a party to the suit and "his power to bring this action has not been challenged...." It was not until oral argument before us, when Judge Friendly raised the question in open court, that the parties focused on the jurisdictional issue. They also furnished us with post-argument briefs on the subject. Based on these submissions and our own research, we have come to the conclusion that on this record there was no jurisdiction over this action in the Eastern District of New York.

If the United States were a proper party plaintiff, then there would be no question that jurisdiction would lie. 28 U.S.C. § 1345. But we believe that the United States is not properly in this action. While we have found no cases raising this issue in which a receiver had been appointed under 15 U.S.C. § 687c(b), there are sufficiently analogous situations from which we may draw. For example, in a suit by minority stockholders against a corporation's officers to recover money fraudulently converted, the Supreme Court stated:

If the corporation becomes insolvent, and a receiver of all its estate and effects is appointed by a court of competent jurisdiction, the right to enforce this and all other rights of property of the corporation vests in the receiver and he is the proper party to bring suit, and, if he does not himself sue, should properly be made a defendant to any suit by stockholders in the right of the corporation.

Porter v. Sabin, 149 U.S. 473, 478, 13 S.Ct. 1008, 1010, 38 L.Ed. 815 (1893). See also Schmidt v. Esquire, Inc., 210 F.2d 908, 912-13 (7th Cir.), cert. denied, 348 U.S. 819, 75 S.Ct. 31, 99 L.Ed. 646 (1954); Coyle v. Skirvin, 124 F.2d 934, 938 (10th Cir.), cert. denied, 316 U.S. 673, 62 S.Ct. 1044, 86 L.Ed. 1748 (1942); Klein v. Peter, 284 F. 797, 799 (8th Cir. 1922); 3 R. Clark, The Law and Practice of Receivers § 786.1 (3d ed. 1959) (hereafter Clark). But see Hanna v. Brictson Mfg. Co., 62 F.2d 139, 143 (8th Cir. 1932). A similar rule prevails in bankruptcy proceedings. 2A Collier, Bankruptcy P 47.05 at 1745 (14th ed. 1968).

The original purpose of the receivership here was to collect assets to pay creditors, including the United States. Even the complaint in this action against Franklin impliedly recognizes this in its prayer for relief which calls for, at a minimum, a separate $10,000 recovery for Todel. To collect the assets, Todel was directed to

take possession, control and custody of all funds, assets, and property of Roosevelt Capital Corporation, wherever located, including but not limited to ... claims and choses in action, and ... take all such action as may be deemed necessary or advisable to collect, preserve and protect such assets and to enforce and recover upon any such claims and choses in action by the institution of appropriate legal proceedings or otherwise.

Thus, to hold that the creditor United States could still prosecute Roosevelt's action against Franklin would be inconsistent with the terms of Todel's original appointment in March 1965. If we allowed the United States as a creditor of the corporation to join as a co-plaintiff then there would be no reason to refuse other creditors in other actions the right to join receivers' suits until the resulting confusion brought chaos to the administration of receiverships. Cf. In re American Fidelity Corp., 28 F.Supp. 462, 471-72 (S.D.Cal.1939), and the cases cited therein. It is true that the default judgment obtained in August 1966 by the United States against Roosevelt directed the Receiver to continue his efforts to recover assets "for the purpose of satisfying the judgment entered herewith." From this, the United States argues that Todel was merely a "receiver-in-aid-of-judgment," so that the cases cited above do not apply. We need not consider whether this argument would be persuasive if Todel's powers were so limited. They were not; the default judgment relied upon by the United States also continued "in full force and effect" the original order appointing the Receiver with the broad powers specified therein.

III

Since the United States is not properly a party, any jurisdictional support for bringing the action must be furnished by the Receiver alone. The complaint alleged that such jurisdiction was based on Todel's status as a receiver appointed by the federal courts and on 28 U.S.C. § 1331, the federal question statute. We will first discuss the federal receivership appointment as a basis for jurisdiction.

Prior to the amendment of Fed.R.Civ.P. 66 in 1946 (carried forward as an amendment to 28 U.S.C. § 754 in 1948), a receiver appointed in one federal district could not even bring suit in another district without undergoing the bothersome procedure of preliminary ancillary appointment. See 7 J. Moore, Federal Practice P 66.07(1) at 1933-34 (2d ed. 1948) (hereafter Moore). But 28 U.S.C. § 754 now provides that a federal receiver "shall have capacity to sue in any district without ancillary appointment...." The comments of the Advisory Committee on Rules for Civil Procedure on the then new Rule 66 make clear that giving the receiver automatic capacity to sue was only intended to streamline federal practice, and do not mention any change in the law with respect to jurisdiction. U.S.Code Cong.Serv., 79th Cong., 2d Sess., 1946 at 2365. Thus, the earlier learning with respect to jurisdiction over actions brought by receivers is still relevant.

Whether a receiver appointed in one federal district need allege an independent jurisdictional basis to maintain a suit in another federal district remains a question that has not been decided authoritatively. Had Todel been able to maintain this action in the Southern District where he had been appointed receiver, ⁸ however, no independent jurisdictional...