The opinion of the court was delivered by: FEINBERG
FEINBERG, District Judge.
This action by plaintiff Mike Sherman was originally brought in December 1962 against defendant Leo Jacobson to collect the proceeds of seven notes. The complaint bases jurisdiction upon diversity, alleging that Sherman is a citizen of Iowa and Leo Jacobson a citizen of New York. Leo Jacobson died on October 2, 1964, shortly after plaintiff had moved for summary judgment and defendant had moved for a stay of proceedings. Pending substitution of a new party defendant, both motions were withdrawn. Subsequently, Martha Jacobson was appointed executrix of the last will and testament of Leo Jacobson. Thereafter, an uncontested motion by plaintiff to substitute Martha Jacobson as party defendant was granted and both plaintiff's and defendant's motions were reinstated. Plaintiff argues that as a result of a previous litigation in a federal district court in Iowa,
defendant is collaterally estopped from litigating in this court any of the material issues. For the reasons indicated below, plaintiff's motion for summary judgment is granted, and defendant's motion for a stay is denied.
The unusual background of this litigation is as follows: In 1960, Carrol Morris, a resident of Iowa, proposed to Leo Jacobson, a retired manufacturer of ladies' garments, a business venture involving purchases of cattle and swine. The proposal was apparently attractive to Jacobson. He and Morris worked out a system whereby Jacobson enabled Morris to purchase cattle and swine on Jacobson's behalf and then lease the cattle to Fashion Farm, Inc., and the swine to Swine Improvement Ass'n, a proprietorship. The plan was that Fashion Farm and Swine Improvement, which were both owned or operated by Morris, would care for the livestock, and Jacobson would share in the profits from the sale of milk and offspring of the livestock.
The financing arrangements for the purchase of cattle and swine by Jacobson were as follows: Jacobson supplied in cash an amount equal to one-half of the purchase price required; the other half was obtained by Jacobson's furnishing notes and chattel mortgages payable to Fashion Farm and Swine Improvement which Morris discounted with purchasers of commercial paper. Accordingly, Jacobson invested in 1960 and 1961 approximately $750,000 in the purchase of cattle and hogs and became obligated to pay notes of approximately $300,000. Various friends and acquaintances of Jacobson, on the strength of his participation in the venture, also made similar investments so that nearly $4 million was invested in this way.
The seven notes, totaling $185,000, upon which plaintiff sues in this court, were issued from January to May 1962,
and grew out of this plan of operation. Six of the notes were payable to Swine Improvement and one to Fashion Farm. The notes were all subsequently endorsed over to plaintiff Sherman. Each note was payable one year from date, but contained a provision which allows the holder to accelerate the due date if the value of the collateral securing the note becomes insufficient or there is a default in the payment of any part of the principal or interest.
In late 1962, both Fashion Farm and Swine Improvement acknowledged to the investors whose livestock they were managing their financial inability to continue operations. Two Iowa corporations were then formed by investors in the venture to take over the livestock, liquidate the investment in an orderly manner and salvage as much as possible from this financial debacle.
Thereafter, these two corporations each brought an interpleader action in the United States District Court for the Southern District of Iowa pursuant to 28 U.S.C. § 1335 (1964). In each action, the investors, including Leo Jacobson, were all named defendants adversely claiming ownership of the property involved in the interpleader action, and Mike Sherman was also named as a defendant. Receivers were appointed and procedures were fixed by the court to determine the competing rights of various claimants to the cattle, swine, funds and property in the possession of the two Iowa corporations.
Plaintiff Sherman, as a holder of notes and mortgages of several investors, including those of Leo Jacobson, made claim upon the assets in the jurisdiction of the Iowa court. In the course of the interpleader actions, Jacobson asserted that the notes held by Sherman, which are the subject of the action before this court, were incomplete when issued as to date, amount, date of payment and description of collateral securing the payments.
Jacobson also asserted in Iowa that the notes were invalid because there was no delivery by Jacobson or a duly authorized agent;
that there was no consideration for the issuance of the notes and chattel mortgages;
that there was a material alteration of the names of the organizations to which the notes were allegedly issued and of the place where the notes were made and were made payable;
that Mike Sherman was not a holder in due course;
and that the notes were not negotiable.
About six months after the interpleader actions were commenced, Sherman made application to the Iowa federal district court to have a determination of issues raised by the pleadings relating to the validity and enforceability of notes and mortgages held by him. Jacobson answered the application, requesting that it be denied, and giving his reasons therefor. After additional pleading and a pre-trial conference culminating in an order containing stipulations and otherwise narrowing the issues, a trial was ordered. It appears from the papers in this court that at the three-day hearing both parties testified and offered evidence.
After the hearing, Judge Stephenson of the Iowa court signed a document, dated March 2, 1964, entitled "Findings of Fact, Conclusions of Law, Judgment and Decree Re Validity of Notes and Mortgages Held by Mike Sherman."
Judge Stephenson found "that all interested parties have been duly served with summons herein and with notice of the hearing of" Sherman's application "and that this Court has jurisdiction of the subject matter and the parties."
Judge Stephenson, "on the issues concerning the validity of the notes and mortgages held by Mike Sherman * * * and after having examined the files and having given full consideration to all of the evidence adduced,"
made findings of fact totalling about twelve legal-size pages and conclusions of law of one page and entered a judgment covering eleven pages. He found, inter alia, that Sherman had purchased the notes and mortgages in good faith and for value in the ordinary course of business and before they were due, that Jacobson failed to establish his affirmative defenses,
that each note of Jacobson sued upon by Sherman here is a valid subsisting obligation of Jacobson, that each note is now in default, and that the principal as claimed by Sherman is due and owing to him, plus interest from the date of each note according to its terms.
Since the basis of the Iowa court's jurisdiction was in rem (possession of the assets of the Iowa corporations), and since Sherman did not pray for a money judgment in that court but only for a judgment establishing the validity of the notes, the court held that it did "not have jurisdiction to enter a personal judgment against the makers of the notes ordering them to pay the sums due thereon."
However, Jacobson, as well as Sherman, personally appeared in the Iowa actions and litigated through counsel the issues affecting the validity of the notes. An appeal was taken from the March 2, 1964 judgment of the Iowa court, and on August 13, 1965, that appeal was dismissed without prejudice for lack of jurisdiction in the appellate court. Smith v. Sherman, 349 F.2d 547 (8th Cir. 1965).
The suit in this court against Jacobson directly on the notes was authorized by the Iowa district court
and was brought here not long after the commencement of the interpleader proceedings in Iowa. In this court, defendant Jacobson asserts the following affirmative defenses to the notes: (1) the notes and mortgages were signed in blank and were incomplete in various respects; (2) the completion of the notes was effected without defendant's authority; (3) there was no delivery of the instruments and plaintiff is not the owner of them; (4) the notes were materially altered by changing the name of the payee and place of making and payment; and (5) defendant received no consideration for the notes and plaintiff had notice of the lack of consideration. The defense of plaintiff's knowledge of lack of consideration was not raised and decided in the Iowa action, but the alleged lack of consideration was raised and was decided adversely to Jacobson.
All of the other defenses asserted here were also raised and decided adversely to Jacobson in the Iowa proceedings.
In support of the motion for summary judgment, plaintiff points out that there can be no dispute as to any of the material facts because they have already been decided and that the only defenses raised have also already been decided adversely to defendant in the Iowa action. In opposition to the motion for summary judgment, Jacobson argues that (1) a determination in an in rem action (which the Iowa action concededly was) cannot be used as the basis for a judgment in an in personam action; (2) collateral estoppel should not be applied "until there is a final determination which is upheld on appeal";
and (3) plaintiff, by interposing a claim in the Iowa interpleader action, chose to await distribution there and cannot proceed here.
In determining the effect to be given the Iowa judgment, neither party has explicitly considered the conflicts question of what law is applicable.
Some of the conflicts problems lurking in the record are formidable in the abstract; i.e., does New York law, Iowa law or federal law apply in resolving each of the three issues stated above?
See United States v. United Air Lines, Inc., 216 F. Supp. 709, 718-729 (D.C.Nev.1962), aff'd in part sub nom. United Air Lines, Inc. v. Wiener, 335 F.2d 379 (9th Cir. 1964), cert. dismissed, 379 U.S. 951, 85 S. Ct. 452, 13 L. Ed. 2d 549 (1964), and cases cited therein. However, resolution of the choice of law question is not crucial because there do not appear to be material differences between the Iowa, New York or federal decisions affecting the issues raised here.
As to the argument that a determination in an in rem action cannot be used in an in personam action, defendant cites Hagan v. Central Avenue Dairy, Inc., 180 F.2d 502 (9th Cir. 1950). However, there is an exception to the general rule where, as here, defendant appears and defends the in rem action. In such a case, defendant is bound by the facts upon which the prior judgment is based if he has actually litigated the question of the existence of such facts. This distinction is made ...