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United States v. Franklin National Bank

decided: February 24, 1975.

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



Appeal by Franklin National Bank from decision of the United States District Court for the Eastern District of New York, Senior Circuit Judge Leonard P. Moore sitting by designation, granting United States and Todel, as Receiver, summary judgment. Reversed and remanded for dismissal for lack of subject-matter jurisdiction unless other considerations appear in remand.

Friendly, Feinberg and Timbers, Circuit Judges.

Author: Feinberg

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,*fn1 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*fn2 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*fn3 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,*fn4 and also asked that a receiver for Roosevelt be appointed pendente lite under 15 U.S.C. § 687c(b).*fn5 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*fn6 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.*fn7 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, 37 L. Ed. 815, 13 S. Ct. 1008 (1893). See also Schmidt v. Esquire, Inc., 210 F.2d 908, 912-13 (7th Cir.), cert. denied, 348 U.S. 819, 99 L. Ed. 646, 75 S. Ct. 31 (1954); Coyle v. Skirvin, 124 F.2d 934, 938 (10th Cir.), cert. denied, 316 U.S. 673, 86 L. Ed. 1748, 62 S. Ct. 1044 (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 ...


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