by Apollo Savings, through its receiver."
FSLIC also argued that these claims alleging corporate
mismanagement, arise under state law and are "cognizable under
state law, but not under the (Securities) Act," citing Mutual
Shares Corp. v. Genesco, Inc., 384 F.2d 540, 546 (2nd Cir.,
The initial filing of the Katin complaint was followed by
numerous motions by the many defendants; by the filing of an
amended complaint by plaintiffs; and finally, by the filing of
this case, FSLIC v. Kelly et al.
(B) FSLIC v. Kelly.
This case, a civil conspiracy, fraud and corporate
mismanagement case, was brought by FSLIC against certain officers
and directors of Apollo and certain other persons having major
transactions with Apollo. It contains many of the allegations of
corporate mismanagement contained in the Katin case. It is
allegedly brought by FSLIC in its capacity as the state court
receiver of Apollo and as an insurer subrogee. The only basis for
federal court jurisdiction is the fact that FSLIC is a federal
agency authorized to bring suit in federal court. See Acron
Investments, Inc. v. Federal Savings and Loan Insurance
Corporation, 363 F.2d 236 (9th Cir. 1966).
The original complaint was filed October 29, 1969, and the
amended complaint January 5, 1970. One defendant later filed a
cross-claim. By April 22, 1970, most of the defendants had
responded by answer or motion. At that time I ordered that the
two cases (Katin v. Apollo and FSLIC v. Kelly) be consolidated
for pretrial discovery and trial. I also advised counsel that I
was considering the feasibility of proceeding with this cause
under the enlightened and accelerated procedures established for
protracted cases by the Judicial Conference in its Manual for
Complex and Multidistrict Litigation.
In my review of the many pleadings filed by the various
parties, I thought it clear that this Association, though
properly in custody of the state, was not in the sorry financial
condition of others we have dealt with. On the contrary, my first
reaction to the issues in this case was that it appeared that
here the dispute related to the proper disposition of potential
surplus. Specifically, the plaintiffs in Katin argued that they
were entitled to a first claim to the "remains" of the estate of
the Association as their "loss of bargain", whether it be legally
defined as dividends or interest, for the last six months of the
Association's operation; certain officers and directors,
generally referred to as the "Kelly interests" argued that any
surplus should go to the owners of permanent reserve stock, 80
percent of which were owned by the Kelly interests; and FSLIC
argued that any surplus must first go to pay "post-default
interest" to the FSLIC, that is, interest on the money which
FSLIC had paid to the insured depositors.
The various aspects of this case were explored in detail in
pretrial conference held with all counsel in both cases. When I
expressed my views as to the proper method of proceeding in this
case Mr. Merrill Shepard, counsel for FSLIC, — in urging the
dismissal of the Katin case — stated that, in his opinion the
Katin claim belonged in the state court because, "the
determination as to who would be entitled to any surplus, as
among all classes of claimants would necessarily rest with the
court in which the receivership (was pending) * * * the State of
Illinois." Mr. Shepard also stated:
"Judge O'Brien, who has that case, that receivership,
made it quite clear during a hearing at which Mr.
Kirby and I participated that that was so.
Whatever happened in relation to the proceedings
here, the fund from which a judgment would be made,
except for possible assets of the individual
defendants, would be the fund in his charge. And I
believe Mr. Kirby and I both agreed with Judge
O'Brien when he made that observation."