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September 24, 1970


The opinion of the court was delivered by: Campbell, District Judge.


This action arises out of the liquidation of an Illinois Savings and Loan Association, Apollo Savings ("Apollo"). Plaintiff, Federal Savings and Loan Insurance Corporation ("FSLIC") is acting as Receiver of Apollo in a liquidation proceeding presently pending before the Circuit Court of Cook County. That receivership proceeding commenced on April 26, 1968 when the Commissioner of Savings and Loan Associations for the State of Illinois appointed a receiver to take custody of and to liquidate Apollo pursuant to the Illinois Savings and Loan Act. (Ill.Rev.Stat. C. 32, par. 921). On May 2, 1968, the Attorney General of the State of Illinois, pursuant to the provisions of the Illinois Savings and Loan Act, filed a statutory complaint in the Circuit Court of Cook County, Chancery Division, seeking the liquidation and dissolution of Apollo. The cause was assigned to the Honorable Donald J. O'Brien, Presiding Judge of the Chancery Division of that court, and at the request of the Illinois Attorney General, Judge O'Brien entered a Decree ordering the liquidation of Apollo and directing its receiver to take custody and control of its assets and records for the purpose of liquidating the Association. At the request of the Attorney General, the Decree further, "restrained all persons from obtaining or attempting to obtain any judgment, attachment, encumbrance, or other like lien against or upon said association or any of its assets * * * while the same are in possession and control of said receiver or until further order" of the court.

The Decree also provided that the state court retained jurisdiction of the cause, "for the purpose of granting such other and further relief as said association, its members, said receiver, creditors, debtors, the public or others who apply to this court may require and in the judgment of this court merit."

On September 30, 1968, the then acting receiver resigned and plaintiff FSLIC was appointed receiver. It is still acting in that capacity.


(A) Katin v. Apollo.

On May 3, 1968, certain depositors-shareholders of Apollo brought an action in this court against Apollo and its Directors alleging various acts of mismanagement and violations of state law relative to the management of Savings and Loan Associations. Katin, et al. v. Apollo, et al., 68 C 808. Plaintiffs in Katin contend that these actions constituted a violation of the Securities Act of 1933 and the Securities Exchange Act of 1934. Basically, the relief sought is an award to each depositor-shareholder of "interest" or "dividends" for a period commencing when the last "interest" or "dividend" was paid and continuing up to the time each depositor was paid his principal by the FSLIC.*fn1

In moving to dismiss the Katin case, FSLIC, as receiver of Apollo, stated that "stripped to its essentials", the Katin case is a "classic case of corporate mismanagement which can only be asserted 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., 1967).

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."
  Counsel for the "Kelly interests" agreed that Katin should be dismissed in deference to state court proceedings and further urged that all claims including that of the receiver ...

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