UNITED STATES COURT OF APPEALS FOR THE SEVENTH CIRCUIT
decided: February 6, 1976.
BLACKHAWK HEATING & PLUMBING COMPANY, INC., PLAINTIFF AND COUNTERDEFENDANT-APPELLEE,
JOSEPH D. GEESLIN, JR., SPECIAL DEPUTY INSURANCE COMMISSIONER OF THE STATE OF INDIANA FOR THE LIQUIDATION OF UNITED BONDING INSURANCE COMPANY, DEFENDANT AND COUNTERPLAINTIFF-APPELLANT, V. BLACKHAWK HEATING & PLUMBING COMPANY, INC., AND HARRIS TRUST & SAVINGS BANK, AN ILLINOIS CORPORATION, COUNTERDEFENDANTS, AND ROBERT D. WILCOX, SPECIAL DEPUTY LIQUIDATOR OF PRUDENCE MUTUAL CASUALTY COMPANY, COUNTERDEFENDANT-APPELLANT
Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 67 C 362 J. Sam Perry, Judge.
Clark, Associate Justice,*fn* Castle, Senior Circuit Judge, and Swygert, Circuit Judge.
CASTLE, Senior Circuit Judge.
The state court-appointed liquidators of two insurance companies appeal from a district court order that a bank turn over certain assets of one of the insurance companies, held by the bank pursuant to an escrow agreement between the two companies, to the appellee Blackhawk Heating & Plumbing Company, Inc. [hereinafter "Blackhawk"]. The appellants are Joseph D. Geeslin, Jr., Special Deputy Insurance Commissioner of the State of Indiana and the liquidator of United Bonding Insurance Company [hereinafter "United"]; and Robert D. Wilcox, Director of Insurance for the State of Illinois and liquidator of Prudence Mutual Casualty Company [hereinafter "Prudence"].
During the years of 1964, 1965, and 1966, Prudence and United entered into a series of reinsurance agreements. Under the terms of these agreements, United agreed to cede to Prudence a percentage of certain insurance bonds on which it became obligated and to pay Prudence a percentage of the premiums received. In order to secure United for monies due from Prudence on these agreements, the two entered into an escrow agreement whereby Prudence deposited securities with the Harris Trust & Savings Bank in Chicago, Illinois. The face value of these securities owned by Prudence was $296,000.00. The escrow agreement provided that the securities were to remain in escrow until such time as all losses on the insurance bonds subject to the reinsurance agreement were determined and discharged.*fn1
In March of 1967, Blackhawk filed suit in federal district court against United to recover $400,000.00 on a performance bond issued by United to secure the performance of one of Blackhawk's subcontractors.*fn2 In August of 1969, Blackhawk amended its complaint by adding a second count seeking $600,000.00 in damages for United's violation of federal wiretap statutes. See 18 U.S.C. §§ 2510-2520 (1970).
While this litigation was pending, Prudence was ordered into conservatorship by the Circuit Court of Cook County, Illinois. On February 6, 1970, Prudence was placed into liquidation by the same court.
On December 2, 1970, Blackhawk and United entered into a settlement agreement concerning their litigation. The agreement provided that United would consent to the entering of a judgment against it in the amount of $360,000.00. The agreement further provided that this amount was to be satisfied by United's delivery of certain securities and cash, and assignment of its interest in $130,000.00 of the Prudence securities in the Harris escrow account. The district court entered judgment in the amount of $360,000.00.*fn3 United subsequently fulfilled its part of the agreement by delivering the cash and securities, and also by assigning its interest in $130,000.00 of the Harris escrow. Soon thereafter, on February 8, 1971, United was placed into liquidation by order of the Superior Court of Marion County, Indiana.
In order to recover the $130,000.00 in securities in the Harris escrow account which it claimed was due it because of Prudence's alleged default on its reinsurance agreements with United, Blackhawk filed a petition to turn over assets in federal district court. In this petition, Blackhawk asked the district court to order Harris to pay it $130,000.00 from the escrow plus a proportionate share of any appreciation in the fund.
United's liquidator, Geeslin, intervened on the ground that the escrow securities were still the property of Prudence and therefore subject only to the jurisdiction of the Illinois court overseeing Prudence's liquidation. Geeslin and Prudence's liquidator, Wilcox, moved to dismiss Blackhawk's petition for lack of jurisdiction over the subject matter of the action. The district court denied the motion. Geeslin and Wilcox thereupon filed answers to Blackhawk's petition contending that the assignment by United of its security interest in the Prudence securities constituted a voidable preference under Indiana law. Geeslin also contended that his rights to Prudence's securities as lien creditor of United were superior to Blackhawk's rights as assignee of United's security interest in the securities. In addition Geeslin counterclaimed for the return of the securities and cash which United had previously transferred to Blackhawk pursuant to the settlement agreement. He argued that these transfers also constituted voidable preferences under Indiana law.
After a lengthy trial, the district court decided the preference issue in favor of Blackhawk and held its rights to the escrow superior to Geeslin's. The court ordered Harris to pay Blackhawk $130,000.00 plus appreciation from the escrow account.
Geeslin and Wilcox appeal the district court's denial of their motion to dismiss and the court's determination that Blackhawk's rights to the escrow are superior to theirs. Since we are of the opinion that the district court lacked jurisdiction to entertain Blackhawk's turnover petition, we vacate the court's judgment and remand the case with instructions that the petition be dismissed.
This case presents a confrontation which is the natural by-product of our federal form of government. Two courts, one state and one federal, seek to exercise power over the same piece of property and order its final disposition. State liquidation proceedings against Prudence are pending in an Illinois court. In these proceedings, a state official has been appointed to oversee the winding up of Prudence's affairs and the final disposition of its assets. The state court vested title to all of Prudence's assets in this official pursuant to state law in order to facilitate the termination and settlement of Prudence's business.*fn4 Rather than file a claim in these proceedings, Blackhawk, as assignee of United's rights in certain of Prudence's property, chose instead to file a petition in federal court to have that property turned over to it. A conflict thus arose between the jurisdiction of these two courts over control of this particular property.
Because such conflicts occur from time to time, the Supreme Court long ago fashioned jurisdictional rules to resolve them. In Penn General Casualty Company v. Pennsylvania, 294 U.S. 189, 79 L. Ed. 850, 55 S. Ct. 386 (1935), the Court stated:
If the two suits are in rem or quasi in rem, requiring that the court or its officer have possession or control of the property which is the subject of the suit in order to proceed with the cause and to grant the relief sought, the jurisdiction of one court must of necessity yield to that of the other. To avoid unseemly and disastrous conflicts in the administration of our dual judicial system, and to protect the judicial processes of the court first assuming jurisdiction, the principle, applicable to both federal and state courts, is established that the court first assuming jurisdiction over the property may maintain and exercise that jurisdiction to the exclusion of the other. [ Id. at 195 (citations omitted).]
The Court has reaffirmed this principle on numerous subsequent occasions. See, e.g., Princess Lida of Thurn v. Thompson, 305 U.S. 456, 466, 83 L. Ed. 285, 59 S. Ct. 275 (1939); United States v. Bank of New York & Trust Company, 296 U.S. 463, 80 L. Ed. 331, 56 S. Ct. 343 (1936); Gordon v. Washington, 295 U.S. 30, 79 L. Ed. 1282, 55 S. Ct. 584 (1935). And this court has recognized and invoked the principle. See, e.g., Barrett v. International Underwriters, Inc., 346 F.2d 345, 348 (7th Cir. 1965); Mills v. Smith, 113 F.2d 404, 409 (7th Cir. 1940).
It is clear that this jurisdictional rule is applicable to the situation presented by this case since the legal proceedings involved are both actions in rem. The appointment of a receiver and institution of liquidation proceedings in the Illinois court against Prudence constitutes an action in rem. Carter Oil Company v. McQuigg, 112 F.2d 275 (7th Cir. 1940); 1A J. Moore, Federal Practice P0.214, at 2502-03. The fact that the Illinois court does not have actual physical possession of all of Prudence's assets is of no consequence. The constructive possession by Prudence's liquidator is sufficient; his possession is the court's possession.*fn5 Goldfine v. United States, 300 F.2d 260, 263 (1st Cir. 1962); see also Drexler v. Walters, 290 F. Supp. 150, 156 (D.Minn. 1968); Safeway Trails, Inc. v. Stuyvesant Insurance Company, 211 F. Supp. 227 (M.D.N.C. 1962). In rem jurisdiction attached when the liquidation proceedings were commenced against Prudence. 1A J. Moore, Federal Practice P0.215, at 2508-10. And Blackhawk's petition in federal court to turn over assets was also clearly an action in rem.*fn6 In order to grant the relief requested, the district court had to exercise control over a res: Prudence's securities held by Harris in escrow.*fn7 See Carney v. Sanders, 381 F.2d 300 (5th Cir. 1967).
It is equally clear from the record that the state court liquidation proceeding was instituted prior to Blackhawk's filing its petition in federal court. Prudence was placed into liquidation on February 6, 1970, and Blackhawk filed its action on June 3, 1971. Therefore jurisdiction over the securities in escrow attached first in the state court, thus excluding the federal court from subsequently exercising control over them.
Blackhawk maintains, however, that since the district court possessed ancillary jurisdiction to enforce its judgment entered upon the settlement between Blackhawk and United, its jurisdiction is somehow superior to that of the Illinois court. We disagree. Assuming Blackhawk's turnover proceeding was ancillary to the prior federal proceeding, it nevertheless retained a separate identity. In no way can the two actions which Blackhawk instituted in federal court be deemed to have been one with the filing date of the earlier action controlling. The district court did not seek to exercise control over that property until Blackhawk filed its turnover petition.
Nor did the judgment give the federal court any extraordinary power over the escrow superior to that which the state court attained by its prior attachment of jurisdiction. Blackhawk's rights in the securities were those of an ordinary assignee. Thus its remedy was to file its claim in state court and "stand in line" with all other Prudence claimants. Mills v. Smith, supra, at 409.
Therefore, since the Illinois court had already acquired control over the securities of Prudence held in the Harris escrow at the time Blackhawk filed its turnover petition, the federal court lacked power to exercise control over that property. That property had been removed from the in rem jurisdiction of all other courts. In re Rehkopf Mattress Sales, Inc., 479 F.2d 67 (5th Cir. 1973); PPG Industries, Inc. v. Continental Oil Company, 478 F.2d 674 (5th Cir. 1973); Burbridge Foundation, Inc. v. Reinholdt & Gardner, 496 F.2d 326, 327-28 (8th Cir. 1974). The district court should have accordingly dismissed the petition, leaving Blackhawk to resort to the state liquidation proceedings for the enforcement of its rights in the property.*fn8 Cf. Mills v. Smith, supra, at 409; Carney v. Sanders, supra, at 302-03.
The states have a paramount interest in seeing that liquidation proceedings conducted by court-appointed liquidators and overseen by their courts are free from the interference of outside agencies. This interest is of even greater importance when the company undergoing liquidation is a domestic insurance company or other financial institution. Cf. Motlow v. Southern Holding & Securities Company, 95 F.2d 721 (8th Cir. 1938), cert. denied, 305 U.S. 609, 83 L. Ed. 388, 59 S. Ct. 68 (1939).*fn9 The interests of the company's owners, policyholders, and creditors, as well as the public, are best served and protected by an orderly and efficient process of liquidation.*fn10 The liquidation of Prudence is best left to a proceeding which will settle all of its affairs and dispose of all of its property. Federal courts should refrain from deciding select issues confronting another court in pending proceedings. Fireman's Fund Insurance Company v. St. Paul Fire & Marine Insurance Company, 357 F. Supp. 464 (D.Minn. 1973); see also Ahrensfeld v. Stephens, 528 F.2d 193 (7th Cir. 1975); Koehring Company v. Hyde Construction Company, 424 F.2d 1200 (7th Cir. 1970).
We therefore vacate the judgment of the district court and remand the case with instructions that it be dismissed for lack of jurisdiction.
VACATED AND REMANDED.
VACATED and REMANDED.