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 ...