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Federal Savings and Loan Insurance Corp. v. PSL Realty Co.

decided: September 12, 1980; As Amended September 19, 1980.

FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION, AN AGENCY OF THE UNITED STATES OF AMERICA, PLAINTIFF-APPELLEE,
v.
PSL REALTY CO., A CORPORATION, ET AL., DEFENDANTS-APPELLEES, GRANITE INVESTMENT COMPANY, A LIMITED PARTNERSHIP; JAMES C. GREEN; CAPITOL INDEMNITY CORPORATION, A CORPORATION; AND HOWARD STEELE CONSTRUCTION CO., DEFENDANTS-APPELLANTS, THE HON. CHARLES E. JONES; THE HON. JOHN M. KARNES; THE HON. GEORGE W. KASSERMAN, JR.; AND ALL OTHER JUSTICES OF THE ILLINOIS APPELLATE COURT FOR THE FIFTH DISTRICT; THE HON. VICTOR J. MOSELE, AND ALL JUDGES OF THE THIRD JUDICIAL CIRCUIT OF ILLINOIS, APPELLANTS



Interlocutory Appeal from the United States District Court for the Southern District of Illinois -- No. A-CIV-76-79, J. Waldo Ackerman, Judge.

Before Swygert, Cummings and Bauer, Circuit Judges.

Author: Bauer

These consolidated appeals present for review a decade of litigation, whose odyssean journey through the various state and federal courts sitting in Illinois was ultimately destined on a collision course between the two court systems and which achieved that destiny in a rather dramatic interim finale when, on October 2, 1979, the United States District Court for the Southern District of Illinois, invoked its injunctive powers to enjoin the Illinois state courts from further interference with its jurisdiction over certain property subject to a mortgage foreclosure action instituted in the district court nearly four years earlier. 482 F. Supp. 77. Our jurisdiction is founded on 28 U.S.C. § 1292(a)(1), permitting an interlocutory appeal as a matter of right from the granting of an injunction. The sole issue before us is whether the district court erred in issuing the injunction. We affirm.

I

Although the final chapter of this case remains to be written, its history to date stands as a compelling testimonial to the maximum utilization of the American jurisprudential system, embracing as it does both the state and federal trial and appellate courts as well as the federal bankruptcy courts. For our purposes, the story begins in the early 1960's when appellant James C. Green entered into a debtor-creditor relationship with the Piasa Federal Savings and Loan Association ("Piasa"), in which first lien mortgages were executed in favor of Piasa to finance the development and construction by Green and his associates of several apartment complexes situated in Madison, Clinton, St. Clair, and Sangamon Counties, Illinois. Financial difficulties were encountered in the completion and operation of the units and restructuring of the debt and provision of additional construction funds became necessary. To that end, the parties entered into a lengthy and detailed agreement, termed the Base Agreement, on August 1, 1970.

Under its terms, title to the properties was conveyed to a newly formed corporation, PSL Realty Company, wholly owned by Piasa. PSL Realty Company ("PSL") then entered into contracts for deed to the same properties with Granite Investment Company ("Granite"), a limited partnership of which James Green was the principal. Granite was to manage the properties until such time as the provided payments were made and the other conditions imposed by the contracts for deed were fulfilled, upon which PSL would reconvey the properties to Granite. During this time PSL had an absolute right to all income generated by the properties. Piasa continued to hold the first lien mortgages as mortgagee.

The Granite management arrangement was not successful. The properties continued to experience grave financial difficulties and in 1971, the Federal Savings and Loan Insurance Corporation ("FSLIC") determined that Piasa was on the verge of insolvency. Pursuant to its powers under Section 406(f) of the National Housing Act, 12 U.S.C. § 1729(f), FSLIC procured the merger of Piasa into the Illini Federal Savings and Loan Association ("Illini"). Under the terms of the merger, Illini became the owner of the mortgages, forty-eight in number, upon the apartment units and a residence of James Green. Illini also became the sole owner of PSL which, under the Base Agreement, was the holder of legal title to the properties, subject to the contracts for deed with Granite, and entitled to the gross rentals from the operation of the units. At the time of the merger, the Green loans were in the area of $14 million and were seriously delinquent. As the principal inducement to Illini, FSLIC and Illini entered into a Contribution Agreement, which provided that FSLIC would subsidize Illini for certain losses incurred in connection with the non-earning assets it would acquire from Piasa. The agreement also granted FSLIC the option to terminate that subsidy by purchasing the non-earning Piasa assets from Illini at book value.

After the merger, the economic situation pertaining to the financial management and operation of the properties continued to deteriorate. Granite remained manager of the properties, but the units were incurring losses of approximately $30,000 per month. Mortgage delinquencies continued to mount, and matters reached a climax in March 1972. On March 27, PSL and Illini demanded the books and records from Granite, but they were refused. On April 11, 1972, PSL and Illini filed a four count complaint in the Circuit Court of Madison County, Illinois seeking an injunction requiring Granite and James Green to turn over the books and records of Granite for examination, to refrain from collecting further rents, and to cease interference with PSL's collection of the rents. A temporary restraining order was issued to that effect upon posting of a $50,000 bond, security waived. On April 28, 1972, the trial court denied Granite's motion to dissolve the temporary injunction and granted the motion of PSL and Illini to appoint FSLIC, without objection by Granite, as receiver of the properties pendente lite. Pursuant to the powers accorded to it by the receivership order, FSLIC designated Illini as its local agent in the management of the receivership properties.

On May 23, 1972, Granite and Green commenced an interlocutory appeal challenging the issuance of the injunction and the appointment of the receiver. The matter was continued at the request of the parties and was finally argued to the Illinois Appellate Court for the Fifth District on March 31, 1976. On July 23, 1976, the appellate court reversed the order appealed from and dissolved the temporary injunction and receivership on the ground that these ancillary remedies were inappropriate in the absence of a complaint stating an underlying cause of action. The case was remanded to the circuit court solely for an accounting of the income and expenses of the receivership, for a determination of the distribution of the net income, and for the award of a fee to the receiver. PSL Realty Co. v. Granite Investment Co., 42 Ill.App.3d 697, 1 Ill.Dec. 417, 356 N.E.2d 605 (1976).

On August 13, 1976, PSL and Illini filed a petition for rehearing with the appellate court. On August 18, 1976, FSLIC exercised its contractual right under the Contribution Agreement to purchase the mortgages from Illini at the agreed price of $10,673,000, in order to reduce its obligation to indemnify Illini for losses on Piasa's nonearning assets. On August 26, 1976, FSLIC filed a suit in federal court to foreclose on the notes and mortgages encumbering the properties, and the subsequent actions of the federal and state courts precipitated the injunction order which is the subject matter of the instant appeal.

On August 31, 1976, Granite and Green also petitioned the Illinois Appellate Court for rehearing of its decision dissolving the temporary injunction and receivership, asserting, among other claims, that FSLIC had acquired the mortgages and was prosecuting a foreclosure action in federal court, and that Granite was entitled to possession of the properties. On the same day, FSLIC petitioned the district court for an order authorizing it to remain in possession of the subject real estate as mortgagee. Granite opposed the petition on the grounds that FSLIC was estopped, by its conduct, from proceeding with foreclosure and that FSLIC had no legal right to purchase the mortgages in light of the state court's jurisdiction. On September 2, 1976, the district court entered an order authorizing FSLIC to remain in possession of the properties as mortgagee, but providing specifically:

That this order shall become operative upon the effective date of the mandate from the Illinois Appellate Court for the Fifth District dissolving FSLIC's status as receiver of the subject properties.

Order of September 2, 1976 at 2-3. On September 13, 1976, the Illinois Appellate Court denied the petitions for rehearing in a supplemental opinion and the mandate issued on October 13, 1976. Having decided that it had the power to and would in fact assume jurisdiction over the properties of the then-dissolved receivership, the district court proceeded with the foreclosure action.

The focus of the litigation returned to the Circuit Court of Madison County, Illinois. On April 28, 1977, the circuit court denied the petitions of Granite and Green challenging the conduct of FSLIC as receiver and entered an order approving the receiver's final report and discharging the receiver effective retroactively to September 30, 1976. While the appeal by Granite and Green from this order was pending before the Illinois Appellate Court, the trial on the merits of the foreclosure case in federal court commenced. On November 16, 1978, FSLIC rested its case and Granite's motion for a directed verdict was denied. The trial was subsequently recessed and in the spring of 1979, the district court advised the parties that the trial would resume on September 24, 1979. On September 13, 1979, the Illinois Appellate Court entered its now controversial judgment from the appeal of the circuit court order discharging the receiver. The appellate court held that FSLIC breached its fiduciary duty as a receiver by acquiring the notes and mortgages to the property and ...


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