United States District Court, Northern District of Illinois, E.D
January 3, 1984
PEOPLE OF THE STATE OF ILLINOIS ON THE RELATION OF JEROME COSENTINO, TREASURER OF THE STATE OF ILLINOIS, PLAINTIFF,
FEDERAL RESERVE BANK OF CHICAGO AND MERCHANDISE NATIONAL BANK OF CHICAGO, DEFENDANTS.
The opinion of the court was delivered by: Moran, District Judge.
MEMORANDUM AND ORDER
The State of Illinois brought this action to collect $4,900
from the defendants, who had transferred and presented for
payment fifteen checks drawn by the State but bearing forged
endorsements by the payees.
Essentially, checks with forged endorsements were cashed at
currency exchanges, deposited at Merchandise National Bank of
Chicago, transferred to the Federal Reserve Bank of Chicago,
which in turn presented them to the State for payment. Both
Merchandise National Bank and the Federal Reserve Bank endorsed
In counts 1 and 2 of the complaint the State charges that the
Federal Reserve Bank and Merchandise National Bank violated their
warranties of good title under the Uniform Commercial Code when
presenting the checks with forged endorsements for payment.
Ill.Rev.Stat., ch. 26, §§ 3-417(1)(a), 4-207(1)(a).*fn1 In count
3 the State charges Merchandise National Bank with violating an
express guarantee of the genuineness of the prior endorsements on
the checks. The State seeks the amount it paid on the checks,
prejudgment interest and costs.
The State argues that this court has subject matter
jurisdiction over the Federal Reserve Bank under 12 U.S.C. § 632,
which reads in pertinent part:
Notwithstanding any other provision of law, all suits
of a civil nature at common law or in equity to which
any Federal Reserve bank shall be a party shall be
deemed to arise under the laws of the United States,
and the district courts of the United States shall
have original jurisdiction of all such suits; and any
Federal Reserve bank which is a defendant in any such
suit may, at any time before the trial thereof,
remove such suit from a State court into the district
court of the United States for the proper district by
following the procedure for the removal of causes
otherwise provided by law. No attachment or execution
shall be issued against any Federal Reserve bank or
its property before final judgment in any suit,
action, or proceeding in any State, county,
municipal, or United States court.
We agree. The state also requests the court to exercise pendent
party jurisdiction over Merchandise National Bank. This we
decline to do.
Defendants' argument that this court lacks subject matter
jurisdiction over the claim against the Federal Reserve Bank can
be disposed of quickly. Their position is that § 632 only confers
jurisdiction over "civil" suits against or on behalf of federal
reserve banks. An action under the U.C.C. is not a "civil" action
they claim. Hence, the argument goes, this court has no subject
Section 632 applies, however, to "all suits of a civil nature"
to which a federal reserve bank is a party. Nothing in the U.C.C.
suggests that cases under it are not "civil in nature." The
U.C.C. was designed primarily to simplify, clarify and promote
the uniformity of commercial law. Ill.Rev.Stat., ch. 26, § 1-102.
The U.C.C. makes clear its intimate connection with the common
law in Section 1-103:
Unless displaced by the particular provisions of this
Act, the principles of law and equity, including the
law merchant and the law relative to capacity to
contract, principal and agent, estoppel, fraud,
misrepresentation, duress, coercion, mistake,
bankruptcy, or other validating or invalidating cause
shall supplement its provisions.
Courts routinely look to the common law in U.C.C. cases. See
e.g., Avco Delta Corp. Canada Ltd. v. United States, 459 F.2d 436
(7th Cir. 1972); Northern Trust Co. v. Oxford Speaker Co.,
109 Ill. App.3d 433, 65 Ill.Dec. 113, 440 N.E.2d 968
(1st Dist. 1982);
GNP Commodities Inc. v. Walsh Heffernan, Co., 95 Ill. App.3d 966,
51 Ill.Dec. 245, 420 N.E.2d 659
In addition, § 632 was designed to give federal courts
jurisdiction over actions involving federal reserve banks to the
same extent they had prior to the passage of section 12 of the
Act of February 13, 1925, c. 229, 43 Stat. 941 [now at 28 U.S.C. § 1349].
See pages 1264-1265 infra. During this earlier period
federal courts exercised jurisdiction over claims against federal
reserve banks much like the one at issue here. See Closter
National Bank v. Federal Reserve Bank of New York, 285 F. 138 (2d
The more difficult issue is whether this court has pendent
party jurisdiction over Merchandise National Bank. Pendent party
jurisdiction is the joinder of a party who is not otherwise
subject to federal jurisdiction. Pendent claim jurisdiction,
which is more common, is the joinder of a non-federal claim
against a party already subject to federal jurisdiction.
The starting point for pendent jurisdiction analysis is United
Mine Workers of America v. Gibbs, 383 U.S. 715, 86 S.Ct. 1130, 16
L.Ed.2d 218 (1966). There, the Supreme Court set out a two-part
test for the exercise of pendent claim jurisdiction. First,
federal courts have power under Art. III, § 2 to exercise pendent
jurisdiction where the pendent and federal claims "derive from a
common nucleus of operative fact." Id. at 725, 86 S.Ct. at 1138.
Second, judges have discretion to exercise pendent jurisdiction
based on a "consideration of judicial economy, convenience and
fairness to litigants." Id. at 726, 86 S.Ct. at 1139. Although
Gibbs was addressed to pendent claim jurisdiction, it prompted
most federal courts to exercise jurisdiction over pendent
parties. See Bowers v. Moreno, 520 F.2d 843, 846-48 (1st Cir.
1975); Curtis v. Everette, 489 F.2d 516, 519-20 (3d Cir. 1973),
cert. denied, 416 U.S. 995, 94 S.Ct. 2409, 40 L.Ed.2d 774 (1974);
Almenares v. Wyman, 453 F.2d 1075, 1083 (2d Cir. 1971), cert.
denied, 405 U.S. 944, 92 S.Ct. 962, 30 L.Ed.2d 815 (1972);
Leather's Best, Inc. v. S.S. Mormaclynx, 451 F.2d 800, 809-11 (2d
Cir. 1971) (admiralty claim supported negligence claim against
pendent party); Connecticut General Life Ins. Co. v. Craton,
405 F.2d 41, 48 (5th Cir. 1968); State of North Dakota v. Merchants
National Bank and Trust Co., 634 F.2d 368 (8th Cir. 1980). The
Seventh and Ninth circuits resisted this trend. Hampton v. City
of Chicago, 484 F.2d 602 (7th Cir. 1974); Hymer v. Chai,
407 F.2d 136 (9th Cir. 1969).
The Supreme Court cautioned against the blanket exercise of
pendent party jurisdiction in Aldinger v. Howard, 427 U.S. 1, 96
S.Ct. 2413, 49 L.Ed.2d 276 (1976). See also Owen Equipment &
Erection Co. v. Kroger, 437 U.S. 365, 98 S.Ct. 2396, 57 L.Ed.2d
274 (1978). The Court emphasized that the joinder of a party not
otherwise subject to federal jurisdiction presented a "more
serious obstacle" to the exercise of pendent jurisdiction for
both practical and legal reasons:
The situation with respect to the joining of a new
party, however, strikes us as being both factually
and legally different from the situation facing the
Court in Gibbs and its predecessors. From a purely
factual point of view, it is one thing to authorize
two parties, already present in federal court by
virtue of a case over which the court has
jurisdiction, to litigate in addition to their
federal claim a state-law claim over which there is
no independent basis of federal jurisdiction. But it
is quite another thing to permit a plaintiff, who has
asserted a claim against one defendant with respect
to which there is federal jurisdiction, to join an
entirely different defendant on the basis of a
state-law claim over which there is no independent
basis of federal jurisdiction, simply because his
claim against the first defendant and his claim
against the second defendant "derive from a common
nucleus of operative fact." True, the same
considerations of judicial economy would be served
insofar as plaintiff's claims "are such that he would
ordinarily be expected to try them all in one
judicial proceeding. . . ." But the addition of a
completely new party would run counter to the
principle that federal courts, as opposed to state
trial courts of general jurisdiction, are courts of
limited jurisdiction marked out by Congress.
Aldinger, 427 U.S. at 14-15, 96 S.Ct. at 2420-2421 (Quoting from
Gibbs, 383 U.S. at 725, 86 S.Ct. at 1138). Aldinger reaffirmed
the need to examine constitutional and discretionary issues as
outlined in Gibbs before extending pendent jurisdiction. It also
added a requirement that the court closely scrutinize the statute
conferring federal jurisdiction to determine if it explicitly or
implicitly denied jurisdiction over pendent parties. Id. 427 U.S.
at 18, 96 S.Ct. at 2422. See also United States ex rel. Hoover v.
Franzen, 669 F.2d 433
, 437-441 (7th Cir. 1982). Far from
precluding all pendent party jurisdiction, the Court urged a
careful case-by-case analysis of each pendent party question.
Aldinger, 427 U.S. at 18, 96 S.Ct. at 2422.
The history of 12 U.S.C. § 632, which gives this court subject
matter jurisdiction over the claim against the Federal Reserve
Bank, begins with Osborn v. Bank of the United States, 9 Wheat.
738, 6 L.Ed. 204 (1824). There the Court, speaking through Chief
Justice Marshall, held that Congress could vest the federal
courts with jurisdiction over claims by and against the Bank of
United States. Id. at 816-18. Fifty years later the Court
expanded federal court jurisdiction to cover all actions against
federally-incorporated institutions. Pacific Railroad Removal
Cases, 115 U.S. 1, 5 S.Ct. 1113, 29 L.Ed. 319 (1885).
The Pacific Railroad decision apparently subjected federal
courts to a flood of litigation. See generally Murphy v. Colonial
Federal Savings & Loan Association, 388 F.2d 609 (2d Cir. 1967).
This litigation included common law cases with the Federal
Reserve Bank as a party. See City of Douglas v. Federal Reserve
Bank of Dallas, 2 F.2d 818 (5th Cir. 1924), aff'd, 271 U.S. 489,
46 S.Ct. 554, 70 L.Ed. 1051 (1926); Closter National Bank v.
Federal Reserve Bank of New York, 285 F. 138 (2d Cir. 1922);
Federal Reserve Bank of Richmond v. Malloy, 291 F. 763 (4th Cir.
1923), aff'd, 264 U.S. 160, 169, 44 S.Ct. 296, 299, 68 L.Ed. 617
(1924). In 1925 Congress responded with a statute that limited
the jurisdiction of the federal courts over actions involving
That no district court shall have jurisdiction of any
action or suit by or against any corporation upon the
ground that it was incorporated by or under an Act of
Congress: Provided, That this section shall not apply
to any suit, action, or proceeding brought by or
against a corporation incorporated by or under an Act
of Congress wherein the Government of the United
States is the owner of more than one-half of its
Act of February 13, 1925, ch. 229, § 12, 43 Stat. 941 [Now at
28 U.S.C. § 1349]. This statute ended federal jurisdiction over
actions involving a federal reserve bank where there was no
independent jurisdictional base. See Federal Reserve Bank of
Kansas City v. Omaha National Bank, 45 F.2d 511
(8th Cir. 1930).
Congress created two exceptions to the jurisdictional limits
established by the 1925 Act. The first involved banking
associations. See 28 U.S.C. § 1348. The second was 12 U.S.C. § 632,
at issue here. Section 632 was passed as part of the
Glass-Stengall Banking Act of 1932, which extended the control of
the federal government over the operations of the federal reserve
banks. Act of June 16, 1933, ch. 89, § 15, 48 Stat. 162. The
legislative history of § 632 is not extensive. Nevertheless, a
letter of recommendation from the Federal Reserve Board to the
Senate Banking Committee, relevant portions of which are
reprinted in the margin,*fn2 make clear the purposes of § 632.
First, § 632 was designed to avoid inconsistent state court
interpretations of the Federal Reserve Act and accompanying
regulations. Second, § 632 recognized that federal reserve banks
were deemed citizens of no state and thus could not remove cases
against them to federal court on diversity grounds. Third, the
extension of federal jurisdiction over federal reserve banks was
based on a recognition of the central role the federal reserve
banks played in the nation's economy and their actions as fiscal
agents and sub-treasuries for the federal government. See also
Federal Reserve Bank of Richmond v. Kalin, 77 F.2d 50, 51 (4th
Cir. 1935). ("[I]t was doubtless the intention of Congress to
grant full rights of recourse to [federal reserve banks] which
had been important agencies of the federal government in its
control of banking and currency.") In the half-century since the
passage of § 632 there has been no important changes in either
the language granting federal jurisdiction or in the judicial
interpretation of that provision.
The history of § 632 reveals that it is a limited grant of
federal jurisdiction necessitated by the unique role played by
the federal reserve banks. Congress intended 28 U.S.C. § 1349 to
limit the jurisdiction of the federal courts over
federally-chartered institutions. Section 632 is a carefully
delineated exception. A fair implication from this history is
that Congress never intended § 632 to be the basis for pendent
party jurisdiction in a case involving a state law claim. Pendent
party jurisdiction here would conflict with Congress' intent to
limit the amount of litigation in federal courts involving
federally-chartered corporations. Our refusal to exercise pendent
party jurisdiction over Merchandise National Bank does not
threaten inconsistent state court interpretations of the Federal
Reserve Act and accompanying regulations. Nor would the assertion
of federal jurisdiction over a pendent party in a case involving
a state law issue relate to the vitally important banking and
currency functions of federal reserve banks which prompted the
passage of § 632.
In its brief the State points to a number of cases where the
federal court used an "anchor" claim which gave it jurisdiction
over one party as a basis for exercising pendent party
jurisdiction. In those cases the anchor claims arose from a
statute and federal jurisdiction was exclusive. Federal courts
were the only place where all the claims in each case could be
tried together. See Aldinger, 427 U.S. at 18, 96 S.Ct. at 2422.
Here the grant of jurisdiction is specific to one institution,
which highlights the limited scope of § 632.
Congress' intention of giving federal reserve banks access to a
federal forum under all circumstances but in restricting access
by others which seek to reach third parties is not inconsistent
with considerations of judicial economy, nor does it inhibit the
federal reserve banks, for which the jurisdictional grant was
enacted, from having full rights of recourse in federal court.
The doctrines of removal and ancillary jurisdiction ensure that
common law suits brought against a federal reserve bank and third
parties can be adjudicated in a single federal forum.
Section 632 provides in part that a "Federal reserve bank which
is a defendant in any such suit may, at any time before the trial
thereof, remove such suit from a State court into the district
court of the United States for the proper district. . . ."
Courts interpreting similar provisions have concluded that even
if the suit in state court includes parties which could not have
been joined in an original federal action, the federal entity can
remove the entire suit. See, e.g., Kasdon v. G.W. Zierden
Landscaping, Inc., 512 F. Supp. 172 (D.Md. 1981) (12 U.S.C. § 1444).
Two leading commentators also agree that removal of the
entire action is appropriate under statutes explicitly
authorizing removal. Wright, Miller & Cooper, 14 Federal Practice
and Procedure, § 3729 at 705-06; 1A Moore, Federal Practice, ¶
0.166. Thus, if the state brings an action in state court against
the federal reserve bank and a local bank, the federal reserve
bank can remove the entire action for adjudication in a single
If it were the only party being sued by the state in federal
court, the federal reserve bank would likely implead as a
third-party defendant the bank from which it received the forged
checks. By exercising ancillary jurisdiction the federal court
could hear this third party action, over which it has no
independent base for jurisdiction. It has long been well
established that a federal court can exercise ancillary
jurisdiction over claims arising out of the same core of facts as
the action before it which the defendant asserts against third
party. See Dery v. Wyer, 265 F.2d 804, 807 (7th Cir. 1959).
Compare Owen Equipment & Erection Co. v. Kroger, 437 U.S. 365, 98
S.Ct. 2396, 57 L.Ed.2d 274 (1978) (no jurisdiction over
plaintiff's claim against a non-diverse third party defendant).
Furthermore, if the state sues only the federal reserve bank in
state court, the bank can remove the case and then implead the
This court has subject matter jurisdiction under 12 U.S.C. § 632
over the State's claim against the Federal Reserve Bank of
Chicago. The limited scope of § 632, however, does not allow it
to exercise pendent party jurisdiction over Merchandise National
Bank of Chicago. Counts 2 and 3 of the complaint are accordingly