Petition — First Bank of Oak Park v. United California Bank

Gupreme Court, U.

ED

Ra APR 22 1980

Supreme Court of the Anited

OCTOBER TERM, 1979

No 629-1669

FIRST BANK OF OAK PARK, an Illinois

banking corporation,

Petitioner,

vs.

UNITED CALIFORNIA BANK, a California

banking corporation,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

COURT OF APPEAL OF THE STATE OF CALIFORNIA,

FIRST APPELLATE DISTRICT, DIVISION TWO

RICHARD ORLIKOFF

208 South LaSalle Street

Chicago, Illinois 60604

Attorney for Petitioner

Of Counsel

Davip P. BANCROFT

SIDEMAN, BANCROFT & SUTTON

Suite 1960

3 Embarcadero Center

San Francisco, California 94111

ROBERT J. PETERS

FRANKEL, McKay, ORLIKOFF & DENTEN

208 South LaSalle Street

Chicago, Illinois 60604

Gunthorp-Warren Printing Company, Chicago e Financial 6-6565

a

Pare earn A en agme e

TABLE OF CONTENTS

aa lt aba gaaatek s onks oc eae’

OSU ESE PCN El ge ae ee a ae

i awe ic cue dc clec cece

Reasons for Granting the Writ ..................008.

THE DECISION BELOW HOLDING THAT THE

COURTS OF CALIFORNIA HAVE IN PER-

SONAM JURISDICTION OVER PETITIONER

VIOLATES THE DUE PROCESS CLAUSE OF

THE FOURTEENTH AMENDMENT AND IS

CONTRARY TO THE DECISIONS OF THIS

GEE 2 6S Gh EMRE EEN Sete ee Eee

A. The Court of Appeal’s Opinion Is Based Upon

A Decision Which Was Reversed By This Court

B. The Decision Below Is Contrary To The Sub-

sequent Decisions Of This Court In World-Wide

Volkswagen Corporation Vv: Woodson And Rush

EN By Sand a g's hbk oy’ a 6

C. Petitioner Is A Non-Residen#Of California And

Has Virtually No Business Contacts With That

NE iia acpi PO bie Wake Piao e4Sd Ss He ops

D. Under The Facts And Circumstances Apparent

In This Record, Requiring Petitioner To Defend

This Action In California Offends Traditional

Notions Of Fair Play And Substantial Justice. . .

I rn Cr es Ok a aku odes

Appendices:

A. Opinion in United California Bank v. First Bank

of Oak Park, 98 Cal. App. 3d 439, 159 Cal.

Rptr. 607 (1st Dist. 1979) and Order denying

Petition For Rehearing: . ow. ik. icine ee

12

13

15

er ws Le Re ET EEL NTR ee mE ee ee ee eee maT ee En ern ee te Tee

ii

B. Order of the Supreme Court of California Deny-

ing Pettion. Fae EICMNS oe se de el A8

C. Order of Superior Court of Alameda County,

California, Quashing Service of Summons and

CINE oss ak > eiieiy sb 58s beh eee elbeey Lk A9

TABLE OF AUTHORITIES

Cases

Arnold v. San Ramon Valley Bank, 184 Cal. 632, 194

PR Pe CREEP ives sk cv ieee a Re es ake 9

Chicago Title & Trust Co. v. Central Trust Co.,.312 II.

Se ee Pas ee eS LEY Wh Kh bees cage 8c 9

Continental Grain Co. v. Barge FBL-585, 364 U.S. 20

Ci cere ee eer es eae ae Tis case hee bes 15

Hanson v. Denckla, 357 U.S. 235 (1958) ...... 06380. 7

Harris v. Balk, 198 U.S. 215 (1905) ............... 12

The Haytian Republic, 154 U.S. 118 (1894) ......... 15

International Shoe Co. v. Washington; 326 U.S. 310

CR ae iach CONS eae e 7, 13,14

Kamfner v. Auburn Park Trust & Savings Bank,-344 III.

EF a i: ee CRED 4 Gs 6.60 66 5 tsa od 0s 4 aves BAe 9

Kerner v. Kinsey, 384 Ill. 180, 51 N. E. 2d 126 (1943)... 9

Kulko v. Superior Court of California, 436 U.S. 84

CR ae A Ae A964 <nleh Kale. Cie AE Reto Bh a 7, 8, 15

Kulko v. Superior Court, 19 Cal. 3d 514, 564 P. 2d 353

DE shaky pins yw oa bd 6 bed a a 8 oo A 7

Landis v. North American Co., 299 U.S. 248 (1936).. 15

McGee v. International Life Ins. Co., 355 U. §. 220 (1957) 13

Rush v. Savchuk, 48 U.S. L. W. 4088 (January 21,1980) 9

Shaffer v. Heitner, 433 U.S. 186 (1977) ............. 7

Sibley v. Superior Court, 16 Cal. 3d 442, 546 P. 2d 322

SEES wala cut Sh aa Ck Gee tks eRe va aK ae 12

Stutsman v. Patterson, 457 F.Supp. 189 (C.D. Cal.

1978)

United California Bank v. First Bank of Oak Park, 98 Cal.

App. 3d 439, 159 Cal. Rptr. 607 (1st Dist. 1979)....

PMR ERM EM Guay ee AVE EV ck CREE NOOR 6-7, 8, 10, 11

Willey v. Crocker-Woolworth Nat. Bank, 141 Cal. 508, 75

Pac. 106 (1904)

World-Wide Volkswagen Corporation v. Woodson, 48

U.S. L. W. 4079 (January 21, 1980)..............

iis cepkese. sss ete tee on #59, 36, 81, 12, 13, 16

In re Yale Express System, Inc., 245 F. Supp. 790 (S. D.

ae aE. i ohn area ota eo a ee 14

Statutes

California Code of Civil Procedure, § 410.10.......... 7

Miscellaneous

American Law Institute, ‘Restatement (Second) of Con-

CP CRT EP hie dc Hak SOR 6 oes Ca SA Loe. 8

Armstrong, “The Developing Law of Participation Agree-

ments,” 23 Bus. Law 689 (1969)....3............ 14

Fed. Res. Bull., March 1980, p. A19 ................ 15

=

s

———

IN THE

Supreme Court of the Gnited States

OCTOBER TERM, 1979.

FIRST BANK OF OAK PARK, an Illinois

banking corporation,

Petitioner,

VS.

UNITED CALIFORNIA BANK, a California

banking corporation,

Respondent.

PETITION FOR A WRIT OF CERTIORARI*TO THE

COURT OF APPEAL OF THE STATE OF CALIFORNIA,

FIRST APPELLATE DISTRICT, DIVISION TWO

Petitioner First Bank of Oak Park respectfully prays that a

writ of certiorari issue to review the judgment of the Court of

Appeal of the State of California, First Appellate District,

Division Two.

OPINION BELOW

The opinion of the Court of Appeal of the State of Cali-

fornia, First Appellate District, Division Two, is reported at

93 Cal. App. 3d 439, 159 Cal. Rptr. 607 (1979) and is set

out in Appendix A to this Petition. The order of the Supreme

Court of California denying Petitioner’s Petition For Hearing is

reprinted in Appendix B. The order of the Superior Court of

Alameda County quashing service of summons upon petitioner

for lack of jurisdiction is unreported but is set forth in Ap-

pendix C.

JURISDICTION

The decision of the Court of Appeal of the State of Cali-

fornia was entered on Nov aber 6, 1979. After unsuccessfully

seeking a rehearing in the Court of Appeal, petitioner filed a

Petition For Hearing with the Supreme Court of California

which was denied on January 24, 1980. This petition for

certiorari was filed within ninety days of that date. The juris-

diction of the Court is invoked under 28 U.S.C. § 1257(3).

QUESTION PRESENTED

Is an Illinois banking corporation which transacts no busi-

ness and has no presence in California subject to the in personam

jurisdiction of the courts of California in an action to collect

a non-negotiable certificate of deposit which the Illinois bank

issued in Illinois to a Delaware corporation, and which the

Delaware corporation assigned to a California bank?

oe

CONSTITUTIONAL PROVISION AND

STATUTE INVOLVED

Constitution of the United States, Amendment XIV, Section 1.

All persons born or naturalized in the United States,

and subject to the jurisdiction thereof, are citizens of the

United States and of the State wherein they reside. No

State shall make or enforce any law which shall abridge

the privileges or immunities of citizens of the United States;

nor shali any State deprive any person of life, liberty, or

property, without due process of law; nor deny to any

person within its jurisdiction the equal protection of the

laws.

California Code of Civil Procedure, § 410.10.

A court of this state may exercise jurisdiction on any

basis not inconsistent with the Constitution of this state

or of the United States.

STATEMENT OF THE CASE

The federal constitutional question presented is whether

California can compel an Illinois bank to defend a suit in a

California court to collect a non-negotiable certificate of de-

posit issued by the Illinois bank and subsequently pledged to

a California bank. Petitioner moved in the trial Court to quash

service of summons and complaint on the ground that ‘California

had no in personam jurisdiction over petitioner. (CT 10-11)?

In support of that motion petitioner argued, inter alia, that the

exercise of jurisdiction by the California court in this case

‘ would violate due process of law. (CT 14 et seq.)

1. The certified copy of the record below has been filed with this

Petition. References to the record in the trial Court are made by the

prefix “CT” followed by the as number. References to other

documents in ord are made by document description, followed

by the page number of the document.

4

The trial Court found “that there exists no basis for the

exercise of jurisdiction by a court of this state” over petitioner,

and granted petitioner's motion to quash. (Appendix C, p. A9)

Respondent appealed and the Court of Appeal reversed on the

ground that the California courts could subject petitioner to

personal jurisdiction because petitioner had issued a certificate

of deposit (“CD”) which its officers knew might be used to

finance a grape-growing venture in California, “. . . and that

the certificate of deposit would be worthless security for the loan

issued in California because Oak Park could cancel the certifi-

cate against its own loan to Gleaco.” (Appendix A, p. A2)

Petitioner is a banking corporation chartered under the laws

of Illinois with its business offices located exclusively in the

Village of Oak Park, Illinois. (CT 24) Petitioner does not

transact business in California and never has transacted business

in California. (CT 24)

On February 14, 1975 petitioner lent $350,000 to Gleaco

Corporation, a Delaware corporation (“Gleaco”), evidenced by

a demand promissory note. (deMoya Dep., pp. 28, 38)! The

‘transaction took place in Illinois. John S. Gleason, Jr. (“Glea-

son”), the President of Gleaco (CT 32) and an Illinois resident

(CT 168), executed and delivered to petitioner Gleaco’s note.

(Ott Dep., pp. 63-4) The borrowed funds were deposited by

1. Transcripts of the depositions referred to herein appear in one

document filed in the Court of Appeal by respondent and entitled,

“Appellant United California Bank’s Application To Take New

Evidence On Appeal And Alternative Request To Take Judicial

Notice”.

On appeal respondent moved, under a provision of the Cali-

fornia Evidence Code, for the Court of Appeal to take new evidence,

or for the Court to take judicial notice of certain facts. In connection

with,that motion respondent filed transcripts of depositions taken of

one Officer and two former officers of petitioner in a case brought by

the Federal Deposit Insurance Company against petitioner and

pendirg in the federal District Court in Chicago. Federal Deposit

Insurance Corporation v. First Bank of Oak Park, No. 76 C 3925

(N. D. Ill.) The Court of Appeal denied the motion, but then, after

oral argument, reversed itself and granted the motion.

5

Gleaco with petitioner, and petitioner issued a non-negotiable

certificate of deposit for $350,000, payable to Gleaco. A copy

of the CD is annexed to respondent's complaint. (CT 9)

Gleason apparently carried the CD to California, and Gleaco

pledged and assigned it to the First State Bank of Northern

California (“Northern”) to secure a personal loan to Gleason

of $350,000." Respondent purchased a 90 per cent participation

in Northern’s personal loan to Gleason. (CT 8)

Deposition testimony placed in the record before the Court

of Appeal by respondent shows that petitioner received no no-

tice of any assignment, pledge, posting, deposit or other dis-

position of the non-negotiable CD prior to the exercise of

petitioner’s right to set-off Gleaco funds deposited with petitioner

against sums due petitioner from Gleaco. (deMoya Dep., pp.

74-75, 91-95; Ott Dep., pp. 82-90; O’Keefe Dep., pp. 39,

46-47)

In early February 1976 the Gleaco loan was delinquent and

petitioner demanded payment by February 17. (deMoya Dep.,

pp. 93-94) Gleaco, Gleason and other related entities filed peti-

tions under Chapter XI of the former Bankruptcy Act in mid-

February 1976. (CT 3) Shortly after Gleaco filed for bank-

ruptcy, petitioner set off the CD against its loan to Gleaco.

(CT 3)

On May 21, 1976 Northern failed and the Federal Deposit

Insurance Corporation (“FDIC”) was appointed receiver. (CT

27) At or about that same time respondent set off funds held by

it for Northern against the funds it had advanced for its 90 per

cent participation in Northern’s loan to Gleason. (CT 2)

Two other suits are pending which are related to this action.

Respondent’s suit against petitioner was filed January 27, 1977,

1. The Assignment was executed by Gleaco, “. . . as security for

the payment of our note . . .” (CT 32), but only Gleason is a

signatory on the note. (CT 30) Respondent alleges that the security

for Northern’s loan to Gleason was the non-negotiable CD (CT 2),

and that the CD “had been pledged as security for the Gleason

loan”. (CT 3, 4)

6

in three counts, viz., for a declaratory judgment that petitioner’s

set-off of the funds represented by the CD against Gleaco’s debt

was improper, for damages of $326,900 plus interest, and for

punitive damages of $5 million. (CT 1-9) The first related suit

is FDIC v. United California Bank, filed September 1, 1976

and pending in the Superior Court of Alameda County, Cali-

fornia, No. 485056-2. The FDIC, serving as Receiver of North-

ern, claims that respondent wrongfully set off against funds of

Northern on deposit with respondent a sum equal to respondent’s

90% participation interest in Northern’s $350,000 loan to

Gleason, plus interest.

The second suit is FDIC v. First Bank of Oak Park, No.

76 C 3925, filed October 22, 1976 and pending in the U. S.

District Court for the Northern District of Illinois, Eastern

Division. In this suit FDIC claims that petitioner wrongfully

exercised its set-off rights against Gleaco funds on deposit which

backed and were represented by the CD. (CT 26-36) To that

extent FDIC’s suit against petitioner parallels respondent’s in-

stant action against petitioner. The Illinois suit was filed by

FDIC at the demand of respondent.’

REASONS FOR GRANTING THE WRIT

THE DECISION BELOW HOLDING THAT THE COURTS OF

CALIFORNIA HAVE IN PERSONAM JURISDICTION OVER

PETITIONER VIOLATES THE DUE PROCESS CLAUSE OF

THE FOURTEENTH AMENDMENT AND IS CONTRARY

TO THE DECISIONS OF THIS COURT.

The California Court of Appeal reversed the judgment of

the trial Court and found that it was “reasonable for California

1. On July 1, 1976, more than six months prior to the time

respondent filed the instant action, respondent tendered the CD to

FDIC and demanded that FDIC “commence legal action against the

First Bank of Oak Park”. (CT 245-246)

7

. . . [under California’s long-arm statute, Cal. Code of Civ.

Proc., § 410.10] . . . to exercise jurisdiction over Oak Park”

(Appendix A, p. A5), by applying the “effects test of jurisdic-

tion”. (Appendix A, pp. A3-4) In so doing the Court of Appeal

wholly failed to apply the “minimum contacts” test of jurisdic-

tion first enunciated in International Shoe Co. v. Washington,

326 U.S. 310 (1945), and subsequently followed and applied

by this Court. World-Wide Volkswagen Corporation v. Wood-

son, 48 U.S. L. W. 4079 (January 21, 1980): Kulko v. Superior

Court of California, 436 U.S. 84 (1978); Shaffer v. Heitner,

433 U.S. 186 (1977); Hanson v. Denckla, 357 U.S. 235

(1958).

A. The Court Of Appeal’s Opinion Is Based Upon A

Decision Which Was Reversed By This Court.

As its primary authority and guide for applying the “effects

test of jurisdiction” the Court of Appeal relied upon Kulko v.

Superior Court, 19 Cal. 3d 514, 564 P. 2d 353 (1977). That

decision was reversed by this Court. Kulko v. Superior Court of

California, 436 U.S. 84 (1978).

In finding that it was fair and reasonable to subject petitioner

to the jurisdiction of the California courts, the Court of Appeal

simply ignored the reasoning of this Court in its Kulko opinion,

and followed solely the reasoning of the California Court in the

Kulko decision which this Court reversed. The factors which

the Court of Appeal considered determinative of the question

of jurisdiction were factors which this Court has rejected. The

Court of Appeal failed to consider those factors which this Court

has mandated must be considered.

B. The Decision Below Is Contrary To The Subsequent

Decisions Of This Court In World-Wide Volkswagen

LL

Corporation v. Woodson And Rush v. Savchuk.

In World-Wide Volkswagen this Court expressly reaffirmed

the “long settled” principle that “a state court may exercise

8

personal jurisdiction over a non-resident defendant only so long

as there exist ‘minimum contacts’ between the defendant and the

forum State. International Shoe Co. v. Washington, supra, at

316.” 48 U.S.L.W. at 4081. The Court of Appeal below

did not consider whether petitioner had the requisite minimum

contacts in California.

The Court below predicated its decision upon the “facts” that

petitioner issued its non-negotiable CD knowing it would Be

taken to California, thereby causing “effects” upon banks in

California, namely, the inability of a California bank lender to

realize the value of the CD pledged as security for a loan since

“the security would be worthless because of Oak Park’s right of

offset.” (Appendix A, p. A4)

The Court of Appeal applied the “effects” test of jurisdiction

in such fashion as to nullify and contradict the “minimum

contacts” test promulgated by this Court.’ The inability of

Northern, a California bank, to collect the CD issued by peti-

tioner and which Northern had taken as security for an uncol-

lectible loan, was the result of improper action taken by

Northern, i.e., failure to perfect its security interest in the non-

negotiable CD by giving notice to petitioner of assignment of

the CD. It was not the result of any wrongful action by peti-

tioner. The “effects” test of jurisdiction was improperly applied

by the Court of Appeal to stretch California jurisdiction to

cover the “effect” of a proper action in Illinois by petitioner that

started a chain of events which culminated in damage to a

California bank. It is true that had the CD not been issued a

California bank could not have taken it as security. But issuance

of the CD was not wrongful, improper or violative of any bank-

ing regulation. The “but for” theory is not a proper foundation

upon which a foreign state may assert in personam jurisdiction.

1. This Court has pointed out that the “effects” test is derived

from the American Law Institute’s Restatement (Second) of Con-

flicts §37 (1971), which “. . . was intended to reach wrongful

activity outside of the State causing injury within the State, . . .”.

Kulko y. Superior Court of California, 436 U.S. at 1699.

9

See World-Wide Volkswagen, supra, at 4083. The “effects”

test should not be applied to proper, legal action taken in a

foreign jurisdiction—especially when the actor has not had the

requisite minimum contact with the State seeking to assert

jurisdiction.

The Court below did not consider whether petitioner’s “con-

duct and connection with the forum State are such that he

should reasonably anticipate being haled into court there. See

Kulko v. Superior Court, supra, at 97-98; Shaffer v. Heitner,

supra, at 216; and see id., at 217-219 (Stevens, J., concurring

in the judgment).” World-Wide Volkswagen, supra, at 4082.

The relationship among petitioner, the forum and the litigation

was not explored at all. See Rush v. Savchuk, 48 U.S. L. W.

4088 (January 21, 1980).

The Court below did not consider that the CD was issued in

Illinois in a transaction that was completed in Illinois, that the

CD was non-negotiable, and that under both Illinois and Cali-

fornia law, petitioner’s right to set off against that non-negotiable

instrument existed until it was placed on notice of the assign-

ment of that instriment. See Kerner v. Kinsey, 384 Ill. 180, 51

N. E. 2d 126 (1943); Kamfner v. Auburn Park Trust & Sav-

ings Bank, 344 Ill. 200, 176 N. E. 363 (1931); Chicago Title

& Trust Co. v. Central Trust Co., 312 Ill. 396, 482, 144 N. E.

165 (1924); Arnold v. San Ramon Valley Bank, 184 Cal.

632, 194 Pac. 1012 (1921); Willey v. Crocker-Woolworth

Nat. Bank, 141 Cal. 508, 75 Pac. 106 (1904).

Petitioner did not set loose upon California banks an instru-

ment which, without more, would have an “effect” in California

because it was “worthless”. By perfecting its security interest in

the CD any holder, bank or otherwise, could have obtained the

benefit of the obligation evidenced by the CD. Respondent fully

recognized that notice to petitioner was necessary to perfect

Northern’s security interest in the CD. (CT 257-8) However,

the record shows no notice to petitioner of any assignment or

pledge of the CD to a California bank, and no acknowledgement

10

by petitioner of any such pledge or assignment. It may be

reasonable for the State of California to require California

banks, by statute or regulation, to perfect their security interests

when lending money on the security of foreign instruments.

But it is unreasonable to construe California’s interest in regu-

lating and protecting its banks in such fashion as to insulate

those banks from the stupidity and cupidity of their actions,

and demand, in effect, that the banks of other States answer in

California for'all losses incurred by California banks as a result

of accepting foreign instruments as security.

The Court of Appeal based its holding upon the happenstance

that the certificate was assigned or pledged to a California bank,

without considering the fact that it could have been assigned to

any bank in any state. Although the Court of Appeal purported

_ to rely on deposition testimony that petitioner knew that the CD

was to be brought to California, it failed to recognize that

“foreseeability alone has never been a sufficient benchmark

for personal jurisdiction under the Due Process Clause.” World-

Wide Volkswagen, supra, at 4082.’ The unilateral activity of

Gleason, the president of the Delaware corporation to which

the certificate of deposit was issued, in pledging or assigning

the non-negotiable certificate as security for a personal loan can-

not satisfy the requirement of contact by petitioner with the

forum State, to paraphrase World-Wide Volkswagen, supra, at

4083.

The Court of Appeal below fourid that the “difference in

interest rates [between petitioner's loan and the certificate of

deposit] resulted in substantial economic benefit to Oak Park.

This realization of economic benefit from out-of-state activity

which caused effects in California makes it reasonable for

California to exercise jurisdiction over Oak Park. Kulko v.

Superior Court, supra, 19 Cal. 3d 514; . . .” (Appendix A; p.

1. The depositions of petitioner’s officers in the record show

they did not know how the CD would be used to finance a grape-

growing venture in California. (Ott Dep., p. 60; de Moya Dep., pp.

28, 48; O’Keefe. Dep., pp. 18, 22)

1}

A5) The money made by petitioner in the transaction with

Gleaco, resulting from the differential between the rate of in-

terest charged on the loan and the rate of interest paid on the

CD, cannot serve to support California’s jurisdictional asser-

tion.’ In concluding that the “. . . realization of economic benefit

from out-of-state activity which caused effects in California

makes it reasonable for California to exercise jurisdiction over

Oak Park . . .”, (Appendix A, p. A5), the Court below reached

beyond the limits imposed on California by its status as a co-

equal sovereign in a federal system. The “effect” that ultimately

resulted was too tenuous; indeed, had Northern followed ac-

cepted banking practices the “effect” would not have occurred at

all—the CD would have been collectible. The “effect”, or injury

that actually occurred in California resulted from ineptness of

Northern, a California bank, and of respondent, also a Cali-

fornia bank. This “effect” was not a necessary or to-be-expected

consequence of issuance of the CD.

This Court has ruled that “. . . [FJinancial benefits accruing

to the defendant from a collateral relation to the forum State

will not support jurisdiction if they do not stem from a con-

stitutionally cognizable contact with that State. See Kulko v.

Superior Court, supra, at 94-95.” World-Wide Volkswagen,

supra, at 4083. There was no econaqmic benefit to petitioner

which resulted from any activity in California. Whatever bene-

fit the petitioner received arose from a transaction which was

completed in Illinois. In similar situations both federal and

California courts have found the purported economic benefit

too tenuous to support jurisdiction. See Stutsman v. Patterson,

457 F.Supp. 189, 192 (C.D. Cal. 1978) (assignment to a

1. The interest rate on the CD was 642%. (CT 9) There is

nothing in the record which shows the rate of interest on petitioner’s

loan to Gleaco. Petitioner does not dispute that a differential existed.

2. Respondent’s attorneys have taken the position with the FDIC

that, “The security for the debt of John S. Gleason, Jr. has been

lost through inaction by [Northern] .. . .” (CT 258)

12

California bank of a letter of credit); Sibley v. Superior Court,

16 Cal. 3d 442, 447, 546 P. 2d 322, 325 (1976) (guaranty

of a bank loan by a California resident).

“The Due Process Clause of the Fourteenth Amendment

limits the power of a state court to render a valid personal

judgment against a nonresident defendant. Kulko v. Superior

Court, 436 U.S. 84, 91 (1978).” World-Wide Volkswagen,

supra, at 4081. The basic standard to be applied is whether

“, . defendant’s contacts with the forum State [are] such that

maintenance of the suit ‘does not offend traditional notions of

fair play and substantial justice.’ International Shoe Co. Vv.

Washington, supra, at 316, quoting Milliken v. Meyer, 311

U. S. 457, 463 (1940).” World-Wide Volkswagen, supra, at

408 1.

An examination of the relevant factors and facts in this case

clearly demonstrates the unreasonableness and unfairness of

California in requiring petitioner to litigate—indeed, relitigate

—this case in California.

C. Petitioner Is A Non-Resident Of California And Has

Virtually No Business Contacts With That State.

This record does not reveal any “presence” by petitioner in

California at all. Petitioner has no office, facility or personnel

in California. Petitioner solicits no business in California. Pe-

titioner’s loan to the Delaware corporation in question was

made in Illinois, and petitioner issued its non-negotiable CD

in Illinois. Wherever the holder of the CD carried it, and to

whomever that holder pledged it, the only manner in which

petitioner’s right to set off the funds backing the CD could be

affected or changed was by notification of that pledge delivered

to and received by petitioner in Illinois.

What the Court below did was to resurrect the rule of

Harris v. Balk, 198 U. S. 215 (1905). By treating the physical

presence of the holder of the CD as a ground for jurisdiction

Se

13

(just as in Harris v. Balk the presence of the debtor was deemed

to confer jurisdiction of an action to extinguish the interest of

the creditor of the debtor in the debtor’s debt) the Court below

created in personam jurisdiction from discarded quasi in rem

principles.

In no way did petitioner avail itself of the privilege of con-

ducting business in California, or of the benefits and protections

of California laws.

D. Under The Facts And Circumstances Apparent In This —

Record, Requiring Petitioner To Defend This Action

In California Offends Traditional Notions Of Fair

Play And Substantial Justice.

Assuming arguendo that petitioner caused an “effect” in

California by reason of its loan transaction in Illinois, the record

clearly illustrates that the exercise by a California Court of

jurisdiction over respondent’s claim against petitioner would

still do violence to the constitutional requirement that the

maintenance of this action “. . . not offend ‘traditional notions

of fair play and substantial justice.’ ” International Shoe, supra,

326 U.S. at 316.

This Court has concluded that in assessing whether a State

Court may exercise in personam jurisdiction over a nonresident

corporate defendant relevant factors to be weighed include an

““estimate of the inconveniences’ which would result to the

corporation from a trial away from its ‘home’ or principal

place of business . . .”, International Shoe, supra, 326 U.S. at

317, and the disadvantages occasioned by forcing a plaintiff

to follow a defendant to a distant forum. McGee v. Interna-

tional Life Ins. Co., 355 U.S. 220, 223 (1957). See World-

Wide Volkswagen, supra, at 4081. Petitioner, its officers and

former officers, and Gleason, the president of the Delaware

corporation to which the certificate of deposit was issued,

are all Illinois residents, rendering petitioner’s defense far

14

from mobile. Further, it seems clear that requiring petitioner

to defend against the same cause of action brought by different

parties in different courts more than two thousand miles apart

is the kind of “inconveniente” to which this Court referred

in International Shoe, supra.

Here, prior to the filing of this action in the Superior Court

in California, respondent caused FDIC to challenge, in an IIli-

nois forum, petitioner’s right to set off the funds backing the

CD. On July 1, 1976, respondent delivered the CD to FDIC,

as successor-in-interest to Northern as holder of the Gleason

note secured by the CD, and demanded that FDIC sue peti-

tioner. FDIC promptly did so, bringing action against petitioner

in the United States District Court for the Northern District

of Illinois.’ That action seeks a declaration of the invalidity of

petitioner’s set-off, and recovery of the monies represented by

the CD. However differently worded, respondent’s subsequent

complaint in this action seeks relief based upon the same alle-

gations. Sound judicial policy designed to avoid a multiplicity

of actions strongly militates against continued maintenance of

respondent’s instant and multiplicitous action in California.

The inconvenience and unfairness to petitioner occasioned by

its necessary simultaneous defenses to two similar actions—each

seeking the recovery of respondent’s investment in Northern’s

loan to Gleason—is manifest. By allowing the instant action to

be brought in California, the Court of Appeal permitted

respondent to achieve the “mischievous consequences” this Court

has found, albeit in different contexts, to be the impermissible

end result of the allowance of separate but simultaneous actions

1. Because petitioner has, to date, not interposed defenses to

respondent’s cause of action, the question whether respondent has

any standing to bring this action has yet to be raised or determined.

However, it appears that respondent—as a mere participant in

Northern’s loan to Gleason—has no standing to sue petitioner. See

In re Yale Express System, Inc., 245 F. Supp. 790, 792 (S. D. N. Y.

1965): Armstrong, “The Developing Law of Participation Agree-

ments,” 23 Bus. Law. 689, 693 (1969).

15

relating to the same parties and incidents. Continental Grain Co.

v. Barge FBL-585, 364 U.S. 20, 21 (1960). See Landis V.

North American Co., 299 U.S. 248, 254-5 (1936); The Hay-

tian Republic, 154 U.S. 118 (1894).

Respondent’s “play” in bringing this action against petitioner

cannot be considered fair by any standard. If only by reason of

respondent’s affirmative determination to have its rights enforced

in Illinois, here, as in Kulko, “. . . basic considerations of fair-

ness point decisively in favor of . . . [petitioner's]. . . State of

domicile as the proper forum for adiudication of this case . . .”

436 U.S. at 97.

CONCLUSION |

The question presented to this Court is of significance to the

commerce of the nation. As of September 30, 1978, insured

commercial banks had issued and outstanding certificates of

deposit in excess of $100,000 face value in an aggregate amount

of $186.837 billion. Fed. Res. Bull., March 1980, p. A19

(Detailed Balance Sheet, September 30, 1978, “Commercial

Bank Assets and Liabilities”, Item No. 127). The certificate of

deposit is a widely-used instrument of commerce. The State of

California should not be permitted to impair the use of that

commercial instrument by subjecting any bank in the United

States to the jurisdiction of California courts merely because that

bank has issued a certificate of deposit which has been assigned

to a California bank.

For the reasons given, petitioner prays that a writ of certiorari

be granted to review the decision and opinion below. In the

alternative, petitioner prays that the writ be granted, that the

decision below of the California Court of Appeal be vacated.

16

Al

and that this case be remanded to that Court for reconsideration |

in light of World-Wide Volkswagen Corporation v. Woodson, 48 APPENDIX A

U. S.L. W. 4079 (January 21, 1980).

Respectfully submitted, Certified for Publication

RICHARD ORLIKOFF - IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

208 South LaSalle Street

: First Appellate District

Chicago, Illinois 60604

Division Two

Attorney for Petitioner

| United California Bank >

Of Counsel i

inti Filed November 6,

ee Plaintiff and Appellant, 1979

SIDEMAN, BANCROFT & SUTTON ivi

Suite 1960 = % bi en a

3 Embarcadero Center First Bank of Oak Park, 491277-2)

San Francisco, California 94111 Defendant and Respondent. |

ROBERT J. PETERS |

FRANKEL, McKay, ORLIKOFF & DENTEN This is an appeal from an order of the trial court quashing the

208 South LaSalle Street | service of summons on the defendant and respondent First Bank

Chicago, Illinois 60604 of Oak Park (Oak Park). There is some confusion by the

attorneys about what facts are in the record.’ However, the

relevant facts for this appeal are summarized as follows:

John Gleason was an Illinois resident. He was the sole share-

holder of Gleaco Corporation, a Delaware corporation. Oak

Park was a bank incorporated in Illinois. Gledéson and Gleaco e

had previously borrowed money from Oak Park..Gleason, on

_ behalf of Gleaco, applied for a new loan from Oak Park in the

yey amount of $350,000. Oak Park denied the loan because of the

manner in which Gleason and Gleaco had repaid prior loans.

However, Oak Park agreed to make the loan on the following

‘ ¢ basis: Gleason, on behalf of Gleaco, on February 14, 1975,

1. United California Bank (appellant) moved this court to take

new evidence on appeal. It argued facts taken from its motion in its

opening brief. The motion to take new evidence was then denied.

On the court’s own motion, the new evidence was subsequently taken

into the record for appeal.

| )

A2

executed a note to Oak Park for $350,000; Oak Park in turn

transferred by intra-bank transfer the borrowed funds and issued

to Gleaco a certificate of deposit for $350,000. Oak Park’s

officers knew that Gleason intended to use the certificate of

deposit to obtain financing for a grape-growing venture in

California, and that the certificate of deposit would be worthless

security for the loan issued in California because Oak Park

could cancel the certificate against its own loan to Gleaco.

John Gleason came to California and pledged the certificate

of deposit as security for a personal loan in the amount of

$350,000, borrowed from the First State Bank of Northern

California (Northern). The certificate of deposit was assigned

to Northern by Gleason for Gleaco Corporation.

United California Bank (appellant) purchased a 90 percent

participation in Northern’s personal loan to Gleason. Gleaco

defaulted on its loan with Oak Park, and Oak Park canceled the

certificate of deposit. Thus, Northern’s loan (with appellant’s

90 percent participation) was unsecured.

John Gleason filed for bankruptcy in February 1976. He

defaulted on his personal loan from Northern on March 4, 1976.

Northern was closed and placed in receivership by the Super-

intendent of Banks for the State of California on May 21, 1976.

The Federal Deposit Insurance Corporation (FDIC) was

appointed received for Northern, and by a sale of assets to itself,

FDIC acquired the note from Gleason to Northern. FDIC then

filed an action in Alameda County against appellant and sought

to recover Northern’s deposits that appellant used to “offset”

the amount of appellant’s participation in Northern’s loan to

Gleason.?

Appellant then instituted this action for a declaratory judg-

ment against Oak Park. Appellant seeks a declaration that Oak

Park wrongfully offset its loan to Gleaco against the certificate

2. The FDIC also filed an action against Oak Park in the United

States District Court for the Northern District of Illinois. The FDIC

sought a declaration that the certificate of deposit was valid.

A3

of deposit, and that it is entitled to be indemnified by Oak Park

to the extent that an award is made against it in the FDIC action.

Oak Park moved the trial court to quash the service of

summons on it of the ground of lack of jurisdiction or, in the

alternative, to stay or dismiss the action on the ground of

inconvenient forum. The motion to quash was granted by the

trial court and led to the instant appeal.®

Appellant asks this court to hold that the exercise of juris-

diction over Oak Park is proper under California’s long-arm

statute, section 410.10 of the Code of Civil Procedure. Section

410.10 states that California may exercise jurisdiction “on any

basis not inconsistent with the Constitution of this state or of

the United States.”

Appellant contends that the court should exercise jurisdiction

over the defendant on the theory that if a defendant has caused

effects in this state by his out-of-state act or omission, the state

may exercise jurisdiction over the defendant (Kulko v. Superior

Court (1977) 19 Cal. 3d 514; Sibley v. Superior Court (1976)

16 Cal. 3d 442).* The effects theory is discussed in the Judicial

Council Comment to the Code of Civil Procedure for section

410.10: “A state has power to exercise judicial jurisdiction over

an individual who causes effects in the state by an omission or

act done elsewhere, with respect to causes of action arising from

those effects, unless the nature of the effects and of the individ-

ual’s relationship to the state make the exercise of such juris-

diction unreasonable.” Appellant argues that consistent with

3. The facts before the trial court were different than as recounted

above. New evidence, taken in the record for appeal, has changed

the nature of the case. Our decision need not involve any disapproval

of the trial court’s action in view of the evidence before it.

4. The “effects” test of jurisdiction is an outgrowth of the

seminal case of Internat. Shoe Co. v. Washington (1945) 326 U.S.

310, 316, which stated that the test for personal jurisdiction over

out-of-state defendants was “minimum contacts” sufficient to satisfy

“ ‘traditional notions of fair play and substantial justice.’” (See

Hanson v. Denckla (1958) 357 U.S. 235; McGee v. International

Life Ins. Co. (1957) 355 U.S. 220.)

A4

the effects test of jurisdiction, the exercise of jurisdiction is

reasonable in the instant case because: 1) Oak Park did an in-

tentional act knowing that it would cause effects in California,

the nature of which California deems to be exceptional and

subject to special regulation, and 2) Oak Park anticipated an

economic benefit from its act which caused the effect in this

state.

We agree with both of appellant’s contentions, and, therefore,

the ruling of the trial judge must be reversed.

In Quattrone v. Superior Court (1975) 44 Cal. App. 3d

296, 306, the court said, “we conclude that it is reasonable to

exercise jurisdiction on the basis of the defendant intentionally

causing ‘effects in the state by an omission or act done else-

where’ whenever (a) the effects are of a nature ‘that the State

treats as exceptional and subjects to special regulation, ... .”

Quattrone is controlling in this case. An examination of the

record makes it abundantly ciear that respondent, Oak Park,

issued the certificate of deposit knowing that Gleason intended

to take it to California and use it as security for a loan, and that

the security would be worthless because of Oak Park’s right of

offset. The effects caused was the extension of a loan to Gleason

which in effect was unsecured and ultimately became uncollec-

tible. Both effects are treated as exceptional and are subject to

regulation in California. The types and amounts of loans and

the types and values of security which state banks must obtain

for those loans are regulated by the state (Fin. Code, §§ 1220-

1236). No further citations are needed to support the conclu-

sion that California deems state chartered banks exceptional

and subject to special regulation. Consequently, under the hold-

ing of Quattrone, it is reasonable to require Oak Park to ap-

pear and defend this lawsuit in California.

Additionally, we hold that it is reasonable to exercise juris-

diction over Oak Park because Oak Park anticipated that it

would derive an economic benefit as a result of its out-of-state

activities which caused effects in California. That Oak Park

AS

anticipated sucli economic benefits is apparent from the record.

By making the loan to Gleaco, which was immediately rein-

vested in the Oak Park certificate of deposit, Oak Park had

made a risk free loan: Meanwhile, it collected interest on the

loan in excess of the interest it paid on the certificate of de-

posit. This difference in interest rates resulted in a substantial

economic benefit to Oak Park. This realization of economic

benefit from out-of-state activity which caused effects in Califor-

nia makes it reasonable for California to exercise jurisdiction

over Oak Park (Kulko v. Superior Court, supra, 19 Cal. 3d

514; Sibley v. Superior Court, supra, 16 Cal. 3d 442).

In view of our conclusion, the additional issues raised by the

parties need not be discussed.

A6é .

- The order of the trial court quashing service of summons is

reversed.

CERTIFIED FOR PUBLICATION.

Calhoun, J.*

WE CONCUR:

Taylor, P. J.

Trial Court:

Superior Court, County of Alameda

Trial Judge:

John Sparrow

Attorneys for Appellant:

‘Severson, Werson, Berke & Melchior

Robert L. Loftus

Jan T. Chilton

Steven W. Waldo

One Embarcadero Center, 25th Floor

San Francisco, California 94111

Attorneys for Respondent:

William H. Carder

785 Market Street, Suite 1304

San Francisco, California 94103

Robert J. Peters

Frankel, McKay, Orlikoff, Denten

& Kostner °

208 South La Salle Street

Chicago, Illinois 60604

1/Civil 43371 i

United California Bank v. First Bank of Oak Park

* Assigned by the Chairperson of the Judicial Council.

A7

CouRT OF APPEAL OF THE STATE OF CALIFORNIA

In and for the First Appellate District

Division Two

Filed Dec. 6, 1979

United California Bank, etc., 7

Plaintiff and Appellant,

No. 43371

VS. r

Superior Court No. “....

First Bank of Oak Park, etc.,

Defendant and Respondent. )

By the Court:

The petition for rehearing filed in the above entitled cause is

hereby denied.

Dated Dec. 6, 1979

. /s/ Taylor P.J.

A8

APPENDIX B.

ORDER DUE

February 4, 1980

ORDER DENYING HEARING

After Judgment by the Court of Appeal

Ist District, Division 2, Civil No. 43371

IN THE SUPREME COURT OF THE STATE OF CALIFORNIA

In Bank

Filed January 24, 1980

UNITED CALIFORNIA BANK

vs.

First BANK OF OAK PARK

Respondent’s petition for hearing Denied.

Clark, J., is of the opinion that the petition should be granted.

Bird

Chief Justice

A9

APPENDIX C.

Filed August 9, 1977

IN THE SUPERIOR COURT OF THE STATE OF CALIFORNIA

85

In and for the County of Alameda

United California Bank, a California )

banking corporation,

Plaintiff,

VS.

° No. 491277-2

First Bank of Oak Park, an Illinois

banking corporation, Does One

through Four, inclusive,

Defendants. |

ORDER QUASHING SERVICE OF

SUMMONS AND COMPLAINT

Defendant First Bank of Oak Park appeared specially to

move this Court for an order quashing service of summons and

complaint upon said defendant on the ground of lack of juris-

diction over said defendant or in the alternative for an order

staying or dismissing this action on the ground of inconvenient

forum. Said motion came on regularly for hearing on August

1, 1977, Steven W. Parnes, Esq., appearing for said defendant

in support of said motion and Robert L. Lofts, Esq., appearing

for plaintiff in opposition thereto. The Court, on the basis of the

papers on file herein and evidence offered at said hearing, having

found that there exists no basis for the exercise of jurisdiction by

a court of this state over defendant First Bank of Oak Park

consistent with Code of Civil Procedure Section 410.10, which

defines the permissible bases for the exercise of jurisdiction by

the courts of this state,

A10

It Is Hereby Ordered that the service of summons and com-

plaint upon defendant First Bank of Oak Park be and hereby is

quashed.

Dated: August 1, 1977

and Presented and Signed

August 9, 1977

John P. Sparrow

Judge of the Superior Court