By Kenneth Dante Murena and Jonathan E. Groth

In accordance with Section 1367(a) of Title 28 of the United States Code, a U.S. District Court has supplemental jurisdiction over actions brought by an equity receiver appointed by the Court when the receiver’s claims are part of the same case or controversy as the action over which the Court has original jurisdiction.  Circuit Courts of Appeals throughout the country have long held that the exercise of supplemental jurisdiction established by 28 U.S.C. §1367(a) specifically includes actions ancillary to an action in which a receivership was established by a District Court so long as the ancillary action seeks to accomplish the ends sought and directed by the action in which the receiver was appointed.  When a receiver brings a recovery action to fulfill his or her duties under an appointment order entered in an underlying enforcement action, and the appointing Court expressly authorizes and directs the receiver to bring such an action to accomplish the ends sought in that enforcement action, the appointing Court has supplemental jurisdiction over the recovery action.

Supplemental jurisdiction is a statutory creation that Courts have applied to cases ancillary to a receivership and have further clarified and expanded its application.  Under Section 1367(a) of Title 28 of the United States Code, in any civil action over which the United States District Courts have original jurisdiction, the District Court shall have supplemental jurisdiction over all other claims that are so related to claims in the action within such original jurisdiction that they form part of the same case or controversy.  28 U.S.C. §1367(a).

Courts have long held that supplemental jurisdiction under 28 U.S.C. §1367(a) applies to actions filed by a court-appointed receiver when such an action is intended to accomplish the ends sought and directed by the action in which the appointment was made.  Indeed, the United States Supreme Court has continuously applied this standard, and the Seventh Circuit Court of Appeals has followed suit.  Specifically, the United States Supreme Court has consistently ruled that a federal court-appointed receiver may bring an action in the appointing court to accomplish the ends sought and directed by the action in which appointment was made, and that such action is regarded as ancillary to Court’s original subject matter jurisdiction and, under such circumstances, the court hearing the ancillary action will have supplemental jurisdiction.[1]  See Pope v. Louisville, N.A. & C. Ry., 173 U.S. 573, 577, 19 S. Ct. 500, 43 L. Ed. 814 (1899); see also Oils, Inc. v. Blankenship, 145 F.2d 354, 356 (10th Cir. 1944) (“A federal court, which has appointed a receiver in a proceeding of which it has jurisdiction, has jurisdiction to entertain a suit or proceeding to collect or recover assets.”).

The Seventh Circuit Court of Appeals has followed this ruling most notably in the case Tcherepnin v. Franz, 485 F.2d 1251, 1255-56 (7th Cir. 1973).  In Tcherepnin, a federal District Court appointed a receiver over City Savings Association (“City Savings”) following an action initiated by a group of shareholders alleging fraudulent solicitation.  See 485 F.2d at 1251.  The court-appointed receiver filed claims on behalf of City Savings in the same United States District Court alleging that the claims were ancillary to the principal receivership action in which he was appointed.  See id. at 1253-54.  The receiver alleged, among other things, fraud as to certain officers and employees of City Savings as well as third parties and sought the imposition of a constructive trust.  See id.  The District Court ruled in favor of the receiver and the defendants appealed to the Seventh Circuit Court of Appeals arguing, among other things, that the United States District Court lacked subject matter jurisdiction over the receiver’s claims.  See id. at 1255.  The Seventh Circuit held, consistent with Supreme Court’s ruling in Pope, supra, that “the ancillary jurisdiction of federal courts over actions incident to a receivership established by a federal court has long been recognized.  So long as an action commenced by a court-appointed receiver seeks ‘to accomplish the ends sought and directed by the suit in which the appointment was made, such action or suit is regarded as ancillary so far as the jurisdiction of the . . . court of the United States is concerned.’” Id., citing Pope, 173 U.S. 573, 19 S. Ct. 500, 43 L. Ed. 814 (1899).[2]

Other courts have further expanded on the types of ancillary actions brought by court-appointed receivers over which the appointing district court in the main action has supplemental jurisdiction.  In particular, consistent with the ruling and spirit of the Pope decision, courts have ruled that the district court will have supplemental jurisdiction over actions filed by a federal court-appointed receiver that are ancillary to the primary receivership action even when such claims are based entirely on state law, finding that the receiver does not need an independent basis for subject matter jurisdiction in cases filed to accomplish the ends of the receivership and even suggesting that the appointing court is the only court that has jurisdiction over such ancillary matters.  See United States v. Franklin Nat’l Bank, 512 F.2d 245, 249-52 (2d Cir. 1975) (concluding that an ancillary action can be brought by a federal court-appointed receiver only in the court that appointed the receiver); Donell v. Braun, 546 F. Supp. 2d 1013, 1016 (D. Nev. 2008) (“It is very well established that a receiver does not need an independent basis for subject matter jurisdiction in cases filed to accomplish the ends of the receivership within the court of appointment.  However, the receiver’s ancillary or supplemental subject matter jurisdiction exists only in the appointing court.”) (citations omitted); see also 12 Charles Alan Wright et al., Federal Practice and Procedure § 2985 (3d ed. 2014) (“[I]t is clear that the mere fact that the appointment of a receiver was by a federal court does not make all actions by or against him or her cases arising under the Constitution or laws of the United States for subject-matter jurisdiction purposes in courts other than the appointing tribunal.”).

If a receiver’s recovery claims against a defendant are related to the enforcement action in which the receiver was appointed, they form part of the same case or controversy as the enforcement action, and they were formulated and brought to accomplish the ends sought in the underlying enforcement action and directed by the District Court in the appointment order, the receiver’s claims are ancillary to the enforcement action and the Court has supplemental jurisdiction over them pursuant to 28 U.S.C. §1367(a).

[1] The initial action which results in the appointment of the receiver is the primary action and any action which the receiver thereafter brings in the appointing court in order to accomplish his or her duties and obligations is ancillary to the primary action.  See Haile v. Henderson Nat. Bank, 657 F.2d 816, 822 (6th Cir. 1981); see also S.E.C. v. Bilzerian, 378 F.3d 1100, 1107 (D.C. Cir. 2004); U.S. Small Bus. Admin. v. Integrated Envtl. Solutions, Inc., CIV.A. H-05-3041, 2006 WL 2336446, at *2 (S.D. Tex. Aug. 10, 2006); Quilling v. Cristel, CIV.A. 304CV252, 2006 WL 316981, at *4 (W.D.N.C. Feb. 9, 2006); see also S.E.C. v. Ross, 504 F.3d 1130 (9th Cir. 2007).

[2]  Other Circuit Courts of Appeals have also followed the United States Supreme Court’s ruling i Pope.  See Eberhard v. Marcu, 530 F.3d 122, 128-29 (2d Cir. 2008); Am. Freedom Train Found. v. Spurney, 747 F.2d 1069, 1073 (1st Cir. 1984); Merrill Scott & Associates, Ltd. v. Concilium Ins. Servs., 253 F. App’x 756, 761 (10th Cir. 2007).