762 F.2d 522 (7th Cir. 1985), 84-2141, Teamsters Local 282 Pension Trust Fund v. Angelos
|Citation:||762 F.2d 522|
|Party Name:||6 Employee Benefits Ca 1513 TEAMSTERS LOCAL 282 PENSION TRUST FUND, Plaintiff-Appellant, v. Anthony G. ANGELOS, et al., Defendants-Appellees.|
|Case Date:||May 13, 1985|
|Court:||United States Courts of Appeals, Court of Appeals for the Seventh Circuit|
Argued April 19, 1985.
Edward J. Boyle, Wilson, Elser, Edelman & Dicker, New York City, for plaintiff-appellant.
John Powers Crowley, Cotsirilos & Crowley, Chicago, Ill., for defendants-appellees.
Before WOOD and EASTERBROOK, Circuit Judges, and DUMBAULD, Senior District Judge. [*]
EASTERBROOK, Circuit Judge.
The principal question in this case is whether a trustee's imprudent failure to investigate before investing relieves the other party of liability for securities fraud. We hold that it does not.
In early 1979 the trustees of Teamsters Local 282 Pension Trust Fund (the Fund) loaned $2,000,000 to the Des Plaines Bancorporation, Inc., a bank holding company (the Borrower). In March 1981 federal and state regulatory officials closed Des Plaines Bank (the Bank), a wholly-owned subsidiary of the Borrower and its principal asset. The Fund was left with an uncollectable loan.
Beneficiaries of the Fund, joined by the Secretary of Labor, promptly brought suits (the New York litigation) maintaining that the Fund's trustees made the loan without adequate investigation and so had violated their duties to the beneficiaries under the Employee Retirement Security Act of 1974 (ERISA), 29 U.S.C. Sec. 1101 et seq. They contended, and the district court held, that an adequate investigation would have revealed the shaky status of the Bank and consequently the very high risk of the loan. Katsaros v. Cody, 568 F.Supp. 360 (E.D.N.Y.1983). The Second Circuit affirmed, 744 F.2d 270 (2d Cir.1984), summarizing the essential findings this way (744 F.2d at 279):
The trustees, being ill-equipped to evaluate the soundness of the proposed loan, failed to observe their duty to obtain outside assistance. They relied exclusively on the representations of [the Borrower] as to its financial strength and reached an investment decision after wholly inadequate inquiry and deliberation. A reasonable investigation would have revealed evidence that the loan was totally unsound.
Both the district court and the Second Circuit traced the trustees' duty to ERISA, which they concluded imposed on the trustees a requirement of prudence. "Prudence," in turn, was "measured according to the objective 'prudent person' standard developed in the common law of trusts." 744 F.2d at 279.
The trustees and the Fund (which participated fully in the New York litigation) filed a third-party complaint against the Borrower's directors and the law firm that had represented the Borrower in the loan, arguing that they had defrauded the trustees and concealed material adverse information. The New York court dismissed this complaint in August 1983, holding that the arguments should be raised in independent litigation.
In February 1984 the Fund filed this suit. We take all of our facts from the complaint, though doubtless the defendants portray the facts very differently. The Fund asserts that the directors of the Borrower, and the Borrower's counsel, "induced the Trustees to make the Loan through the use of fraudulent and/or negligent misrepresentations and omissions". In February 1979 the Federal Deposit Insurance Corporation had investigated the Bank and found many unacceptable practices. The FDIC's examiners concluded that the Bank was inadequately capitalized, had ineffective administration, owned an excessive volume of high-risk loans and was insufficiently liquid, and was in violation of many banking laws and regulations. The bank examiners' outlook was glum. Yet the Borrower's directors painted a fairly rosy picture of the Bank, representing "that the Bank was operating at a profit [and] that the Bank had only minor cash flow problems". Both the directors and the Borrower's counsel prepared documents that embodied this rosy picture,
and they withheld the FDIC's report from the Fund. The Fund's loan staved off the evil day for the Bank, but the undisclosed adverse conditions ultimately brought the Bank down, and the banking regulators closed it. The Fund contends that these acts violate Section 17(a) of the Securities Act of 1933, 15 U.S.C. Sec. 77q(a); Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b), and Rule 10b-5, 17 C.F.R. 240.10b-5; and the common law of Illinois.
The district court granted summary judgment to all defendants. 585 F.Supp. 1401 (N.D.Ill.1984). It concluded that the New York litigation establishes conclusively that the trustees violated their fiduciary duty to investigate the Borrower and the Bank, that this fiduciary duty included a duty not to rely on the defendants' representations, and that if the trustees had investigated as they were required to do they would not have been taken in by any false statements or material omissions. The Fund, having participated in the New York litigation, is as bound by principles of issue preclusion (collateral estoppel) as are the trustees. The district court then held that each of the legal theories on which the Fund seeks recovery require "justifiable reliance" on the false statements or omissions. This legal element, combined with principles of issue preclusion, doomed the case, the district court concluded. "All the Fund's claims rest on asserted misrepresentations on which the Fund claims to have relied. If Fund had no right to rely on these representations (indeed had the duty not to do so), an essential linchpin of its claims is missing." 585 F.Supp. at 1402-03 (emphasis in original).
The Fund challenges the application of issue preclusion to the matters determined in the New York litigation. It says that the New York courts contemplated that their decisions would not bind subsequent courts. The New York district court remarked that the third-party complaint presented "issues unrelated or of doubtful relevancy to the issues in" the action against the trustees. The court also stated that "[a]ny claim the Fund may have under the federal securities laws may be asserted in an independent action." It dismissed the third-party complaint. The Fund contends that the New York judgment therefore is irrelevant here.
At least in federal litigation, though, the first court does not decide the preclusive effect of its judgments. The second court must decide for itself what matters were settled in the first case. Dean Witter Reynolds, Inc. v. Byrd, --- U.S. ----, 105 S.Ct. 1238, 1243-44, 84 L.Ed.2d 158 (1985). Because the New York litigation took place in federal court, 28 U.S.C. Sec. 1738 does not apply. Federal courts apply federal principles of preclusion, and under these principles issues that were fully and fairly litigated between private parties may not later be relitigated, even though the second case entails a legal issue fundamentally different from the first. Coward v. Colgate-Palmolive Co., 686 F.2d 1230, 1234-35 (7th Cir.1982), cert. denied, 460 U.S. 1070, 103 S.Ct. 1526, 75 L.Ed.2d 948 (1983). Compare Parklane Hosiery Co. v. Shore, 439 U.S. 322, 99 S.Ct. 645, 58 L.Ed.2d 552 (1979) (federal principles), with Marrese v. American Academy of Orthopaedic Surgeons, --- U.S. ----, 105 S.Ct. 1327, 84 L.Ed.2d 274 (1985) (state rules apply if first case was decided in state court).
Perhaps the second court should honor the express conclusion of the first that a claim was not decided in that case, if only because this shows the absence of an opportunity to litigate that claim. See Restatement (Second) of Judgments Sec. 26(1)(b) (1982); C. Wright, A. Miller & E. Cooper, 18 Federal Practice and Procedure Sec. 4413 (1981). But this case involves issue rather than claim preclusion, and the New York courts did not purport to reserve any particular issues (as opposed to the securities claims at large) for subsequent litigation. We therefore need not decide with greater precision the effect the New York district court meant its decision to
have or whether New York would allow the first court to determine the preclusive effect of factual and legal decisions made on the way to its own judgments. The application of issue preclusion here means at least that the trustees breached a duty to investigate and that but for the failure to investigate the loss would not have occurred. We must decide the legal effects of these conclusions.
The principal issue in the New York litigation was the application of ERISA to a substantial investment by the Fund. The New York courts concluded that ERISA tracks the common law of trusts, which imposes on trustees a duty to take the degree of care a "prudent man" would take in making important decisions. That duty entailed investigation of the Borrower's claims, not blind reliance on them.
An ordinary investor is under no duty to investigate, though, and many people invest large sums in reliance on representations made to them or on the accuracy of the market price of the investment. The self-interest of those who seek to maintain reputations for honest dealing, and the legal rules against fraud, are the primary guarantors of the accuracy of representations in securities transactions. Investors are entitled to rely on these incentives to speak the truth and to recover damages from those who breach their duty to speak truthfully. In many ways it is undesirable for would-be investors to investigate what the other party says. In a case such as this the Borrower's directors had the best access to the pertinent information. Those with access can reveal it at low cost. A single revelation will do. There are many potential investors, however, and if each must hire a financial...
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