Herget Nat. Bank of Pekin v. USLife Title Ins. Co. of New York, s. 85-2693

• Decision Date: 27 February 1987
• Docket Number: 85-2694,Nos. 85-2693,s. 85-2693
• Citation: 809 F.2d 413
• Parties: HERGET NATIONAL BANK OF PEKIN, First National Bank of Peoria, and First National Bank & Trust Company of Pekin, Plaintiffs-Appellants, v. USLIFE TITLE INSURANCE COMPANY OF NEW YORK, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 413

809 F.2d 413

HERGET NATIONAL BANK OF PEKIN, First National Bank of Peoria, and First National Bank & Trust Company of Pekin, Plaintiffs-Appellants, v. USLIFE TITLE INSURANCE COMPANY OF NEW YORK, Defendant-Appellee.

Nos. 85-2693, 85-2694.

United States Court of Appeals Seventh Circuit.

Argued April 10, 1986.

Decided Jan. 13, 1987.

Rehearing and Rehearing En Banc Denied Feb. 27, 1987.

Louis E. Miller, Frings, Bagley, Atherton & Clark, Pekin, Ill., for plaintiffs-appellants.

John A. Slevin, Vanachen, Cation, Lawless, Trager & Slevin, Peoria, Ill., for defendant-appellee.

Before WOOD and RIPPLE, Circuit Judges, and ESCHBACH, Senior Circuit Judge.

RIPPLE, Circuit Judge.

The appellants, Herget National Bank of Pekin, First National Bank of Peoria and First National Bank & Trust Company of Pekin (Banks), appeal the district court's decision to set aside a jury verdict in their favor and grant the appellee, USLife Title Insurance Company of New York (USLife), judgment notwithstanding the verdict (judgment n.o.v.). We affirm the judgment of the district court.

I Facts

A. The Underlying Transactions

The complicated factual framework of this case was meticulously detailed by the district judge in his decision granting summary judgment in favor of USLife on counts II and III of the complaint:

In April of 1977 the president of the local UAW [United Auto Workers] union wrote various banks in the Peoria area announcing the construction of the Schor House and introducing the mortgage-banking firm of Samuel T. Isaac and Associates, Inc. ("Isaac and Assoc."). Shortly thereafter, Samuel Isaac, as president of Issac [sic] and Assoc., wrote each of the Banks enclosing a resume of the project, a sample commitment letter, and various other documents. In April or early May of 1977, each Bank sent a commitment letter to the UAW in care of Isaac and Assoc. These letters were accepted by Samuel Isaac. The letters contained the following clause:

"The maturity of our mortgage will be the same as the expiration date of the Government National Mortgage Association commitment. However, the loan is to be closed as soon as construction has been completed."

Herget National Bank was also requested to lend $250,000 for equity financing. On June 8, 1977, the vice president of the Herget Bank wrote the UAW approving of this equity loan. On June 22, Isaac and Assoc. wrote to the participating Banks and informed them that they would be advised as soon as the date was set for the "Initial Endorsement" and that loan closing documents were being prepared and would be sent upon completion.

On June 29, 1977, the UAW and the building contractor requested permission to commence construction prior to the Initial Endorsement. This request was later signed by Samuel Isaac on behalf of Isaac and Assoc., as mortgagee, and was approved by the regional director of HUD. On July 14, HUD wrote the UAW stating that HUD would insure the mortgage note on the project.

On September 14, Samuel Isaac, as president of Isaac and Assoc., sent a memo to the participating Banks announcing that on Friday, September 16, the early start would be approved by the FHA and that the final $1,723,700 would be funded by the Illinois Housing Development Authority. Isaac also stated that all funds would be disbursed by Bluegrass Titles, Inc. ("Bluegrass").

Bluegrass was a wholly owned subsidiary of Isaac and Assoc. and an authorized agent for U.S. Life for the purpose of writing title insurance. Bluegrass and Isaac and Assoc. shared the same office building and the same directors. At the time the events in this lawsuit occurred, Samuel Isaac was president of Isaac and Assoc. and senior vice president of Bluegrass. Oran McFarlan was president of Bluegrass and senior vice president of Isaac and Assoc. The two corporations used their respective stationery interchangeably on a regular basis in their correspondence, including their correspondence with U.S. Life.

On September 20, U.S. Life issued an insured closing service letter to each participating Bank stating that the Banks were protected if they sustained any loss from Bluegrass failing to follow their written closing instructions or from any fraud or dishonesty on the part of Bluegrass. On September 26, Samuel Isaac, as president of Isaac and Assoc., wrote Oran McFarlan of Bluegrass, enclosing a copy of FHA Form 2403 and directing disbursement after the title policy had been updated to the date and hour of the draw. FHA Form 2403 on its face indicates that certain disbursements would be paid to the Government National Mortgage Association ("GNMA") because there existed a commitment from GNMA to provide a takeout loan. The form was executed on behalf of Isaac and Assoc. by Oran McFarlan.

On September 29, Isaac and Assoc. sent a Participation Agreement to each of the participating Banks. The Banks were also sent Participation Reports, which were certificates as to the Bank's participation in the loan. On October 4, Isaac and Assoc. directed a memo to the participating banks enclosing FHA Form 2403, and requesting execution of the Participation Agreement and written confirmation that the money would be wire transferred to Bluegrass on October 12.

The loan was closed on October 13, 1977. A first mortgage was given to Isaac and Assoc. which secured a mortgage note of the same date to Isaac and Assoc. in the amount of $6,073,700. By previous commitment between the Plaintiff Banks and Isaac and Assoc., the Banks participated in the loan although they were not mortgagees of record. On October 13, the Banks made a combined initial advance of $530,183.75. These funds were wire transferred to Bluegrass. The funds wired by the Banks were disbursed by Bluegrass in accordance with the written directions given to Bluegrass by Samuel Isaac as president of Isaac and Assoc. No separate written instructions were sent by the Banks to Bluegrass. Bluegrass made no disbursement to GNMA. Instead, Bluegrass disbursed the money designated for the GNMA fee to Isaac and Assoc. On October 20, Samuel Isaac sent to the participating Banks a list of the closing documents and copies of the actual documents used at the loan closing.

R.30 at 2-5.

On or about February 1, 1979, the Banks learned that GNMA had never made a commitment for permanent financing. The Banks believed, therefore, that they were locked-in to loans at the interest rate of eight percent per annum. The Banks brought suit in state court against Samuel Isaac and Isaac and Assoc. This litigation was eventually settled. In exchange for the note and mortgage, the Banks, inter alia, released Mr. Isaac and his corporation from "any and all claims or causes of action."

To secure substitute permanent financing of the Schor House project to replace the construction loans, the Banks arranged for the sale of City of Pekin Industrial Revenue Bonds. By May 28, 1982, the Banks had recovered all of their investments plus interest. However, they claimed that they had also incurred substantial loss of the income that they could have earned had the money been repaid by the end of the originally contemplated contract period instead of the five years that it actually took for the loans to be repaid. They also claimed that they incurred significant attorneys' fees and related expenses throughout this process. Notice of claim was not given to USLife until March 1982, just before the Banks and Isaac reached a settlement and executed mutual releases.

B. The Present Litigation

Three suits were filed by the Banks in December 1982 in Illinois state court. In January 1983, the suits were consolidated and removed to the United States District Court for the Central District of Illinois, Peoria Division. The Banks' three-count complaint against USLife alleged breach of contract (count I); conversion of funds (count II); and fraud (count III). In March 1984, the district court granted USLife's motions for summary judgment as to counts II and III on the ground that the claims were time-barred. Count I was tried to a jury, which reached a verdict in favor of the Banks. The jury, in answer to special interrogatories, found that the Banks had proved that they had accepted in writing the insured closing service offered by USLife, and that Bluegrass Titles, Inc. acted fraudulently or dishonestly as to all the plaintiffs. R.65. Damages were computed as follows: (1) First National Bank & Trust Company--$97,737.68; (2) Herget National Bank--$48,868.84; and (3) First National Bank of Peoria--$48,868.84. R.66.

USLife timely filed a motion for judgment n.o.v. or, in the alternative, for a new trial. On September 3, 1985, the district court granted the judgment n.o.v. R.78. The court concluded that the evidence, viewed in a light most favorable to the Banks, was insufficient to support a finding that the plaintiffs had accepted the insurance offer. The district court also agreed with USLife's argument that the Banks had suffered no loss of settlement funds:

This Court ruled at the close of all the evidence that "settlement funds" are those funds actually transmitted by the Banks to the title company and the coverage against the loss of those funds does not include damages sustained by the payment of attorney's fees, expenses incurred in connection with bringing the loan to closing, or indirect losses, such as loss of profits.

R.77 at 4; see Tr. Vol. V at 33. Thus, even if the offer of insurance had been accepted, the insurance extended only to the "settlement fund" as defined by the court. Because there was no loss remaining from disbursement of the settlement funds, the district court concluded that USLife was entitled to judgment n.o.v. This appeal followed.

II Analysis

The major issues presented for review are 1) whether the jury's finding that the Banks suffered a loss of settlement funds was supported by the evidence, and 2) whether the district court properly granted summary judgment on the fraud count...