Federal Savings & Loan Ins. Corporation v. Szarabajka

• Citation: 330 F. Supp. 1202
• Decision Date: 21 July 1971
• Docket Number: No. 67 C 189.,67 C 189.
• Parties: FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION, Plaintiff, v. William SZARABAJKA et al., Defendants.
• Court: U.S. District Court — Northern District of Illinois

330 F. Supp. 1202

FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION, Plaintiff, v. William SZARABAJKA et al., Defendants.

No. 67 C 189.

United States District Court, N. D. Illinois, E. D.

July 21, 1971.

COPYRIGHT MATERIAL OMITTED

Wm. A. Carey, and Kael B. Kennedy, Pope, Ballard, Kennedy, Shepard & Fowle, Chicago, Ill., for plaintiff.

Thaddeus J. Bojanowski, Elward & Macie, Chicago, Ill., for defendants Racina and Kowalko.

John C. Tucker, Jenner & Block, Chicago, Ill., for defendant Vernon Sherman.

Anna R. Lavin, Chicago, Ill., for defendant, Nowak.

Defendant Quinn Hogan appeared pro se.

MEMORANDUM OPINION

DECKER, District Judge.

On February 8, 1971, the jury returned a verdict in this cause in favor of plaintiff, Federal Savings and Loan Insurance Corporation ("FSLIC"), and against various defendants. Under Count I, defendants Vernon V. Sherman, Jerome S. Morris and Joseph W. Nowak were found liable in the sum of $150,000 for fraud in the so-called Riverwoods transaction; defendant Quinn Hogan was found liable in the sum of $20,000 for fraud in the so-called Vernon Hills transaction. Under Count II, defendants Joseph Racina and Edward Kowalko were found liable for negligence, and an award of $5,000 was made. Now Nowak, Sherman and Morris have filed post-trial motions. F.R.Civ.P. rule 50.

Following the trial, the FSLIC filed a $30,760.51 bill of costs with the Clerk of the Court, who allowed $29,760.51 worth of the bill. All defendants, except Hogan, have moved the court to review the clerk's taxation of costs. F.R.Civ.P. rule 54(d).

I. Post-trial Motions

A. Defendant Quinn Hogan

Hogan has moved for judgment notwithstanding the verdict, or in the alternative, for a new trial. F.R.Civ.P. rule 50(b). He argues that evidence of a deficient legal description in a mortgage on the Vernon Hills property was improperly admitted into evidence, because it was conclusively determined in a prior proceeding that no fraud was perpetrated in drawing up the mortgage.

Hogan was an officer of and majority shareholder in Vernon Hills, Inc., when it entered into reorganization proceedings in 1962. As security for a loan made to the debtor, Service Savings and Loan Association ("Service") held a mortgage on the Vernon Hills Country Club golf course. The debtor's trustee petitioned the district court for a determination of the value of Service's security interest, which petition was referred to a special master for a hearing.

During the pendency of the valuation hearing, Service petitioned to reform its mortgage on the Vernon Hills Country Club. It claimed that, due to a mistake of fact arising from a scrivener's error, the legal description set out in the mortgage failed to include the entire eighteen holes of the golf course. Service petitioned the court to reform the description so as to include the legal description of the entire golf course, as the parties to the mortgage allegedly had agreed in the first place.

The FSLIC, in its capacity as assignee of Hillside Savings and Loan Association ("Hillside"), opposed the reformation petition on the ground that it held certain mortgages on that part of the golf course which Service sought to have included in its mortgage. The master heard proofs on the matter, and after the parties rested, he granted Service leave to file an amended petition for reformation based on the alleged fraud of the debtor. His Report and Recommendations (submitted May 25, 1964), upon which Hogan now relies, was affirmed and approved in its entirety by the district court. In the Matter of Vernon Hills, Inc., No. 62. B 9719 (N.D.Ill.1964), and affirmed on appeal, 348 F.2d 4 (7th Cir. 1965).

Hogan relies in particular upon ¶9 of Part I of the special master's report:

"9. Service failed to prove by clear and convincing evidence that Vernon Hills, Inc. or its agents intended to or engaged in fraudulent or deceitful conduct in connection with the preparation of the $700,000 and $850,000 mortgages or that Vernon Hills, Inc. or its agents by any statements, misrepresentations, acts or conduct, misled or perpetrated any fraud upon Service."

Hogan argues, in effect, that the above finding collaterally estops any finding in this court that he committed fraud in procuring the loan in the Vernon Hills transaction.

A preliminary difficulty with Hogan's argument in support of his motion is that it asserts an affirmative defense which was not pleaded in conformity with Rule 8(c) of the Federal Rules of Civil Procedure. The defenses enumerated in Rule 8(c) must be set out in responsive pleadings, otherwise they are waived. Factor v. Carson, Pirie Scott & Company, 393 F.2d 141, 150 (7th Cir.), cert. denied, 393 U.S. 834, 88 S.Ct. 107, 21 L.Ed.2d 105 (1968) (estoppel); Wagner v. Fawcett Publications, 307 F.2d 409, 412 (7th Cir. 1962), cert. denied, 372 U.S. 909, 83 S.Ct. 723, 9 L. Ed.2d 718 (1963) (statute of limitations). Hogan did not plead the defense of collateral estoppel. He raised it first at trial, and then neglected to amend his pleading to include it. F.R.Civ.P. § 15(b). Thus, he should be held to have waived the defense.

However, even if the court should address itself to the merits of Hogan's argument, cf. Tornello v. Deligiannis Brothers, Inc., 180 F.2d 553, 556 (7th Cir. 1950), there is little question that the collateral estoppel argument is without merit. In order for a finding of fact in a previous case to have a binding effect upon a finding in a subsequent case, the fact must be material and controlling in both cases, and it must also conclusively appear that the fact in issue was necessarily determined by the first court. Insull v. New York, World-Telegram Corp., 273 F.2d 166, 168 (7th Cir. 1959), cert. denied, 362 U.S. 942, 80 S.Ct. 807, 4 L.Ed.2d 770 (1960). Despite the sweeping language found in ¶ 9 of the master's report, quoted above, it is apparent from a reading of that entire report and from a reading of the Court of Appeals opinion, 348 F.2d at 6-8, that the only issue necessarily determined in the previous proceeding was that no fraud was committed in the transcription of the legal description. Service petitioned for reformation of the legal description only; it did not wage a full-scale attack upon the procurement of the loans by Vernon Hills, Inc. The main ground relied upon by Service was mistake of fact. Only after all the evidence was in did Service amend its petition to allege fraud. The Court of Appeals opinion makes it clear that Service confined the scope of its petition before the special master to the issue of whether the legal description on its mortgage was incorrect, and in particular, whether an oversight or a mistake caused it.

By contrast, the issue in the instant proceeding was whether Hogan committed fraud in the procurement of the mortgage loans. Evidence was offered, for example, that Hogan induced the granting of the loans with a bribe. Thus, the issue in this court was much broader than the one necessarily determined before the special master. Cf. Yates v. United States, 354 U.S. 298, 337, 77 S.Ct. 1064, 1 L.Ed.2d 1356 (1957). Evidence of the defective mortgage was not dispositive of the fraud issue; it was merely one of many factors to be considered by the jury in deciding whether the loans had been procured by fraud, and if so, how much plaintiff was damaged thereby.

In concluding that plaintiff was not collaterally estopped from introducing into evidence the mortgage with the defective legal description, I do not feel it necessary to reach the further objection that Hogan, who was not a party to the reformation petition, cannot avail himself of the finding of no fraud. However, there is some question whether Hogan, an officer and shareholder of Vernon Hills, Inc., is in sufficient privity with the corporate debtor to take advantage of the finding of the special master. Compare Nichols v. Alker, 126 F. Supp. 679 (E.D.N.Y.1954), aff'd, 231 F. 2d 68 (2d Cir.), cert. denied, 352 U.S. 829, 77 S.Ct. 42, 1 L.Ed.2d 51 (1956), with Crown Kosher Super Market of Mass., Inc. v. Gallagher, 176 F.Supp. 466, 470 (D.Mass.1959), rev'd on other grounds, 366 U.S. 617, 81 S.Ct. 1122, 6 L.Ed.2d 536 (1961). See also, Grantham v. McGraw Edison Co., 444 F.2d 210, 212-213 (7th Cir. 1971).

Hogan makes a second argument in support of his contention that the deficient legal description in the mortgage should not have been introduced into evidence. He asserts that since the FSLIC already held title to the remaining portion of the golf course in its capacity as assignee of Hillside, it could not possibly have suffered damage by the failure to include that remaining portion in the Vernon Hills, Inc. mortgage. However, the evidence disclosed that the FSLIC was required to pay for the deed it acquired from Vernon Hills' trustee in bankruptcy, and that deed included property outside of that in the mortgage's legal description. Thus, it is clear that the FSLIC had to pay for that part of the property not included under the Service mortgage, hence it suffered damage which it could recover in the instant action.

B. Defendant Vernon V. Sherman

Sherman has moved for judgment notwithstanding the verdict, F.R.Civ.P. § 50(b), on the ground that the FSLIC's claim against him was satisfied in full by the foreclosure of Service's mortgage on the Riverwoods property. Sherman relies upon the state court's decree of foreclosure, which deemed the indebtedness of the Riverwoods property to be "satisfied in full", and upon Service's filing a consent thereto. Ill.Rev.Stat. ch. 77, § 18d.

However, a prior judgment does not foreclose a subsequent claim based upon an entirely separate and distinct cause of action. See United States v. Temple, 147 F.Supp. 118, 122 (N.D. Ill.1956); Household Finance Corp. v. Suhr, 44 Ill.App.2d 292, 294, 193 N.E.2d 611, 613 (1963). The prior decree in the state court was entered in a mortgage foreclosure proceeding. The instant action was one for fraudulent...