Central Ill. Sav. & Loan Ass'n v. DUPAGE CTY. BANK

• Decision Date: 07 January 1986
• Docket Number: No. 85 C 3451.,85 C 3451.
• Court: U.S. District Court — Northern District of Illinois
• Parties: CENTRAL ILLINOIS SAVINGS & LOAN ASSOCIATION, Plaintiff, v. DUPAGE COUNTY BANK OF GLENDALE HEIGHTS, et al., Defendants.

622 F. Supp. 1493

CENTRAL ILLINOIS SAVINGS & LOAN ASSOCIATION, Plaintiff, v. DUPAGE COUNTY BANK OF GLENDALE HEIGHTS, et al., Defendants.

No. 85 C 3451.

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

November 29, 1985.

Supplemental Opinion and Order January 7, 1986.

James S. Barber, Arvey, Hodes, Costello & Burman, Chicago, Ill., for Dupage Bank.

Kenneth L. Cunniff, Chicago, Ill., for Powers.

Morton Denlow, Carolyn J. Gallagher, Dardick & Denlow, Chicago, Ill., for Leskovisek and Otten.

MEMORANDUM OPINION AND ORDER

SHADUR, District Judge.

Central Illinois Savings & Loan Association ("Central") originally launched this multiparty litigation by filing a ten-count Complaint (the "Central Complaint") against DuPage County Bank of Glendale Heights ("Bank") and several of Bank's directors, officers and employees, as well as two other banks.¹ Central charges Bank with:

1. a "pattern of racketeering activity" in violation of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-1968 (Count I);

2. breach of contract (Count VIII); and

3. common law fraud (Count IX);

all arising out of Bank's sale to Central of a group of promissory notes secured by real estate mortgages. Bank has in turn filed an amended Third-Party Complaint (the "Bank Complaint")² under Fed.R. Civ.P. ("Rule") 14(a) against Gloria Andrews Leskovisek ("Leskovisek"), Joan Otten ("Otten"), W. Jeanne Powers ("Powers") and three other individuals,³ seeking recovery via implied indemnity.

Leskovisek, Otten and Powers now move under Rule 12(b)(6) to dismiss the DuPage Complaint. For the reasons stated in this memorandum opinion and order, those motions are granted.

Facts⁴

On January 20, 1983 Central purchased 16 promissory notes — each secured by a real estate mortgage — from Bank for a total price of approximately $750,000 (Bank Ans. ¶ 4(d)). Bank represented to Central each mortgage was current (Central Complaint Ex. B), and Bank continues to assert that was so (Bank Ans. ¶ 4(c)). But Central premises its Complaint on the allegation the mortgages were in default when Bank assigned them to Central (Central Complaint ¶ 4(e)).

Central's loan policy required it to examine the mortgage documents before acquiring them for its loan portfolio (Bank Complaint ¶ 13). Hence before assigning the 16 notes and mortgages to Central, Bank turned each loan file over to Central to allow Central to check the borrower's payment history (id.). Those files contained receipts indicating some borrowers had made delinquent payments (id.). Nevertheless Central purchased the 16 notes and mortgages.

In April 1985 Central filed this action, advancing a melange of claims. Bank contends any liability it might owe to Central would spring not from its own actions but rather from the failure of Leskovisek, Otten and Powers⁵ to exercise due care in examining the loan file. That negligence, says Bank, entitles it to indemnification.

Leskovisek, Otten and Powers counter with three arguments:

1. Implied indemnity in Illinois has been extinguished by the Illinois Contribution Among Joint Tortfeasors Act (the "Act," Ill.Rev.Stat. ch. 70, ¶¶ 301-305).

2. No intentional tortfeasor can obtain indemnity.

3. RICO's comprehensive character indicates Congress intended to preclude a right to indemnity.

This opinion will first treat briefly with the choice-of-law issue, then consider each of those contentions in turn.

Choice of Law

Bank seeks indemnity from the third-party defendants on two of Central's claims — the RICO claim (Count I) and the common-law fraud claim (Count IX).⁶ Central's RICO claim confers federal-question jurisdiction on this Court under 28 U.S.C. § 1331. Central's common-law claim is properly before this Court under the doctrine of pendent jurisdiction because it "derive from a common nucleus of operative fact" with the RICO claim (which also sounds in fraud). United Mine Workers of America v. Gibbs, 383 U.S. 715, 725, 86 S.Ct. 1130, 1138, 16 L.Ed.2d 218 (1966).

Bank's right to indemnity on Central's RICO claim (if it exists at all) must be grounded in federal law. Cf. Northwest Airlines, Inc. v. Transport Workers Union of America, AFL-CIO, 451 U.S. 77, 90, 101 S.Ct. 1571, 1580, 67 L.Ed.2d 750 (1981) (employer's asserted right to contribution from union based on liability for Title VII violation derived either from the federal statute or from federal common law). But despite the "common nucleus" involved in the common-law claim, United States ex rel. Hoover v. Franzen, 669 F.2d 433, 437 (7th Cir.1982) (footnote omitted) explains state law — here Illinois law⁷ — controls that claim:

This crucial choice-of-law issue is implicit in the exercise of pendent jurisdiction. The pendent state law claim is governed in all respects by state law.... Merely because the state law claim is in federal court does not lead to the application of federal law. As Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938) and its offspring make clear, absent a valid and controlling federal law, state law governs a state law claim (even in nondiversity cases).

Even though the parties have been inattentive to that distinction, citing federal and state precedents indiscriminately, this opinion will analyze Bank's indemnity claims on those separate bases.

Indemnity for Liability Based on Common-Law Fraud

Complaint Count IX, which sounds in common-law fraud, accuses Bank of fraudulently representing to Central that the notes and mortgages were not in default. Bank seeks to invoke the implied indemnity concept to shift to the third-party defendants Bank's entire potential liability to Central.

Leskovisek, Otten and Powers retort the implied indemnity doctrine is dead in Illinois, having been extinguished by the Act. In that respect Act § 302(a) is its critical provision:

Except as otherwise provided in this Act, where 2 or more persons are subject to liability in tort arising out of the same injury to person or property, or the same wrongful death, there is a right of contribution among them, even though judgment has not been entered against any or all of them.

Bank first contends Act § 302(a) applies only to personal injury claims and thus does not affect the viability of implied indemnity as a risk-shifting concept in this business fraud case. It is hard to see how that can be advanced with a straight face:⁸ Section 302(a) speaks of "liability in tort" without any limitation, and it explicitly extends its coverage to "injury to person or property." Fraud claims are unquestionably within the plain language of Act § 302(a).

Bank next says the traditional common-law right to indemnity based on a qualitative distinction between the alleged negligence of the indemnitor and indemnitee is preserved by Act § 303:

The pro rata share of each tortfeasor shall be determined in accordance with his relative culpability.

According to Bank, the term "relative culpability" preserves the common-law active-passive distinction. That contention fails for two reasons.

First, Act § 303 comes into play only after Act § 302 has established the availability or unavailability of contribution or indemnity. If (but only if) the Act § 302 answer is "yes," Act § 303 simply defines the comparative extent of each contributing tortfeasor's liability. Hence Act § 303 returns the relevant inquiry for current purposes to Act § 302.

Second, Bank wholly ignores the impact on the implied indemnity concept (one of total risk-shifting) of the Act's technique of dividing liability according to culpability. As this Court recently pointed out in U.S. Home Corp. v. George W. Kennedy Construction Co., 617 F.Supp. 893, 896-97 (N.D.Ill.1985):

It should be obvious from the very origins of implied indemnity that passage of the Act, which removed a good part of the policy underpinnings from the indemnity doctrine, would work some dramatic changes in indemnity as well as contribution. And that has in fact taken place.

* * * * * *

Today, with a contribution regime in place, the rationale for any kind of full shifting of responsibility (under any label) has lost much of its force. And so it is that Morizzo v. Laverdure, 127 Ill. App.3d 767, 774 83 Ill.Dec. 46, 51, 469 N.E.2d 653, 658 (1st Dist.1984) teaches that, absent an express contract for indemnification (and none is involved here), implied indemnification is not even arguably viable after passage of the Act except perhaps in two situations:

However, none of these post-Act cases including Van Jacobs v. Parikh, 97 Ill.App.3d 610 52 Ill.Dec. 770, 422 N.E.2d 979 (1st Dist.1981) and Lowe v. Norfolk & Western Railway Co., 124 Ill.App.3d 80 79 Ill.Dec. 238, 463 N.E.2d 792 (5th Dist.1984) addressed the question raised by the failure of the legislature to provide for the specific preservation of the right of express or implied indemnity.

As we interpret Van Jacobs, this court held that implied indemnity is not extinguished by the passing of the Contribution Act for cases involving some pre-tort relationship between the parties which gives rise to a duty to indemnify, e.g., in cases involving vicarious liability (lessor-lessee; employer-employee; owner and lessee; master and servant). In Lowe, this court held that implied indemnity was still viable with respect to "upstream" claims in a strict liability action.

Except possibly for those causes of action based on the theories of indemnity just enumerated, it is our opinion that the Contribution Act extinguished a cause of action for active-passive indemnity in Illinois.

Post-Morizzo case law has taught that only the four specified pre-tort relationships remain as potential sources for post-Act indemnity (rather than the listed relationships being merely exemplary). Allison v. Shell Oil Co., 133 Ill.App.3d 607, 611, 88 Ill.Dec. 720, 723, 479 N.E.2d 333, 336 (5th Dist.1985).⁹

This case (like U.S. Home) does not involve an express contract for indemnification. Nor does Bank present an ...