U.S. v. First National Bank of Cicero
| Decision Date | 27 February 1992 |
| Docket Number | No. 90-2404,90-2404 |
| Citation | 957 F.2d 1362 |
| Parties | UNITED STATES of America, Plaintiff-Appellant, v. FIRST NATIONAL BANK OF CICERO and Leslie I. Cohodes, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Linda A. Wawzenski, Asst. U.S. Atty. (argued), Crim. Div., Chicago, Ill., for plaintiff-appellant.
Stephen C. Voris (argued), Clinton J. Wesolik, Burke, Wilson & McIlvaine, Chicago, Ill., for First National Bank of Cicero.
Stephen C. Voris, Burke, Wilson & McIlvaine, Chicago, Ill., for Leslie I. Cohodes.
Before BAUER, Chief Judge, and COFFEY and MANION, Circuit Judges. *
The United States appeals a summary judgment entered in favor of First National Bank of Cicero, denying the United States recovery of both an allegedly improperly paid Small Business Administration loan guaranty in the amount of $410,721.29 and of treble damages under the False Claims Act, 31 U.S.C. § 3729. We reverse and remand for trial.
In 1980 the Small Business Administration ("SBA") created the Automobile Dealers Loan Guaranty Plan, designed to provide immediate financial assistance to automobile dealers suffering from a severe economic downturn. Under the program, the automobile dealers received bank loans guaranteed by the SBA. In a previous opinion, we described the SBA guaranty loan program:
The SBA operates a guaranty loan program that assists small businesses in obtaining financing on reasonable terms when money is unavailable from other sources. See 15 U.S.C. § 631 et seq. Participating banks normally enter into a guaranty agreement with the SBA, setting out procedures and requirements for the guaranteed loan program. When a qualified borrower applies to a bank for an SBA-guaranteed loan, the bank must obtain authorization from the SBA to proceed with the loan. After SBA approval, the bank lends its own funds to the borrower and services the loan pursuant to the guaranty agreement. If the borrower defaults, the bank may demand that the SBA purchase its share of the outstanding balance--typically, and in this case, 90% of the balance.
Eastern Illinois Trust and Savings Bank v. Sanders, 826 F.2d 615, 616 (7th Cir.1987).
Leslie Cohodes was president and owner of Holiday Oldsmobile, Inc., an automobile dealership located in Cicero, Illinois. In February 1980, Holiday obtained two loans from the First National Bank of Cicero, Ill. ("Bank") totalling $165,000. In May, Holiday Oldsmobile refinanced another loan from the Bank, this one for $14,616, and increased it by $10,000.
In June 1980 the SBA and the Bank entered into a Loan Guaranty Agreement making the Bank eligible to lend money with an SBA guaranty. After the announcement of the SBA automobile dealer loan guaranty plan, Cohodes spoke with the Bank's president, Joseph Schuessler, about the possibility of obtaining a guaranteed SBA loan from the Bank. According to Schuessler's deposition, he and Cohodes discussed a loan in the amount of between $75,000 to $100,000 for working capital. Schuessler also suggested that Cohodes might contact a business consultant, Gregory Xylas, who specialized in preparing SBA applications, as the Bank lacked expertise in preparing them. Schuessler informed Bank vice president William Giova that Giova was to process the Holiday Oldsmobile loan application and that the application would be packaged by Xylas.
Gregory Xylas did, in fact, prepare an SBA guaranteed loan application package for Holiday Oldsmobile. The application requested a loan in the amount of $493,000, rather than the smaller amount that Schuessler and Cohodes had originally discussed. In his deposition, Cohodes stated that he signed many of the pages of the Loan Application in blank or without reviewing them. Cohodes also admitted that the application was riddled with inaccuracies. Cohodes had not been in the automobile dealership business for forty years, as stated in the application. Furthermore, Holiday owed Cohodes $450,000, not the $160,000 he claimed. In addition, the corporate tax return attached to the Loan Application was incorrect and listed gross sales figures that were far too low. The credit references page of the Loan Application was also inaccurate. 1
This Holiday Loan Application was submitted to the Bank. William Giova, the bank employee assigned by Schuessler to handle the Loan Application, stated in his deposition that he doubted that he did anything to check the application because Schuessler had told him to take care of the loan and furthermore he knew Cohodes was a customer of the Bank. The Bank failed to make, prior to the disbursement of the loan, any search of the public records to determine whether there were any liens, claims or encumbrances against Holiday and its assets.
On September 12, 1980, the Bank forwarded a Lender's Application to the SBA for a 90% guaranty of a loan to Holiday in the amount of $493,000. The application was signed by Giova, who recommended its approval. Giova was the only bank employee who reviewed or analyzed the document. The SBA considered the application and authorized the requested guaranteed loan on October 10, 1980.
The loan was approved on October 27, 1980. On that same date, after the approval of the loan, Bank President Schuessler learned for the first time that the loan was increased to $493,000 from the $75,000 to $100,000 he had discussed with Cohodes. When he observed a bank employee about to return to Cohodes certificates of deposit that had been pledged as collateral on a previous loan, Schuessler ordered that the certificates be retained as additional collateral on the SBA guaranteed loan. Schuessler, however, did not take any action to modify or cancel either the loan or its terms. He also failed to inform the SBA that he was retaining the additional collateral to protect the Bank against default on the SBA loan.
The settlement sheet submitted to the SBA following closing reflected that the loan proceeds were to be distributed as follows:
$ 60,000.00 Purchase mach. equip. etc.
$ 68,000.00 Purchase inventory
$100,000.00 Pay accounts payable
$171,000.00 Payment of loan"[1st N/B of Cicero]
$ 94,000.00 Working capital
Pursuant to these terms, the Bank received a check from Holiday Oldsmobile for $171,000 on October 27, 1980 and deposited the remaining $322,000 of the loan proceeds in Holiday's checking account. On October 28, 1980, Holiday made payments to the Bank totalling $86,500 on three previous loans from the Bank. These payments were not reflected in the settlement sheet filed with the SBA.
Holiday made payments to the Bank on the SBA guaranteed loan from the time the loan was disbursed until March 1981. On March 8, 1981, the Holiday Oldsmobile building was destroyed by fire. Soon after, Holiday defaulted on its loan payments. The SBA received a request from the Bank on April 17, 1981, to fulfill its obligations as guarantor of ninety percent of the Holiday loan. In June 1981, the SBA paid the bank ninety percent of the outstanding balance due on the loan 2 ($410,710.29).
On April 14, 1987, the United States filed suit against the Bank and Cohodes in the district court seeking repayment of the guaranty under theories of breach of contract (Count One) and quasi-contract (Count Two). The complaint also requested an award of treble damages for a violation of the False Claims Act, 31 U.S.C. § 3729 (Count Three). 3 In its answer to the complaint, the Bank filed a cross-claim against Cohodes based upon fraud, negligent misrepresentation, indemnity and contribution. Neither Cohodes nor anyone on his behalf appeared to defend or contest the action and default judgments were entered against him in favor of both the Bank and the United States. Following cross-motions for summary judgment filed by both the United States and the Bank, the district court entered summary judgment in favor of the Bank and against the United States. The court ruled that there was not a material breach of the contract between the Bank and the SBA (Count One). The trial court further determined that the claim alleged in Count Two was a tort claim which was time barred pursuant to the three-year statute of limitations contained in 28 U.S.C. § 2415(b). 4 Finally, the court decided that recovery under the False Claims Act (Count Three) was unavailable because the damages the government suffered were not caused by the Bank's alleged false claim. The United States appeals.
The following issues are presented in this appeal: (1) Was the district court's entry of summary judgment proper in favor of the Bank on the United States' claim that it was entitled to refuse to honor the guaranty obligation because the Bank materially breached its contract with the government and/or failed to satisfy a condition precedent to the enforcement of this contract? (2) did the trial judge appropriately enter summary judgment in favor of the Bank on Count Two of the Government's complaint on the basis that this claim was time barred under 28 U.S.C. § 2415(b)? and (3) was the trial court's entry of summary judgment in favor of the Bank on the False Claims Act cause of action on the ground that the United States failed to present facts sufficient to establish that its damages were caused by the false claim proper?
This case presents the issue of whether the United States has presented a genuine issue of material fact sufficient to preclude the entry of summary judgment in favor of the Bank on any one of the government's three causes of action. "We review de novo a district court's grant of summary judgement." Renovitch v. Kaufman, 905 F.2d 1040, 1044 (7th Cir.1990). We have also made clear that,
[s]ummary judgment should be granted only when no genuine issues of material fact exist and when the moving party is entitled to judgment as a matter of law.... This standard closely resembles...
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