Brown Leasing Co. v. Cosmopolitan Bancorp, Inc., 94-1023

• Decision Date: 19 December 1994
• Docket Number: No. 94-1023,94-1023
• Citation: 42 F.3d 1112
• Parties: BROWN LEASING COMPANY, Formerly Known as Capital Leasing Company, Plaintiff-Appellant, v. COSMOPOLITAN BANCORP, INCORPORATED, Gerald J. DeNicholas, James Wells, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1112

42 F.3d 1112

BROWN LEASING COMPANY, Formerly Known as Capital Leasing

Company, Plaintiff-Appellant, v. COSMOPOLITAN BANCORP, INCORPORATED, Gerald J. DeNicholas, James Wells, et al., Defendants-Appellees.

No. 94-1023.

United States Court of Appeals, Seventh Circuit.

Argued June 6, 1994.

Decided Dec. 19, 1994.

Bruce R. Braun, Winston & Strawn, Chicago, IL, Michael Silverman, Scott E. Tuckman, Kwiatt & Silverman, Chicago, IL, Michael J. O'Rourke (argued), Thomas G. Griffin (argued), Michael C. Moody, Kelly A. McCloskey, O'Rourke & Griffin, Chicago, IL, for Brown Leasing Co.

Jeffrey Schulman, Wolin & Rosen, Chicago, IL, for Cosmopolitan Bancorp, Inc.

Phillip J. Zisook, Stuart Berks, Deutsch, Levy & Engel, Chicago, IL, for Gerald J. DeNicholas.

Robert G. Heckenkamp, Heckenkamp, Simhauser & Labarre, Springfield, IL, Michael E. Dowd, Dowd & Dowd, Chicago, IL, for Charles E. Robbins, Dennis Polk.

Jeffrey Schulman, Philip S. Wolin, Wolin & Rosen, Chicago, IL, for Myron P. Alcock, James S. Stefo, Richard C. Rosenow.

Robert A. Novelle, Joel A. Whitehouse, Vincent F. Dipiero, Vincent Petrosino, Serpico, Novelle & Navigato, Chicago, IL, Paul V. Carelli, III, Carelli & Miller, Las Vegas, NV, for Carelli Family Trust, Carol A. Carelli, Michael V. Carelli, Paul V. Carelli, III.

Brad S. Grayson, Aaron E. Hoffman, William L. Sharp, Schwartz & Freeman, Chicago, IL, for Robert G. Cunningham.

Michael J. Newman, Ruchim & Associates, Wilmette, IL, Michael A. Goldhirsh, Sam Borek, Borek & Newman, Wilmette, IL, for Fred R. Eiseman.

Franklin P. Auwarter (argued), Charles F. Regan, Mayer, Brown & Platt, Chicago, IL, for Mary A. Kirchschlager.

Gary Senner, John I. Grossbart, Duane C. Quaini, Diane M. Mellett, Sonnenschein, Nath & Rosenthal, Chicago, IL, for Errol L. Stone.

Edward C. Fitzpatrick, Michael J. Gaertner, Lord, Bissell & Brook, Chicago, IL, for Antonio Guillen, Susan Kastner.

Richard M. Randick, pro se.

O. Kenneth Thomas, Peotone, IL, for Richard M. Randick.

Don Dybus, pro se.

Before ENGEL, ^* BAUER and CUDAHY, Circuit Judges.

ENGEL, Circuit Judge.

The principal issue in this case is whether plaintiffs must plead reliance in order to state a claim under federal bank reporting laws. Plaintiff-appellant Brown Leasing filed suit against defendants-appellees alleging violation of the National Bank Act (NBA) and the Federal Reserve Act (FRA). Following the district court's dismissal of its suit, Brown Leasing moved for leave to file a second amended complaint, and now it timely appeals the denial of that motion. Since the motion attempts to re-open the case, it is a final order over which we have jurisdiction. However, Brown Leasing's second amended complaint again fails to plead that it relied to its detriment on misleading statements filed by defendant-appellee Cosmopolitan Bank. Because we agree that the NBA and the FRA require a showing of detrimental reliance to prove causation of plaintiff's damages, we affirm the district court's denial of leave to file a third deficient complaint.

Cosmopolitan Bank (Cosmopolitan) was a subsidiary of Cosmopolitan Bancorp Inc. (CBI). Gerald DeNicholas was Executive Vice President, Chief Financial Officer and Director of Cosmopolitan and President, Secretary, Director, and Shareholder of CBI; Alex Vercillo was President, Chief Operating Officer and Director of Cosmopolitan and Vice President, Director, and Shareholder of CBI. In June of 1989, DeNicholas and Vercillo asked Brown Leasing to extend a one-time $1,950,000 loan to Illinois State Treasurer and Cosmopolitan customer James Cosentino so that Cosentino could pay off an overdraft at the bank. According to the explanation offered to Brown Leasing, federal regulations prevented Cosmopolitan from extending Cosentino any more credit until he paid his overdraft. To provide Brown Leasing with the funds to lend Cosentino, Cosmopolitan paid Brown Leasing $1,986,490 for participation interests in four outstanding loans that Brown Leasing had made to others.

In return for the loan to Cosentino, Brown Leasing received a note for $1,950,000 signed by Cosentino and cosigned by James Wells, president of Cosmopolitan, in his personal capacity. Brown Leasing also received a "Standby Letter of Guaranty" (Guaranty) issued on CBI letterhead signed by DeNicholas, as President of CBI, and Vercillo, as Vice President of CBI, which obligated the "issuer" of the Guaranty to buy back the Cosentino loan in the event of default. Brown Leasing claims that it understood the "issuer" to be Cosmopolitan, despite the fact that it was drafted on CBI letterhead, and that the note was reinforced by an oral promise that Cosmopolitan would buy back the loan if defaulted. Cosmopolitan did not record the Cosmopolitan-Cosentino-Brown Leasing credit arrangement in its books or records, nor did it include any of this information in its quarterly reports to federal regulators.

In April of 1990, upon request by DeNicholas and Vercillo, Brown Leasing agreed to restructure the loan. This request appears to have been motivated by a federal investigation into alleged misappropriation of funds by defendant Wells. The original Cosentino/Wells note was cancelled and replaced by: (1) a $1,000,000 note from Cosentino guaranteed by original defendant Michael High, (2) a $450,000 note from Cosentino, (3) a $250,000 note from original defendant Charles Robbins, and (4) a $250,000 note from original defendant Dennis Polk. The Guaranty remained undisturbed, as apparently did the verbal promise that Cosmopolitan would buy back the loan pursuant to the Guaranty in the event of default. Soon after the final restructuring, the Cosentino, Robbins and Polk notes went into default. In December, 1990, Brown Leasing invoked the Guaranty and requested that Cosmopolitan buy back the notes, but the bank refused. In May of 1991, Cosmopolitan was taken over by the FDIC.

Brown Leasing originally filed suit in state court against Cosmopolitan, CBI, and numerous officers and directors alleging, among other things, that the Guaranty obligated Cosmopolitan to remedy Cosentino's default. After being appointed as receiver, the FDIC was substituted as defendant in Cosmopolitan's place and removed the case to federal court. The FDIC successfully moved for dismissal on the grounds that the Guaranty was an obligation of CBI and not Cosmopolitan; therefore, no valid written agreement existed, as it must according to D'Oench Duhme & Co. v. Federal Deposit Ins. Corp. ¹ and 12 U.S.C. Sec. 1823(e) to obligate the FDIC to assume the Cosentino debt.

Brown Leasing then amended its complaint, for the first time naming as defendants the outside directors who are appellees in this case. The amended complaint included state law claims pendent to a federal law claim alleging a violation of Sec. 93/161 of the NBA ² for the Cosmopolitan directors' willful or reckless failure accurately to record the details of the credit arrangement in its quarterly reports to federal regulators. The complaint was dismissed for failure to state a claim under Sec. 93/161 of the NBA because Brown Leasing did not plead that it relied upon the misleading filings: "Brown Leasing's amended complaint is wanting of any allegation of reliance on these misleading records." Brown Leasing, Inc. v. Federal Deposit Ins. Corp., No. 91-C3729, 1993 WL 115552, at * 5 (N.D.Ill. March 24, 1993).

Brown Leasing moved for leave to file a second amended complaint which, aside from the state law claims, sought to revise its NBA Sec. 93/161 claim and to add a new claim under Sec. 503/1005 of the FRA. ³ The district court denied this motion, holding that the second amended complaint failed to state a claim because, once again, it failed to allege requisite "reliance" with regard to both the NBA Sec. 93/161 claim and the FRA Sec. 503/1005 claim. Brown Leasing Co. v. Federal Deposit Ins. Corp., 833 F.Supp. 672, 677 (N.D.Ill.1993). We review this decision for an abuse of discretion. Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 230, 9 L.Ed.2d 222 (1962); J.D. Marshall Int'l, Inc. v. Redstart, Inc., 935 F.2d 815, 819 (7th Cir.1991).

Brown Leasing contests the district court holding that "to state adequately a claim under Sec. 161(a), Brown Leasing must link the misstatements to reports filed with the Comptroller and must allege sufficiently its reliance on these misleading records. This applies with equal force to the Sec. 1005 claim." 833 F.Supp. at 677. According to Brown Leasing, the district court erroneously required Brown Leasing to plead that it had relied upon Cosmopolitan filings regarding the questionable three-way credit transaction in order to satisfy the causation element of these two statutes. Brown Leasing seeks reversal of the judgment of dismissal and remand to the district court with instructions that it allow Brown Leasing to file a second amended complaint.

Plaintiff's reliance upon the honesty of official bank statements, either in the bank's books or in reports filed with the Comptroller of the Currency, is a necessary element of a cause of action under Sec. 93/161 and Sec. 503/1005. Because Brown Leasing failed to and is evidently unable to plead that it had relied to its detriment on Cosmopolitan's mischaracterization of the Cosmopolitan-Cosentino-Brown Leasing transaction, we hold that the district court did not abuse its discretion in refusing to allow Brown Leasing to file a second amended complaint. ⁴

I.

In Chesbrough v. Woodworth, 244 U.S. 72, 37 S.Ct. 579, 61 L.Ed. 1000 (1917), the Supreme Court established the necessity of pleading reliance on the statements filed with the Comptroller of the Currency in order to satisfy the causation element and state a cause of action under the predecessor to Sec. 93 of the NBA: "the sole primary issue is whether defendants caused or permitted to be made a statement of the bank's condition upon which statement plaintiff relied to his injury and which statement defendant...