Continental Bank, N.A. v. Meyer

Decision Date01 December 1993
Docket NumberNo. 91-3476,91-3476
Citation10 F.3d 1293
PartiesCONTINENTAL BANK, N.A., formerly known as Continental Illinois National Bank & Trust Company of Chicago, Plaintiff-Appellee, v. Andrew C. MEYER, Jr., Nancy M. Lubin, as Administratrix of the Estate of Donald M. Lubin, and Philip J. Crowe, Jr., Defendants-Appellants.
CourtU.S. Court of Appeals — Seventh Circuit

Stephen Novack, Bruce Braverman (argued), Eric N. Macey, Novack & Macey, Lester Stone, Thomas D. Sullivan, Robert D. Hughes, Stone & Hughes, Chicago, IL, for plaintiff-appellee.

Joanne A. Sarasin (argued), Stuart M. Widman, Much, Shelist, Freed, Denenberg & Ament, Chicago, IL, for defendants-appellants.

Before CUMMINGS and BAUER, Circuit Judges, and FAIRCHILD, Senior Circuit Judge.

FAIRCHILD, Senior Circuit Judge.

In 1984, Continental Bank lent funds to Andrew C. Meyer, Jr., Donald M. Lubin and Philip J. Crowe, Jr. to invest in a horse-breeding limited partnership. In 1988, the bank sued each of these individuals to recover on the unpaid renewal notes. In July 1989, the actions were consolidated and the bank filed an amended consolidated complaint against all defendants. 1 The defendants filed an answer including several affirmative defenses. The district court struck all the defenses, but gave leave to amend the defense based on fraud. The defendants amended that defense and added another ("aiding a fraud") and a two-count counterclaim. The court dismissed the counterclaim and struck the affirmative defenses. The bank moved for summary judgment, and the defendants responded solely by challenging personal jurisdiction. The court found the defendants' active participation in the litigation for two-and-a-half years constituted a waiver of the personal jurisdiction defense and granted summary judgment. The court additionally allowed for substitution of the administratrix of defendant Lubin's estate in place of the deceased Lubin, discussed more fully below. The defendants now appeal. We affirm.


On appeal, we address whether the district court properly struck the defendants most recent affirmative defenses and dismissed the counterclaims. We draw on defendants' pleading for the facts.

The three defendants were partners in a law firm in Massachusetts. They invested in and became limited partners in Sunrise Farm Breeding Partnership No. 3, operating in Illinois. The general partners were Charles Schmidt and Edward Zurek. The bank had financed two similar partnerships, Sunrise No. 1 and No. 2. Lubin and Meyer had invested in No. 2. The purpose of the partnership was "to breed world class and champion thoroughbred stallions to proven stakes brood mares with internationally recognized pedigrees so as to breed world class thoroughbred yearlings which would be sold at a profit."

Defendants' pleading is not very specific as to what happened. We gather that each defendant borrowed $200,000 from the bank and invested that amount. The breeding program is said to have "failed." It seems reasonable to assume that defendants claim they received no profits and their interests became valueless because in their counterclaim they seek to recover the part of the loans they had repaid, and their affirmative defenses sought to prevent the bank recovering the unpaid balances. Their allegations of information the bank failed to reveal suggests a claim that the failure was caused by Schmidt's selling to the partnership stallion breeding seasons which he owned for excessive fees and without arm's length negotiation. Other allegations suggest that the mares were not of good quality or value.

The claim of fraud includes alleged oral representations by a bank officer and failure to inform defendants of other facts, including untruths in a Private Placement Memorandum prepared by the General Partners, and approved by the bank officer and attorney. The representations were made before the defendants borrowed the money or the partnership began to operate.

The oral representations alleged, as summarized in appellants' brief, were "that Sunrise No. 3(1) was structured so as to make a profit, (2) was a 'risk free' investment, (3) had highest quality horses, and (4) was managed by competent General Partners."

The alleged omissions were failures to say (1) that Schmidt would personally sell stallion seasons to the partnership, (2) that the partnership "was structured primarily to benefit the Bank and the General Partners," and failures to correct statements in the Private Placement Memorandum, (3) that the bank had investigated the partnership when it had not, (4) that Zurek was the owner of a particular farm in Kentucky, when he was not, and (5) that the bank had committed to fund the investments of limited partners based solely on the value of the horses and foals, when in fact it also relied on the credit of the investors.

The pleading did not allege that the bank had a duty to disclose to defendants the matters allegedly omitted or to correct the allegedly untrue statements in the Memorandum.

The district court concluded that the defendants had failed to allege that the bank made any false statements of fact, as required for fraud under Illinois law. Instead, the court determined that the bank's representations were only opinions. The district court further decided that the defendants had not pled scienter with the required specificity. The district court also found that the defendants had failed adequately to plead loss causation. For these reasons, the court struck the defendants' fraud defense and dismissed the fraud count of the counterclaim.

In the second affirmative defense and second count of the counterclaim, defendants alleged that the bank assisted Schmidt and Zurek in their scheme to defraud defendants and other limited partners. The bank's motive allegedly was to help Schmidt and Zurek repay their own debts to the bank. They alleged that Zurek orally made misrepresentations to defendants concerning the structuring of the partnership and the quality of the horses, and made representations in the Private Placement Memorandum somewhat similar to the representations already referred to. The bank people allegedly knew of the representations and omissions, and knew they were false or had been made with reckless disregard of their truth. It was alleged that the bank assisted Schmidt and Zurek in perpetrating the fraud by "endorsing" Sunrise No. 3, confirming that Zurek's statements were correct, and failing to give information omitted by Schmidt and Zurek.

The district court struck the second affirmative defense and dismissed the second count of the counterclaim. The district judge's first reason was that they were not timely filed, noting defendants' admission that the "aiding a fraud" theory is "simply a new legal theory which arises out of the same facts of which Plaintiff [sic] has always been aware." She also concluded that defendants did not sufficiently allege that the bank benefitted from the fraud.

The bank then moved for summary judgment, and the defendants raised only their claim of lack of personal jurisdiction. This defense had been pled in the defendants' answer, but had not been raised since that time. The court found that the defendants had waived the personal jurisdiction defense by extensively participating in litigation of the merits for two-and-a-half years before affirmatively pressing the challenge to personal jurisdiction.

A. Waiver of Personal Jurisdiction

The defendants contend that the district court erred in finding that they had waived their objection to personal jurisdiction. The district court held that although the defendants pled lack of jurisdiction in their answer, they had waived the defense by extensive participation in the merits of the lawsuit without raising the defense affirmatively.

Federal Rule of Civil Procedure 12(h)(1) provides that "[a] defense of lack of jurisdiction over the person ... is waived ... if it is neither made by motion under this rule nor included in a responsive pleading or an amendment thereof permitted by Rule 15(a) to be made as a matter of course." The defendants did raise the defense in their answer, and therefore the waiver provided for by Rule 12(h) did not occur. See Adden v. Middlebrooks, 688 F.2d 1147, 1156-57 (7th Cir.1982). However, the privileged defenses referred to in Rule 12(h)(1) "may be waived by 'formal submission in a cause, or by submission through conduct.' " Trustees of Central Laborers' Welfare Fund v. Lowery, 924 F.2d 731, 732 (7th Cir.1991) (quoting Marcial Ucin, S.A. v. SS Galicia, 723 F.2d 994, 996-97 (1st Cir.1983)); Neirbo Co. v. Bethlehem Shipbuilding Corp., 308 U.S. 165, 168, 60 S.Ct. 153, 154, 84 L.Ed. 167 (1939); Yeldell v. Tutt, 913 F.2d 533, 539 (8th Cir.1990); see Burton v. Northern Dutchess Hosp., 106 F.R.D. 477, 481 (S.D.N.Y.1985) (asserting jurisdictional defect in answer does "not preserve the defense in perpetuity"). Indeed, "[a] party need not actually file an answer or motion before waiver is found." Central Laborers' Welfare Fund, 924 F.2d at 732-33; O'Brien v. Sage Group, Inc., 141 F.R.D. 81, 83 (N.D.Ill.1992), judgment aff'd, 998 F.2d 1394 (1993).

Here, the defendants fully participated in litigation of the merits for over two-and-a-half years without actively contesting personal jurisdiction. They participated in lengthy discovery, filed various motions and opposed a number of motions filed by the bank. While the defendants literally complied with Rule 12(h), "they did not comply with the spirit of the rule, which is 'to expedite and simplify proceedings in the Federal Courts.' " Yeldell, 913 F.2d at 539 (quoting C. Wright & A. Miller, 5A Federal Practice and Procedure Sec. 1342, at 162 (2d ed.1990)). The district court could properly conclude that the defendants' delay in urging this threshold issue manifests an intent to submit to the court's jurisdiction. See, e.g.,...

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