Dexia Crédit Local v. Rogan

• Decision Date: 03 January 2011
• Docket Number: No. 09-2986,09-2986
• Citation: 629 F.3d 612
• Parties: DEXIA CRÉDIT LOCAL, Plaintiff-Appellee, v. Peter G. ROGAN, et al., Defendants, and Robert C. Rogan, Brian P. Rogan, and Sara C. Rogan, Intervenors-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

629 F.3d 612

DEXIA CRÉDIT LOCAL, Plaintiff-Appellee,

v.Peter G. ROGAN, et al., Defendants,andRobert C. Rogan, Brian P. Rogan, and Sara C. Rogan, Intervenors-Appellants.

No. 09-2986.

United States Court of Appeals,Seventh Circuit.

Argued Feb. 22, 2010.

Decided Nov. 24, 2010.

Rehearing and Rehearing En Banc Denied Jan. 3, 2011.^*

Scott T. Mendeloff (argued), Howrey LLP, Chicago, IL, for Plaintiff-Appellee.

Michael John O'Rourke (argued), O'Rourke & Moody, Timothy J. Touhy (argued), Touhy, Touhy, Buehler & Williams LLP, Chicago, IL, for Intervenors-Appellants.

Neil Holmen, Walker Wilcox Matousek, Michael John O'Rourke, O'Rourke & Moody, Chicago, IL, for Defendants.

Before KANNE and WILLIAMS, Circuit Judges, and SPRINGMANN, District Judge.^**

SPRINGMANN, District Judge.

After obtaining a $124 million judgment against Peter Rogan (Rogan), Dexia Crédit Local (Dexia) instituted supplemental proceedings to locate Rogan's assets and satisfy its judgment. In the course of supplemental proceedings, Dexia requested the turnover of assets held in trusts that Rogan had established, including trusts in the names of each of his three adult children, Robert, Brian, and Sara (the Rogan Children). After the district court froze the trust assets in the course of preliminary proceedings, the Rogan Children intervened in the supplementary proceedings. The case advanced to a bench trial, and the district court concluded that the trust assets actually belonged to and were controlled by Rogan. The court entered a final judgment ordering the turnover to Dexia of nearly all the assets of the Rogan Children's trusts, and terminating the Rogan Children's interests in those trusts. The Rogan Children appealed. Finding that none of the issues raised on appeal requires reversal, we affirm the decision below.

I. BACKGROUND

A. The Underlying Lawsuit and Judgment

This case has its genesis in the Medicare and Medicaid fraud scheme that Rogan perpetrated through Edgewater Medical Center (EMC), a hospital on Chicago's north side, from at least 1993 to 2001. See United States v. Rogan, 459 F.Supp.2d 692 (N.D.Ill.2006) (Rogan I), aff'd United States v. Rogan, 517 F.3d 449 (7th Cir.2008). In 1989, an entity that Rogan formed and controlled purchased EMC. The Rogan-controlled entity managed and administered EMC, and Rogan served as EMC's chief executive officer.

In 1994, EMC was sold to Northside Operating Company. To finance the purchase, Rogan caused the Illinois Health Facilities Authority to issue approximately $41 million in bonds. Although he had sold EMC, Rogan retained control of the hospital after the sale through a series of transactions, and he then caused EMC to enter into management contracts with two entities that he also controlled, Braddock Management, L.P. and Bainbridge Management, Inc. In 1997, Rogan arranged to refinance the bond debt, and to this end, in June 1998, he secured a letter of credit from Dexia guaranteeing EMC's repayment of the bonds. Eventually EMC's fraud was discovered, and the government stopped Medicare and Medicaid payments to EMC. This caused financial distress to EMC and, eventually, required Dexia to pay $55 million on EMC's behalf to satisfy obligations to bondholders. Dexia was unable to obtain reimbursement from EMC.

In November 2002, Dexia sued Rogan and his management company partners for fraud, conspiracy, and other torts. Dexia alleged that, during the due diligence process that led to its issuance of the letter of credit and after Dexia issued the letter of credit, Rogan defrauded Dexia by concealing that a significant portion of EMC's revenue was obtained through Medicare and Medicaid fraud. Rogan vigorously defended against the lawsuit for numerous years, but then moved to Canada and abandoned his defense. In May 2007, Dexia obtained a default judgment against Rogan and his partner companies for $124 million.

B. The Government's False Claims Act Suit

In 2002, the federal government instituted litigation against Rogan under the federal False Claims Act (FCA), 31 U.S.C. §§ 3729-3733, for the submission of false Medicare and Medicaid claims for patients referred to EMC. ¹ In that case, the district court found that Rogan conspired with another EMC officer and physicians to pay kickbacks and other improper benefits to the physicians in return for patient referrals. These referrals resulted in substantial profits for Rogan. See Rogan I, 459 F.Supp.2d at 700. Although the government's lawsuit focused on particular false claims submitted from 1995 through 2000, the district court found that "[t]he conspiracy was evident in the early 1990s." Id. The court also concluded that the conspiracy began (albeit on an apparently smaller scale) at least as early as 1993. See id. (findings related to dealings between Roger Ehmen and Dr. Ravi Barnabas); id. at 722 (findings related to Dr. Barnabas). The court concluded that the government proved that, from 1995 through 2000, Rogan caused EMC to submit over $19 million in false claims to Medicare and Medicaid. Id. at 727.

C. The Rogan Children Trusts

In 1992, Rogan and his wife, Judith, set up three trusts in Florida for the benefit of their children (the Domestic Trusts). The Rogan Children are the only named beneficiaries of the Domestic Trusts. A 10% stock interest in EMC was the initial corpus for each of the Domestic Trusts. After EMC was sold in August 1994, the Domestic Trusts received money in exchange for the EMC stock they held. The Domestic Trusts also owned entities that, in turn, owned the management companies through which Rogan continued to operate EMC following its sale. During the period when Rogan operated EMC through these entities—from 1994 through 1997—the Domestic Trusts received millions of dollars in distributions from the entities. Fredrick Cuppy, who also served as Rogan's lawyer, was the trustee. He was later removed as trustee by the district court as part of the supplemental proceedings.

In June 1997, Rogan formed three additional trusts for his children under Belizean law (Belizean Trusts and collectively with the Domestic Trusts, the Trusts or Rogan Children Trusts). He funded the Belizean Trusts with interests in several of his companies. A company owned by Cuppy served as the trustee.

D. Supplemental Proceedings

To collect its May 2007 judgment, Dexia served Peter Rogan and Judith Rogan with citations to discover assets. See Fed.R.Civ.P. 69; 735 ILCS § 5/2-1402. On September 26, 2007, Dexia initiated supplementary proceedings against the Rogan Children Trusts by serving a citation on Cuppy, the trustee of those Trusts. In February 2009, Dexia served citations upon the individual children.

As part of the proceedings, the district court granted various temporary restraining orders (TROs) to freeze assets. Before the court converted the TROs into preliminary injunctions, the Rogan Children moved to intervene for the purpose of protecting their claimed beneficial interests in the Trusts. The parties engaged in discovery related to the turnover proceedings, and the Rogan Children lodged various procedural and jurisdictional objections, none of which successfully ended the proceedings or removed the Trust assets from consideration.

During the course of ruling on the various challenges lodged by the Rogan Children, the district court judge discovered that two of the Defendants in Dexia's underlying lawsuit, Bainbridge Management, L.P. (Bainbridge LP) and Braddock Management, L.P. (Braddock LP), were citizens of both Illinois and Belize. This dual citizenship destroyed diversity jurisdiction, which does not exist where the party on one side of a case is foreign—Dexia is a French company—and the party on the other side is both domestic and foreign. See Salton, Inc. v. Philips Domestic Appliances & Pers. Care B.V., 391 F.3d 871, 875 (7th Cir.2004). The district court dismissed Bainbridge LP and Braddock LP pursuant to Federal Rule of Civil Procedure 21 as nondiverse, dispensable parties. The district court also discovered that the May 2007 default judgment, which had been issued as a final judgment, was not actually final because it did not dispose of claims against Bainbridge LP (which was in bankruptcy and subject to an automatic stay), and the district court had not otherwise made any findings pursuant to Federal Rule of Civil Procedure 54(b). The court then ruled that the effect of dismissing the dispensable parties, including the one that had been in bankruptcy, was to make the May 2007 default judgment against the remaining defendants, Rogan and Bainbridge Management, Inc. (distinct from Bainbridge LP), retroactively final as of May 2007.

The district court conducted a bench trial on Dexia's motion for turnover. On July 7, 2009, the court issued a 48-page opinion granting Dexia's motion for turnover of assets, including those in the Rogan Children's Trusts, with the exception of $30,000 ($10,000 from each Trust) that was gifted to the Trusts by an individual named Scott Gross. This relief was predicated upon the court's finding that the Trust assets actually belonged to Rogan. As alternative relief, the court imposed a constructive trust on the property held by the Trusts. Again, the court excluded the $30,000 that Dexia did not establish was the result of Rogan's fraudulent activities. This appeal followed.

II. ANALYSIS

A. Subject Matter Jurisdiction

The Rogan Children argue that the district court lacked and we lack subject matter jurisdiction over this case. They contend that Dexia has formed an "unincorporated association" with LaSalle Bank, an Illinois corporation, and that LaSalle's citizenship must be considered when determining whether the federal court has subject matter jurisdiction pursuant to 28 U.S.C. § 1332(a). They assert that, because some of the defendants are also Illinois citizens, Dexia's unincorporated association with an Illinois citizen destroys complete diversity of citizenship. The Rogan Children's claim that Dexia and...