Dunham v. Independence Bank of Chicago

• Decision Date: 20 February 1986
• Docket Number: No. 85 C 8343.,85 C 8343.
• Parties: John L. DUNHAM and Mostly Que, Inc., an Illinois corporation, Plaintiffs, v. INDEPENDENCE BANK OF CHICAGO, a national banking corporation, Defendant.
• Court: U.S. District Court — Northern District of Illinois

629 F. Supp. 983

John L. DUNHAM and Mostly Que, Inc., an Illinois corporation, Plaintiffs, v. INDEPENDENCE BANK OF CHICAGO, a national banking corporation, Defendant.

No. 85 C 8343.

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

February 20, 1986.

Wilfred A. Rice, Jr., Chicago, Ill., for plaintiffs.

George A. Platz, Anne M. Gallagher, Sidley & Austin, Chicago, Ill., for defendant.

MEMORANDUM OPINION AND ORDER

SHADUR, District Judge.

John Dunham ("Dunham") and Mostly Que, Inc. ("Mostly Que") have filed a five-count Amended Complaint (the "Complaint")¹ against Independence Bank of Chicago ("Bank")—a wholly-owned subsidiary of Indecorp, Inc. ("Indecorp")²—charging:

1. violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-1968 (Count I);

2. violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, Ill.Rev.Stat. ch. 121½, ¶¶ 261-272 (Count II);

3. common-law fraud and breach of fiduciary duty (Count III);

4. negligent supervision of employees (Count IV); and

5. breach of contract (Count V).

Bank has now moved under Fed.R.Civ.P. ("Rule") 9(b) and 12(b)(6) to dismiss the Complaint. For the reasons stated in this memorandum opinion and order, both the Complaint and this action are dismissed— Counts II through VI without prejudice.

Facts³

On February 10, 1983 Dunham incorporated Mostly Que to establish a barbeque and "soul food" restaurant in Chicago (¶¶ 6, 8). In May Dunham retained an accounting firm to prepare a Small Business Administration ("SBA") loan guaranty application for Mostly Que (¶ 9). In June Dunham delivered Mostly Que's SBA loan application to Bank loan officer Gilbert Bland ("Bland"), telling Bland of his plans for Mostly Que (¶ 10). Bland assured Dunham Bank would submit Mostly Que's loan application and Bank's lender application to SBA (id.). During discussions in June and July Bland assured Dunham that Bank was processing the SBA application (¶ 11).

On July 16, 1983—at Bland's urging— Dunham opened a Mostly Que checking account at Bank, with an initial deposit of $18,758.71 (¶ 12). At Bland's further requests, and in reliance on Bland's assurances as to Bank's processing of the SBA loan application, Dunham built the checking account balance up to more than $25,000 (id.) Bank frequently used the mails to communicate with Dunham about the checking account (id.).

On July 30 Bank delivered a $70,000 loan commitment letter to Dunham (Complaint App. A), made subject by its terms to Mostly Que's obtaining a 90% SBA guaranty and Dunham's personal guaranty (which he was prepared to provide) (¶ 13). Bland continued to assure Dunham of Bank's processing of the SBA loan application (¶ 14). In reliance on Bank's loan commitment and Bland's statements, Mostly Que hired a design and planning firm to plan the Mostly Que restaurant and a satellite food preparation and storage facility (id.).

On August 15 and 26 Dunham mailed supplemental reports to Bank (requested by Bland) covering Mostly Que's developing projects (¶ 15). Bland continued to represent he was "working with the SBA" on the SBA loan application (id.). In reliance on those representations and with Bank's knowledge, Mostly Que leased space for its satellite facility (id.).

From June to October 1983 Bland and Bank's President and Chief Executive Officer Alvin Boutte ("Boutte") encouraged Mostly Que to buy barbeque pits and other restaurant equipment Bank had repossessed from another borrower (¶ 16). In further reliance on Bank's representations as to the loan application, Mostly Que purchased from Bank (id.):

1. two barbeque pits for $7,000 (Complaint App. B); and

2. other restaurant equipment for some $8,000.

In late 1983 Dunham suggested to Bank that he temporarily use the satellite facility to open a test restaurant to train employees, break in equipment and test possible menus (¶ 17). Bland encouraged Dunham to do so, and the test restaurant opened in November 1983 (id.). Because of the satellite facility's remote location, Dunham never intended it to become Mostly Que's permanent place of business (id.). Dunham's operation of that facility turned out to be a financial disaster.

In January 1984 Dunham asked Bank to honor its July 1983 loan commitment to Mostly Que (¶ 18). Bank wrote Dunham by mail that he still owed Bank $7,000 for the restaurant equipment purchased in 1983 (id.) Bank told Dunham it would "go ahead with the loan" as soon as Dunham paid for the equipment (id.). On April 19, 1984 Dunham paid Bank the $7,000, and Bland assured Dunham Bank was "back on it" (that is, the asserted ongoing efforts to process the SBA application) (id.).

During the summer of 1984 Bland continued to assure Dunham he "was working with the SBA," but nothing happened (¶ 19). After a time Bland failed to return any of Dunham's repeated telephone calls (id.). On September 25 Dunham mailed a letter to Boutte "pleading for some action," but Boutte never responded (id.).

On October 4 Dunham met with Boutte (¶ 20), who:

1. told Dunham Bank's July 1983 letter (Complaint App. A) was not a loan commitment 2. demanded Dunham's repayment of a personal home improvement loan; and

3. refused to repurchase the restaurant equipment.

On October 12 Bland told Dunham the SBA would probably turn down Mostly Que's application (¶ 20). That led Dunham to communicate directly with SBA, which on October 17 told Dunham it had never received any such application at all (¶ 21). Thus Bank's course of action had been a hoax from the beginning, and all its representations about processing the loan application had been known falsehoods.

Bank's Contentions

Bank says the Complaint's RICO claim is flawed because Count I fails adequately to allege:

1. mail fraud as the predicate act underlying the RICO claim;

2. a "pattern" of "racketeering activity"; and

3. investment or use of income derived from Bank's alleged racketeering activity.

Although the second of those contentions proves dispositive (so that discussion of the others ultimately turns out to be dictum), the continuing evolution of civil RICO—and its high profile in current commercial litigation —merits treatment of all three issues in this opinion. Such treatment is also appropriate in light of the ultimate result of this opinion: dismissal of this action (albeit without prejudice as to the state-law claims) as well as the Complaint.

RICO's "Racketeering Activity" Requirement: Herein of Mail Fraud

RICO § 1962(a) renders unlawful (among other things) the use of income derived by any person "from a pattern of racketeering activity" in the operation of an enterprise engaged in, or whose activities affect, interstate commerce. RICO § 1962(c) makes illegal the conduct—again "through a pattern of racketeering activity"—of the affairs of an enterprise engaged in, or whose activities affect, interstate commerce. RICO § 1961(1) defines "racketeering activity" as any of a large number of specified illegal acts, including "any act which is indictable under ... 18 U.S.C. section 1341 (relating to mail fraud)."

Any mail fraud violation—and hence any derivative RICO violation—requires two elements:

1. a scheme to defraud; and

2. the use of the mails to further that scheme.

See, e.g., United States v. Flomenhoft, 714 F.2d 708, 713 (7th Cir.1983), cert. denied, 465 U.S. 1068, 104 S.Ct. 1420, 79 L.Ed.2d 745 (1984). Bank asserts Count I does not adequately allege either of those elements.

1. Scheme To Defraud

Rule 9(b) states:

In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other conditions of mind of a person may be averred generally.

Tomera v. Galt, 511 F.2d 504, 508 (7th Cir.1975) (citations omitted), still the leading case on the subject in our Circuit, interpreted Rule 9(b) liberally:

Rule 9 must be read together with rules 8(a)(2), 8(e)(1) and 8(f), Fed.R.Civ.P.... Rule 8 requires that a plaintiff give through his pleadings notice to defendant of the nature of his claims.... It urges the plaintiff to make known his claims simply and concisely in short, plain statements. With these principles in mind, the purpose of rule 9 becomes clear. Rule 9 lists the actions in which slightly more is needed for notice. In a fraud action, a plaintiff need also state "with particularity" the circumstances constituting the fraud.

Dunham and Mostly Que have met that test here.

Soules v. General Motors Corp., 79 Ill.2d 282, 286, 37 Ill.Dec. 597, 599, 402 N.E.2d 599, 601 (1980) states the familiar five elements essential to a cause of action for fraudulent misrepresentation:⁴

(1) false statement of material fact (2) known or believed to be false by the party making it; (3) intent to induce the other party to act; (4) action by the other party in reliance on the truth of the statement; and (5) damage to the other party resulting from such reliance.

Bank Mem. 4 says the Complaint fails to describe such a claim. But each of those elements is clearly alleged:

1. Bank made false statements to Dunham about its processing of Mostly Que's SBA loan application (¶¶ 10, 11, 14, 15, 18 and 19).

2. Bank knew those statements were false (¶¶ 16 and 21).

3. Bank made the misrepresentations intending to induce Dunham and Mostly Que to forego other avenues of financial assistance, to deposit funds in Bank and to purchase equipment from Bank (¶ 21).

4. Bank's misrepresentations in fact caused Dunham and Mostly Que to take those and other actions (¶¶ 12, 14, 16, 17 and 21).

5. Bank's false statements damaged plaintiffs by causing them to expend substantial sums of money in preparing to open a business that could not succeed without the SBA loan (¶ 22).

In sum, the Complaint unquestionably alleges a "scheme to defraud." And it satisfies Tomera, 511 F.2d at 509, which calls only for allegations of:

the details, a brief sketch of how the fraudulent scheme operated, when and where it

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