F.D.I.C. v. Wabick

• Decision Date: 10 July 2003
• Docket Number: No. 02-4081.,02-4081.
• Parties: FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff-Appellant, v. David J. WABICK, Patricia A. Wabick, Lawrence Ettner, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

335 F.3d 620

FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff-Appellant, v. David J. WABICK, Patricia A. Wabick, Lawrence Ettner, et al., Defendants-Appellees.

No. 02-4081.

United States Court of Appeals, Seventh Circuit.

Argued June 3, 2003.

Decided July 10, 2003.

Rehearing and Rehearing En Banc Denied August 8, 2003.

COPYRIGHT MATERIAL OMITTED

Lawrence H. Richmond (argued), Federal Deposit Ins. Corp., Washington, DC, for Plaintiff-Appellant.

David J. Wabick, Palos Park, IL, pro se.

Kenneth W. Sullivan, Carlins & Associates, Chicago, IL, for Patricia A. Wabick.

Jonathan M. Cyrluk (argued), Stetler & Duffy, Chicago, IL, for Lawrence Ettner, Janelle Ettner, Lorraine Wabick.

Before FLAUM, Chief Judge, and BAUER and EVANS, Circuit Judges.

FLAUM, Chief Judge.

The defendants, David Wabick, Patricia Wabick, Lorraine Wabick, Larry Ettner, Janelle Ettner, and Paul Freitag,¹ (collectively "defendants") allegedly participated in a scheme to defraud the Resolution Trust Corporation ("RTC") in 1992. The scheme succeeded with the defendants improperly winning a sealed auction of financial assets. The assets were sold at an allegedly depressed price to the defendants for $66,750,000. Despite the magnitude of the transaction involved, the Federal Deposit Insurance Corporation ("FDIC"), successor to the RTC, did not bring suit against the defendants until nine years after the fraud — seven years after the RTC became aware of a Department of Justice ("DOJ") investigation into the scheme, and four years after the DOJ indicted one of the defendants. The FDIC is now left struggling to have the courts apply the most lenient statute of limitations in order to keep this case from being removed from court as untimely, and we in turn are faced with questions of choice-of-law principles and statute-of-limitations application. The FDIC argues that Erie R.R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), requires us to apply state choice-of-law principles in choosing which statute of limitations to apply. The district court disagreed and applied federal choice-of-law rules and determined that under the limitations resulting from those rules the FDIC is barred from bringing this suit. Though the district court's conclusion reasonably rejected the FDIC's Erie argument, we disagree with the parties and the district court that this case even presents a choice between an application of the Erie doctrine and federal common law; instead, this case can be resolved by following a statutory directive to apply state choice-of-law principles. We therefore reverse.

I. Background

In 1992 the RTC became the receiver for Home Federal Savings Association of Kansas City, F.A., a lending institution that had been declared insolvent. As receiver RTC decided to sell various outstanding loans that were owned by the insolvent lending institution. Among these loans was a group of non-performing and sub-performing real estate loans known as the Merit Loans. The debtors on the Merit loans were all entities owned or controlled by Albert Ichelson, Jr. The RTC grouped the merit loans into a bid package with other loans to be auctioned off through a sealed bidding process.

Meanwhile, David Wabick and Larry Ettner formed Gateway Capital under Illinois corporation laws in June of 1992. David's wife Patricia owned one half of Gateway Capital while Larry and his wife Janelle owned the other half. David and Larry managed the company. David also controlled Connaught Corporation ("Connaught"), an Illinois corporation. This caused a problem for Gateway Capital, which had as its purpose the purchase of the Merit Loans in the auction, because Connaught had previously defaulted on obligations to the RTC and the FDIC. Corporations and their affiliates who had previously defaulted on obligations to the RTC or the FDIC were ineligible for bidding. To avoid the effects of this rule, David set up what the FDIC calls a sham transaction whereby his mother Lorraine obtained all the stock in Connaught. Later, in an attempt to further disguise David's connections with Connaught, Lorraine transferred the stock to Paul Freitag, a close friend of David's.

On top of this the FDIC claims that David began dealing with Ichelson. David promised Ichelson payments, leases, and employment opportunities for Ichelson's son all in return for Ichelson's help in ensuring that Gateway Capital won the bidding process for the Merit Loans. This help took the form of confidential information and Ichelson causing some of the entities he controlled to file bankruptcy before the auction, thereby artificially reducing the apparent value of the loans. These dealings were in direct violation of RTC requirements that no bidder could communicate with any debtor without RTC consent or enter into business relationships with any debtor.

With this elaborate scheme in place, Gateway Capital entered the bidding process. The defendants received a bid package sent by the RTC from Washington, D.C. In accordance with the rules provided in the package, Gateway returned certifications and agreements to the RTC and sent credit histories to locations directed by the RTC. Based on the representations in these documents, the RTC informed Gateway Capital that it was eligible to bid in the auction. Gateway Capital sent in a bid of $66,750,000. As this was the highest bid, Gateway Capital was successful in purchasing the loans. The deal was closed in Washington, D.C., in January of 1993.

The scheme, though initially successful, was not flawless. Indeed, the DOJ opened an investigation into the bidding process. In connection with this investigation an FBI agent and a DOJ attorney interviewed Martin Blumenthal in July of 1994. Blumenthal, a Contractor Ethics Program Manager at the RTC, was told that an unnamed bidder had engaged in prohibited contact with the largest borrower involved in the loans being auctioned. He was also asked to comment on the possible ramifications on the auction process if David Wabick had been involved with Connaught, which had been involved in defaults on loans held by the RTC and the FDIC. After the interview Blumenthal did not contact the RTC's Office of Inspector General even though he had the authority to forward the information to that office. The DOJ investigation continued and on June 12, 1997, David Wabick was indicted.

More than four years later, the FDIC finally initiated this action against the defendants in the district court on November 9, 2001. The suit was brought pursuant to the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), which provides that all cases brought by the FDIC are deemed to arise under the laws of the United States. 12 U.S.C. § 1819(b)(2)(a). The FDIC asserted claims for conspiracy to commit fraud, common law fraud, breach of contract, and unjust enrichment. The district court recognized that there was a potential statute of limitations problem because FIRREA provides the following rule for determining the limitations period:

Notwithstanding any provision of any contract, the applicable statute of limitations with regard to any action brought by the [FDIC] as conservator or receiver shall be —

(i) in the case of any contract claim, the longer of —

(I) the 6-year period beginning on the date the claim accrues; or

(II) the period applicable under State law; and

(ii) in the case of any tort claim ... the longer of —

(I) the 3-year period beginning on the date the claim accrues; or

(II) the period applicable under State law.

12 U.S.C. § 1821(d)(14)(A). Using federal common law choice-of-law rules, the district court determined that the applicable state law was that of Washington, D.C. Because the D.C. statute of limitations provided a period of three years for both tort and contract claims, the district court found that the default limitations provided in FIRREA were longer and therefore applicable here. The district court held on a motion to dismiss that the tort claims (fraud and conspiracy to commit fraud) were barred by the three-year limitations period. As for the contract claims (breach and unjust enrichment) the district court recognized that there was a question of when the injury was or should have been discovered that could be dispositive under the six-year limitations period. The court therefore ordered the FDIC to submit factual submissions under Federal Rule of Civil Procedure 56(e) and considered the issue as a motion for summary judgment. In the end the district court held that the injury should have been discovered at the time of the DOJ interview with Blumenthal, and the contract claims were therefore barred by the six-year limitations period. The FDIC now appeals to this court the rulings on both the tort and contract claims.

II. Discussion

The FDIC argues that the district court chose the wrong statute of limitations. In the FDIC's view the district court should have applied Illinois' choice-of-law rules because the district court was located in Illinois. In Illinois the statute of limitations is considered purely procedural and therefore the Illinois statute of limitations would automatically apply. Belleville Toyota, Inc. v. Toyota Motor Sales, U.S.A., Inc., 199 Ill.2d 325, 351-52, 264 Ill.Dec. 283, 770 N.E.2d 177 (2002). The district court rejected this argument and instead applied federal common law in choosing which statute of limitations was applicable.

According to the parties, the starting point for us is the Erie doctrine, which provides generally that a federal court is not authorized to apply a different substantive law in a diversity case from the law that a state court would apply were the case being litigated in a state court instead. Under this doctrine it is well established that in diversity cases state law is the appropriate source for choice-of-law rules. Klaxon Co. v. Stentor Electric Mfg. Co., Inc., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). And generally...