Fed. Deposit Ins. Corp. v. Chi. Title Ins. Co.
| Decision Date | 31 August 2021 |
| Docket Number | No. 20-1572,20-1572 |
| Citation | 12 F.4th 676 |
| Parties | FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver for Founders Bank, Plaintiff-Appellant, v. CHICAGO TITLE INSURANCE COMPANY and Chicago Title and Trust Company, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Michele A. Casey, Consumer Fraud Bureau, Chicago, IL, John Vincent Church, Federal Deposit Insurance Corporation, Arlington, VA, Chicago, IL, Stuart Tonkinson, FDIC, Arlington, VA, for Plaintiff Chicago Title And Trust Company.
Alicia A Garcia, Wilson Elser Moskowitz Edelman & Dicker, Chicago, IL, for Defendant Jo Jo Real Estate Enterprises, LLC.
Paul Joseph McGeough, Eric Peter Rosenberg, Fidelity National Law Group, New York, NY, Joseph J Stafford, Wilson Elser Moskowitz Edelman & Dicker, Chicago, IL, for Defendant Chicago Title And Trust Company.
Michael Alan Gilman, Dykema Gossett PLLC, Chicago, IL, Fidelity National Law Group, New York, NY, Joseph P. Tucker, Fidelity National Law Group, Chicago, IL, for Third Party Plaintiff Chicago Title And Trust Company.
Before Wood, Hamilton, and Kirsch, Circuit Judges.
This case arose from the fraudulent financing of purchases of four properties in Chicago back in 2006. The borrowers concealed their lack of equity from the lender. All defaulted, and the lending bank later went into receivership. As receiver for that bank, the FDIC brought this suit against the title insurance company that conducted the fraudulent closings and an appraisal company that aided the transactions.
The FDIC settled with the appraisal company and went to trial against the title insurance company, winning a verdict but for less than the FDIC believes was warranted.
The FDIC's appeal raises three issues. The first is whether the district court erred by denying prejudgment interest to the FDIC. That issue requires us to address a somewhat Delphic statutory provision telling courts to award "appropriate" prejudgment interest in FDIC receivership cases that blend federal and state law. See 12 U.S.C. § 1821(l ). We conclude that the statute gave the district court authority to exercise its discretion and to look to state law for guidance, and we find no legal error or abuse of discretion in denying prejudgment interest. The second and third issues are narrower and more specific to this case. Our second conclusion is that, because of difficult causation issues, the district court did not abuse its discretion in refusing to amend the jury verdict to add more damages. Our third, however, is that the district court erred in giving the title company a $500,000 setoff for the appraisal company's settlement. We affirm the judgment for the FDIC as far as it went but remand with instructions to add the setoff amount back into the judgment.
In 2006, Founders Bank made loans to finance four purchases of Chicago properties that the buyers planned to convert into condominiums.1 In making the loans, Founders relied on real estate appraisals by Jo Jo Real Estate Enterprises, which did business as Property Valuation Services LLC ("PVS"). Chicago Title, acting as escrow trustee, conducted the closings and reported the transactions to Founders.2
But the loans had been obtained by deception, leading Founders to lend money to buyers who had little or no real equity in the properties. The scheme worked this way. For each purchase financed by Founders, the same property had changed hands earlier the same day at a much lower price paid to the original owner. When Founders funded its loan later the same day, it had been misled to understand that the buyer/borrower was putting in substantial equity, but there was only phantom equity.
For example, on February 13, 2006, the North LaSalle property first sold for $2.4 million. One hour later, it was resold for $3.1 million. The second transaction was the only one reported to Founders. Because Founders had agreed to finance 80 percent of the purchase price and 100 percent of budgeted construction costs to convert each apartment building into condominiums, the double sale allowed the purchaser to use the funds from the higher-priced transactions to pay off the (very) short-term loan for the first purchase and thus to fund the actual purchase without investing real equity in the property. Chicago Title conducted all of the closings. It reported only the second transactions to Founders, hiding from Founders the scheme to use phantom equity.
The buyers never completed the proposed condominium conversions and soon defaulted on their loans. In 2008, Founders foreclosed on the four properties, then purchased them with "partial credit bids" at foreclosure sales based on new appraisals by PVS. Founders later obtained deficiency judgments against the borrowers and their guarantors.
Only after it obtained the deficiency judgments did Founders learn about the secret double sales and the phantom equity. Founders also discovered that PVS's appraisals at both the time of funding and the later foreclosures overstated the values of the properties.
Founders then ran into broader problems and was closed by its state regulator on July 2, 2009. The Federal Deposit Insurance Corporation ("FDIC") was appointed receiver under 12 U.S.C. § 1821(d)(2)(A). In 2012, the FDIC filed this suit against Chicago Title for breaches of contract, breaches of fiduciary duty, negligence, and negligent misrepresentations, and against PVS for separate breaches of contract and negligent misrepresentations.
Before trial, the district court granted Chicago Title's motion for partial summary judgment, concluding that the "credit bid rule" capped damages at the sum of deficiency judgments obtained by Founders after the foreclosure sales.3 The FDIC then reached a settlement with PVS, which agreed to pay the FDIC $500,000. The FDIC's case went to trial against Chicago Title. In a pretrial order, Chicago Title argued that it was entitled to a setoff based on the settlement between the FDIC and PVS. The FDIC filed a motion in limine to bar Chicago Title from arguing for a setoff at trial, which the court granted.
At trial, the FDIC presented evidence of the amounts it lost, net of its credit bids, totaling $3,790,695.4 Chicago Title argued that its conduct in the double transactions was not a proximate cause of Founders’ and the FDIC's losses, which it argued were caused instead by intervening events like unexpected rising construction costs and a broader downturn in the condominium market in the Great Recession of 2008–09. The jury found Chicago Title liable for breach of contract, breach of fiduciary duty, negligence, and negligent misrepresentation. The jury verdict included a finding that Chicago Title's misconduct was a proximate cause of Founders’ injuries. The jury awarded the FDIC approximately the same amount of the established deficiency losses for the two North Campbell property loans, but it awarded less for the other two loans, for a total verdict of $1,450,000 for the four properties.5
The FDIC's appeal challenges three post-verdict decisions by the district court. First, the FDIC asked the court to award prejudgment interest under 12 U.S.C. § 1821(l ) and Illinois law, which the court denied. Second, the FDIC asked the court to amend the judgment to award it the full amount of all four deficiency judgments, which the court also denied. Third, despite the pretrial rulings, Chicago Title asked the court to grant it a setoff, deducting $500,000 from the jury verdict to account for the money the FDIC received from its settlement with PVS. The court granted that setoff.
Founders’ claims originally arose under state law, but the district court properly exercised federal-question jurisdiction pursuant to 12 U.S.C. § 1819(b)(2)(A) and 28 U.S.C. § 1331 because the FDIC stepped into the shoes of Founders as its receiver. The FDIC timely appealed the district court's partial final judgment of March 10, 2020. We exercise jurisdiction under 28 U.S.C. § 1291, with an assist from Rule 54(b).6
More than ten years passed between the fraudulent transactions and the district court's entry of judgment against Chicago Title. The FDIC sought prejudgment interest under both federal law, 12 U.S.C. § 1821(l ) (for all claims), and Illinois law (for the fiduciary duty claim). The district court denied prejudgment interest based on its interpretation of the federal statute and Illinois law.
Whether § 1821(l ) mandates a grant of prejudgment interest is a question of law that we review de novo. Joseph v. Sasafrasnet, LLC , 734 F.3d 745, 747 (7th Cir. 2013). The district court said it does not, and the court then exercised its discretion under § 1821(l ) and state law to deny prejudgment interest. We review that decision for an abuse of discretion. E.g., Shott v. Rush-Presbyterian-St. Luke's Medical Ctr. , 338 F.3d 736, 745 (7th Cir. 2003), citing McRoberts Software, Inc. v. Media 100, Inc. , 329 F.3d 557, 572 (7th Cir. 2003).
When the FDIC steps in to pursue claims as receiver for a financial institution, federal courts confront an unusual blend of federal and state law. We consider first whether the district court correctly interpreted the federal statute to allow it discretion to deny prejudgment interest. We then turn to Illinois law of prejudgment interest, particularly as it applies to the claim against Chicago Title for breach of fiduciary duty.
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989, known as FIRREA, authorizes the FDIC to act as receiver for failing insured depository institutions and prescribes the damages that may be available to it when, as a receiver, it pursues claims against other parties. FIRREA includes this instruction: "In any proceeding related to any claim against an insured depository institution's director,...
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