Federal Deposit Ins. Corp. v. W.R. Grace & Co.

• Decision Date: 11 September 1989
• Docket Number: No. 88-2275,88-2275
• Citation: 877 F.2d 614
• Parties: FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff-Appellee, v. W.R. GRACE & CO. and Grace Petroleum Corporation, Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 614

877 F.2d 614

FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff-Appellee, v. W.R. GRACE & CO. and Grace Petroleum Corporation,

Defendants-Appellants.

No. 88-2275.

United States Court of Appeals, Seventh Circuit.

Argued Feb. 23, 1989.

Decided June 21, 1989.

Rehearing and Rehearing En Banc Denied Sept. 11, 1989.

Denis McInerney, Cahill Gordon & Reindel, Charles A. Gilman, New York City, W. Donald McSweeney, Schiff Hardin & Waite, Allan Horwich, Chicago, Ill., for defendants-appellants.

William E. Rattner, Hopkins & Sutter, Paul K. Vickrey, Thomas M. Dethlefs, Chicago, Ill., for plaintiff-appellee.

Before BAUER, Chief Judge, and POSNER and RIPPLE, Circuit Judges.

POSNER, Circuit Judge.

This case began as a diversity suit (governed, the parties agree, by Illinois law) for fraud. The plaintiff was Continental Illinois National Bank, the defendants W.R. Grace & Co. and its wholly owned subsidiary, Grace Petroleum Corporation. The parties treat the two Graces as interchangeable; so shall we. The appeal presents questions of contract law and damages.

Continental had made a $75 million nonrecourse production payment loan to Grace to enable it to develop some natural-gas fields in Mississippi, and when one of the fields turned out to be worthless Continental contended that Grace had induced the loan by fraud. Shortly after filing the suit Continental assigned the loan to the Federal Deposit Insurance Corporation, which had bailed out the failing Continental. The FDIC substituted itself for Continental as the plaintiff and switched the statutory basis of federal jurisdiction from 28 U.S.C. Sec. 1332 (diversity) to 28 U.S.C. Sec. 1345 (suits "commenced by" the United States), 12 U.S.C. Sec. 1819 (the Federal Deposit Insurance Corporation Act), and 28 U.S.C. Sec. 1331 (federal-question jurisdiction). After a four-week trial a jury awarded the FDIC $25 million in compensatory damages and $75 million in punitive damages. The district judge cut the award of punitive damages to $25 million.

Grace appeals, raising a variety of grounds of which the first and least is that there is no federal jurisdiction. The jurisdiction of suits by and against the FDIC is specified in section 1819 Fourth of the Banking Code, which provides that all suits to which the FDIC is a party shall be deemed to arise under the laws of the United States (thus bringing section 1331, the federal-question statute, into play), unless the FDIC is a party "in its capacity as receiver of a State bank." Since Continental is a national bank rather than a state bank, this exception to federal jurisdiction would not apply even if the FDIC had been suing as a receiver, which it was not; an assignee is not a receiver. See, e.g., FDIC v. Braemoor Associates, 686 F.2d 550, 552-53 (7th Cir.1982); FDIC v. Elefant, 790 F.2d 661, 665 (7th Cir.1986) (dictum). Elefant hints that substituting the FDIC for a state bank in a diversity suit that had already been filed would not destroy diversity jurisdiction, see id. at 666, unless the assignment was for the purpose of conferring federal jurisdiction where it would not otherwise exist. See 28 U.S.C. Sec. 1359; Hartford Accident & Indemnity Co. v. Sullivan, 846 F.2d 377, 382 (7th Cir.1988). Jurisdiction normally depends on the facts when the case was brought rather than on what happens later. But no more than in Elefant need we resolve the issue in order to confirm the district court's jurisdiction; Continental was not a state bank.

Grace has not shown any error in the district judge's jury instructions or evidentiary rulings, so we take the facts to be as favorable to the FDIC as a reasonable jury could have found them to be. In 1980 Grace decided to bid for a 50 percent interest in three natural-gas fields owned by a subsidiary of Centex Corporation--the Thomasville, East Thomasville, and Southwest Piney Woods fields, all in the same part of Mississippi. Four wells had already been drilled in the first two fields and three were planned for Southwest Piney Woods, of which one had been drilled but was not yet producing. To finance the purchase, Grace went to its long-time banker, Continental, for a $75 million "nonrecourse production payments loan"--a loan repayable only out of the revenues from the gas fields and not out of Grace's other assets. If the fields proved to be nonproductive, the loan would not be repaid and Continental would have no remedy for the default.

Officers of Grace showed Continental a reserve report prepared by an independent engineering firm. The report showed Southwest Piney Woods with 42 percent of the total gas reserves in the fields, although none of the proven reserves because no producing wells had been drilled yet in that field. A petroleum engineer employed by Continental reviewed the reserve report and concluded that the proven reserves in the other two fields--all he considered--had a loan value of $75 million. This was exactly equal to the loan that Grace was seeking and so left no margin for error. Next to the Southwest Piney Woods estimates the engineer wrote, "all assumed Dry!" Apparently this was his way of saying that in order to be ultraconservative in his evaluation he had ignored Southwest Piney Woods because it had no producing wells as yet. (In other words, the emphasis falls on the word "assumed.") Despite his evaluation of the Thomasville and East Thomasville fields, he told his boss that he was uncomfortable about the loan, but his boss reassured him by pointing out that the Southwest Piney Woods field could be pledged to repay the loan too, and this would provide insurance in case the Thomasville fields turned out to be less productive than expected or the price of gas fell. Consistent with this assurance, when Grace asked Continental to exclude Southwest Piney Woods from the properties dedicated to the repayment of the loan Continental refused.

On March 14, 1980, Continental wrote Grace that it was "pleased to commit to provide $75,000,000 in a production payment loan for the benefit of W.R. Grace & Co. The terms of the loan are summarized below." Provisions follow regarding interest rate (prime plus one percent), balances, maturity (December 31, 1987), security, etc., followed by the statement, "This commitment is, of course, subject to satisfactory documentation." Continental followed up with another letter to Grace on April 1, setting forth in five single-spaced pages "the principal terms and conditions of the financing" and stating at the end that "the above discussion does not constitute an exhaustive list of all the terms and conditions of the financing, but does cover those items of major importance." A virtually identical letter, differing only in being slightly longer, was sent on April 7. The final loan agreement, in which satisfactory final loan documentation is made a condition precedent to Continental's duty to perform, was signed on July 1, and disbursal of the $75 million to Grace followed shortly.

Centex had accepted Grace's $87 million bid for the Mississippi properties early in April, and the parties to that deal had agreed to close on May 23. On May 8, Grace, which pursuant to its still-executory contract with Centex was receiving frequent reports on the progress of the gas-exploration activities in the properties, learned that "Pursue Ridgeway," the well that had been drilled in the Southwest Piney Woods field, had struck water instead of gas. This was bad enough; but by May 18 Grace had discovered that the field would produce no gas, from any well. Grace was horrified. It had valued Pursue Ridgeway at $15.5 million even though the well had not yet started producing any gas. This was 17.1 percent of the entire deal. The well, along with the rest of the field, was now revealed to be worthless. Grace tried to back out of the deal with Centex, but when Centex threatened to sue, Grace decided to go ahead with the deal, which closed on May 27 with a covenant allowing Grace to sue Centex.

The next day Centex issued a press release announcing the sale to Grace and mentioning in passing that Pursue Ridgeway was "non-commercial." A news service to which Continental subscribed carried the release, but no one at Continental concerned with the Grace loan noticed it. Although Grace had issued its own press release on April 22 announcing the signing of the contract with Centex to buy the Mississippi properties, it issued no press release announcing the actual purchase. And it did not tell Continental about the problem with the Southwest Piney Woods field until, three years after the loan was closed, it sent Continental a copy of the complaint it had filed against Centex, alleging that Centex had defrauded Grace by failing to disclose the water problem in Southwest Piney Woods. That suit was later settled for $13 million. The present suit was filed in 1984 and came to trial in 1987, at which time the balance of the $75 million loan, consisting both of principal and of unpaid interest, exceeded $76 million, even though the loan was due to be repaid in only three months. The Thomasville fields were and are productive, but gas prices had tumbled, and the volume of production was not high enough to generate revenues sufficient to repay the loan--which to this day has not been repaid.

Several points raised by Grace are shallow:

1. The fact that Continental may have been deficient in alertness in failing to notice the item in the press release about Pursue Ridgeway might be relevant if this were a suit for negligence, but it is a suit for deliberate fraud, and contributory negligence is not a defense to an intentional tort. See, e.g., Tan v. Boyke, 156 Ill.App.3d 49, 57, 108 Ill.Dec. 229, 234, 508 N.E.2d 390, 395 (1987); Carter v. Mueller, 120 Ill.App.3d 314, 319-20, 75 Ill.Dec. 776, 781, 457 N.E.2d 1335, 1340 (1983); Mother Earth, Ltd. v. Strawberry Camel, Ltd., 72 Ill.App.3d 37, 51-52, 28 Ill.Dec. 226, 328-29, 390 N.E.2d 393, 405-06 (1979); General...