Federal Savings and Loan Insurance Corp. v. Hogan, 71-1902.

• Decision Date: 29 March 1973
• Docket Number: No. 71-1902.,71-1902.
• Citation: 476 F.2d 1182
• Parties: FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION, an Agency of the United States, Plaintiff-Appellee, v. Quinn HOGAN, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

476 F.2d 1182 (1973)

FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION, an Agency of the United States, Plaintiff-Appellee, v. Quinn HOGAN, Defendant-Appellant.

No. 71-1902.

United States Court of Appeals, Seventh Circuit.

Argued January 16, 1973.

Decided March 29, 1973.

Douglas W. Graham, Chicago, Ill., for defendant-appellant.

Merrill Shepard, Donald Page Moore, Kael B. Kennedy, Chicago, Ill., for plaintiff-appellee.

Before SWYGERT, Chief Judge, DUFFY, Senior Circuit Judge, and SPRECHER, Circuit Judge.

SPRECHER, Circuit Judge.

Defendant Quinn Hogan appeals from a jury verdict giving the plaintiffs a $20,000 judgment against him for conspiracy to defraud. We reverse.

Plaintiff Federal Savings and Loan Insurance Corporation, a federal agency (FSLIC), became the owner of the property, assets and causes of action of Service Savings and Loan Association, an Illiois savings and loan institution in Summit, Illinois, in September, 1965, as a result of an agreement under which plaintiff enabled Service Savings to pay its depositors and creditors in full. Thereafter, on February 3, 1967, plaintiff FSLIC filed a complaint in the Northern District of Illinois against various officers and directors of Service Savings, along with others, charging the defendants with a civil conspiracy to mismanage and defraud Service Savings. Hogan was not named in this complaint. On July 17, 1969, FSLIC filed its second amended complaint, again naming various officers and directors of Service Savings as defendants, and this time also including Hogan as a defendant. The second amended complaint alleged a conspiracy to defraud Service Savings in conjunction with loans to three properties.

The first of these properties was Vernon Hills, Inc., or the Vernon Hills Country Club. Hogan was the president of Vernon Hills. Service Savings loaned Vernon Hills $700,000 in November, 1960. The loan was refinanced and increased to $850,000 in November, 1961. Service Savings' security for the loan was a first mortgage on the Vernon Hills Country Club property.

Vernon Hills filed a bankruptcy petition in December, 1962. In June, 1963, Service Savings discovered that the legal description of the property included in its mortgage on Vernon Hills included only twelve holes of the eighteen hole golf course supposedly covered by the mortgage. Service sought reformation of the mortgage to include the whole eighteen holes on the ground of mutual mistake of fact arising from a scrivener's error. This petition was later amended to include allegations of fraud and deceit. The FSLIC filed an answer to Service Savings' reformation petition, alleging that it owned the property sought to be included in the reformation as assignee of the prior owner, Hillside Savings and Loan Association. The Special Master who heard the petitions found that no mutual mistake of fact had been proved, that fraud by the debtor, Vernon Hills, or any of its agents had not been proved, and that the proof was insufficient that the parties intended to include the additional property within that covered by the mortgage. Reformation was therefore denied. The Special Master's findings were approved by both the District Court and this Court. In re Vernon Hills, Inc., 348 F.2d 4 (7th Cir. 1965).

Unsuccessful in its efforts to achieve title to a complete eighteen hole course in the bankruptcy court, Service Savings, through its assignee FSLIC, purchased the remaining property in May, 1966 for $120,000. It then filed suit, although not until 1969 was Hogan added as a defendant, alleging a conspiracy to defraud Service Savings and claiming as its damages on the Vernon Hills transaction the $120,000 paid for the remainder of the golf course.

Count I of the FSLIC's complaint¹ names as defendants, in addition to Hogan, William and Edward Szarabajka, president and executive vice president of Service Savings respectively; Joseph Nowak, attorney for Service Savings; Edward Kowalko and Joseph Racina, members of the board of directors of Service Savings; Vernon Sherman, a real estate investor and developer and a member of the board of directors of another defendant, the Virginia Corporation; Louis Sherman, identified in the complaint only as an attorney and father of Vernon Sherman; Jerome Morris, an attorney and the president and sole owner of defendant Virginia Corporation; John Parrish, a mortgage broker; the Virginia Corporation, a corporation engaged in the lending business; and Kenneth Russ and Harry Prince, each engaged in the business of lending money. These defendants were alleged to have conspired to defraud and mismanage Service Savings in a multitude of ways, but the specific acts charged to be in furtherance of the conspiracy may be generally summarized as follows: (1) causing Vernon Hills to pay large sums of money as bribes to defendants William Szarabajka and Nowak in order to obtain a loan from Service Savings; (2) concealing from Service Savings the fact that defendant Vernon Sherman was insolvent and unemployed; (3) causing a co-conspirator to prepare and certify appraisals which would attribute a fraudulent and excessive value to the Vernon Hills security property as well as another security property known as Riverwoods; (4) causing fraudulent Mulhern appraisals to be placed in the files of Service Savings in order to persuade the plaintiff and examining authorities that the Vernon Hills and Riverwoods loans were made on adequate security and not because of bribes; (5) causing the defendant Vernon Sherman to pay large sums of money as bribes to Nowak and the two Szarabajkas in order to obtain the Riverwoods loan; (6) causing the diversion of more than $150,000 in Vernon Hills, Riverwoods, and Ramlin Rose (another real estate venture) loan proceeds in order to pay the costs of inducing certain money brokers to deposit enough money in Service Savings to fund these loans. Additional allegations detailed the alleged fraud and bribery in connection with the Riverwoods and Ramlin Rose loans.

The 35-page complaint charges Hogan by name with agreeing with others to make a cash bribe in exchange for the Vernon Hills loan, introducing Vernon Sherman to those who could procure the Riverwoods loan for him, agreeing with others to help cause Service Savings to make the Riverwoods loan, and accepting a new car and cash from Riverwoods proceeds in return for help in arranging the Riverwoods loan.

Prior to trial defendants William and Edward Szarabajka and John Parrish defaulted through failure to answer the charges against them. In addition, the district judge instructed the jury that the evidence regarding a conspiracy in the Vernon Hills transaction was to be considered only against Hogan and Nowak, and that no evidence had been presented tying any of the other defendants to this alleged conspiracy. On February 8, 1971, the jury returned a verdict absolving Nowak of any liability with regard to the Vernon Hills transaction but holding Hogan liable for $20,000 on this transaction, and absolving Hogan of any liability with regard to the Riverwoods loan but holding Nowak, Vernon Sherman and Jerome Morris liable in the sum of $150,000 on this transaction. Additional verdicts were returned finding liability in favor of the plaintiff and against certain defendants, not including Hogan, on Count II of the complaint. The district judge denied Hogan's post-trial motions for relief based on collateral estoppel in consequence of the prior decision denying reformation of the mortgage and absence of any proof on the issue of damage.

We have concluded that Hogan was entitled to assert his claim of collateral estoppel although not pleaded as an affirmative defense and that, in the alternative, if the fraud issue in the earlier case differed in any respect from that asserted in the trial in this case then plaintiff failed to prove any damage.

Plaintiff FSLIC argues that the trial court's ruling denying Hogan's estoppel claim was correct on several grounds. It argues that the claim is barred by Hogan's failure to comply with Fed.R. Civ.P. Rule 8(c), which requires that defenses such as estoppel be pleaded affirmatively. FSLIC also argues that collateral estoppel is not applicable here because the fraud issues in the two cases were different. Other defenses, such as lack of mutuality, are also raised.

Fed.R.Civ.P. Rule 8(c) requires that a party responding to a preceding pleading "set forth affirmatively . . . estoppel . . . and any other matter constituting an avoidance or affirmative defense." It is undisputed that Hogan did not comply with this rule nor properly seek to amend his pleadings during the trial when it became apparent that he desired to offer the earlier case in his defense.² The courts have, however, relaxed the pleading requirement in the interests of justice in various instances, such as where the facts underlying the claim of res judicata have been pleaded by the plaintiff in his complaint, Sylk v. United States, 331 F.Supp. 661 (E.D. Pa.1971), and where the plaintiff's own evidence discloses the facts or proof, Bradford Audio Corp. v. Pious, 392 F.2d 67, 73 (2nd Cir. 1968), 2A Moore, Federal Practice ¶ 8.27 3 at 1853-54 (2d ed. 1972). Furthermore, Rule 15(b), Fed.R.Civ.P., specifically provides that

"When issues not raised by the pleadings are tried by express or implied consent of the parties, they shall be treated in all respects as if they had been raised in the pleadings. Such amendment of the pleadings as may be necessary to cause them to conform to the evidence and to raise these issues may be made upon motion of any party at any time, even after judgment;

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