Household Commercial Financial Services, Inc. v. Trump

• Citation: 863 F. Supp. 735
• Decision Date: 09 September 1994
• Docket Number: 92 C 6920.,No. 92 C 5010,92 C 5010
• Parties: HOUSEHOLD COMMERCIAL FINANCIAL SERVICES, INC., a citizen of the states of Delaware and Illinois, Plaintiff, v. Julius TRUMP, a citizen of the state of Florida, Edmond Trump, a citizen of the state of New York, James M. Jacobson, a citizen of the state of New York, and Parker, Chapin, Flattau & Klimpl, a citizen of the states of New York and New Jersey, Defendants.
• Court: U.S. District Court — Northern District of Illinois

863 F. Supp. 735

HOUSEHOLD COMMERCIAL FINANCIAL SERVICES, INC., a citizen of the states of Delaware and Illinois, Plaintiff, v. Julius TRUMP, a citizen of the state of Florida, Edmond Trump, a citizen of the state of New York, James M. Jacobson, a citizen of the state of New York, and Parker, Chapin, Flattau & Klimpl, a citizen of the states of New York and New Jersey, Defendants.

Nos. 92 C 5010, 92 C 6920.

United States District Court, N.D. Illinois, Eastern Division.

September 9, 1994.

COPYRIGHT MATERIAL OMITTED

Robert J. Kriss, Theodore A. Livingston, Carrie Kiger Huff, Javier H. Rubinstein, Mayer, Brown & Platt, Chicago, for plaintiff.

John G. Jacobs, Robert Plotkin, Jonah Orlofsky, Steven J. Plotkin, Bertrand A. Rice, Joshua Karsh, Plotkin & Jacobs, Ltd., Chicago, for Julius Trump and Edmond Trump.

John G. Jacobs, Robert Plotkin, Jonah Orlofsky, Steven J. Plotkin, Plotkin & Jacobs, Ltd., Jerrold E. Salzman, Phillip Leon Stern, Freeman, Freeman & Salzman, P.C., Bertrand A. Rice, Plotkin & Jacobs, Ltd., Chicago, for James M. Jacobson.

John G. Jacobs, Plotkin & Jacobs, Ltd., Christina M. Tchen, Susan Getzendanner, Kimberley K. Baer, Barry R. Conybeare, Skadden, Arps, Slate, Meagher & Flom, Chicago, Joel M. Wolosky, Alvin Stein, Parker, Chapin, Flattau & Klimpl, New York City, for Parker, Chapin, Flattau & Klimpl.

MEMORANDUM OPINION AND ORDER

HOLDERMAN, District Judge:

Defendant Parker, Chapin, Flattau & Klimpl ("Parker") has moved for summary judgment on the complaint of Household Commercial Financial Services, Inc. ("Household") on the grounds it is barred by the statute of limitations. Defendant's motion is denied.

BACKGROUND

This case is one of many that stem from Wieboldt's bankruptcy. (See this court's opinion of September 29, 1993.) The bankruptcy came on the heels of a leveraged buyout ("LBO") of Wieboldt Stores, Inc. ("Wieboldt's").¹ Household agreed to make a 32.5 million dollar loan to WSI Acquisition Corp. ("WSI") to finance the LBO. On December 20, 1985, Household, WSI and Wieboldt's executed the loan agreement. The loan agreement contained a "no material adverse change warranty" ("warranty"), that indicated that no material adverse change had occurred in Wieboldt's business or condition, except as disclosed in SEC reports, since February 2, 1985. The loan was initially unsecured, but following the completion of the acquisition, was secured by mortgages on Wieboldt's real estate. At the time the LBO was being negotiated and consummated, James M. Jacobson ("Jacobson") was a director of Wieboldt's. Jacobson was concurrently an attorney and partner at Parker. Jacobson also had close ties to Julius and Edmond Trump ("Trumps").

Following the closing of the LBO, Wieboldt's sales dipped and their financial condition worsened. In January 1986, Household received financial reports indicating Wieboldt's had had a "disastrous Christmas season." Household acknowledges that it became apparent shortly after the consummation of the LBO that Wieboldt's financial condition was much worse than had been expected based upon the financial data provided to Household and the public. Further, on July 31, 1986, Wieboldt's failed to make an interest payment of $275,347.22 to Household. On August 6, 1986, Household sent Wieboldt's a notice of default. Household concedes there was some concern that misrepresentations had been made regarding the LBO prior to September 1986, and had consulted outside experts to review the transaction.

An involuntary petition for bankruptcy was filed against Wieboldt's on September 23, 1986, which was converted to voluntary petition the following day. The debtor-in-possession threatened to bring a fraudulent conveyance claim against Household seeking to invalidate Household's lien on Wieboldt's property. This prompted an investigation by Household of the underlying facts to evaluate the strength of the claim. The rapid deterioration of Wieboldt's apparently prompted some suspicion on the part of Household early in the investigation (early 1987). (Parker's 12(m), ¶ 47; Household's 12(n), ¶ 47.) A settlement agreement was entered into with the bankruptcy trustees on August 12, 1987. The settlement required a payment of $17 million by Household, which was made in October of 1987. Household had decided sometime prior to the settlement that settlement was the most prudent way to mitigate losses on the loan. Household admits it had information that material adverse changes had occurred prior to the LBO sometime in the first half of 1987.

Household has been involved in numerous actions related to the LBO, including several as plaintiff.² This case's predecessor was originally filed in December 1990 in the Circuit Court of Cook County and was voluntarily dismissed on October 13, 1992 ("Illinois action"). Case No. 92 C 6920, which this court deemed a refiling of the Illinois action, was filed on October 15, 1992. Case No. 92 C 5010 was filed in this court (originally before Judge Rovner) on July 29, 1992. The cases were ultimately consolidated. Household did not add Parker as a defendant until it filed its amended complaint on July 31, 1992. Household seeks to hold Parker liable for the allegedly fraudulent acts of Jacobson.

Parker has moved for summary judgment on the grounds Household's claim was brought after the expiration of Illinois five-year statute of limitations for fraud; Household's complaint against Parker does not relate back to its complaint in the Illinois action; and Parker did not fraudulently conceal any facts that resulted in delay to Household in identifying Parker as a possible defendant.

ANALYSIS

Under Rule 56(c), summary judgment is proper "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). In ruling on a motion for summary judgment the evidence of the non-movant must be believed, and all justifiable inferences must be drawn in the non-movant's favor. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 2513, 91 L.Ed.2d 202 (1986). This court's function is not to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial.

A. Accrual of Action

Parker maintains that Household's claim accrued no later than early 1987, and probably much earlier. Therefore, the filing on July 31, 1992 was after the five year limitations period and barred.³ Parker emphasizes the disastrous performance of Wieboldt's immediately after the LBO and Household's 1986 suspicions regarding the LBO. Household maintains that no action had accrued until October 1987, at the earliest, when Household paid $17 million in settlement with the bankruptcy trustees. Household maintains it had no action prior to that time, as no damages were incurred until the payment, as Household had previously believed it would be fully protected by its collateral.

This case is remarkably similar to a recent Seventh Circuit case, City National Bank of Florida v. Checkers, Simon & Rosner, 32 F.3d 277 (7th Cir.1994). In Checkers, plaintiff Bank had agreed to loan $500,000 to borrower Sheridan in March 1989, at least in part based upon financial statements compiled by defendant accountants which indicated borrower had a net worth of between $24.6 million (1987) and $32.3 million (1990). Borrower requested and received three short extensions on repaying the note (from March 10, 1990 to July 26, 1990). The borrower never paid. On July 26, 1990, the bank declared the borrower in default and subsequently filed a fraud action against borrower in October 1990. Borrower sought refuge in bankruptcy in 1991. During a March 1992 deposition, the bank learned that the accountants had a long relationship with borrower, and, therefore, likely knew the financial statements were false. The bank filed suit against the accountants on September 29, 1992.

The Seventh Circuit concluded that the bank's action accrued as of the default on July 26, 1990, and the action against the accountants was barred by Illinois' two-year statute of limitations for actions against accountants. Checkers, 32 F.3d at 284. The court stated that, under Illinois law, the statute of limitations begins to run when a party knows or reasonably should know that an injury occurred and that it was wrongfully caused. Id. at 283-84. At that time, the party is under an obligation to inquire further to determine whether an actionable wrong was committed. Id.⁴

The Checkers court held that the borrower's repeated failure to repay the loan and ultimate default, when juxtaposed with borrower's apparently substantial net worth, should have placed the bank on notice as to potential wrongdoing. Id. at 283-84. The bank, on default, had notice as to the need to investigate why the seemingly unlikely default occurred "and whether, and against whom, the bank may have had causes of action." Id. The investigation would require the bank to consider the potential liability of all parties involved in the making of the loan. Id. at 283-84. Further, the court rejected the bank's argument that it had no reason to suspect the accountants prior to the deposition by holding "if a claim accrues even though the victim does not know that he has a legal entitlement to recover, the fact that the victim does not know who would be the right defendant cannot matter." Id. at 284 (quoting Central States Pension Fund v. Navco, 3 F.3d 167, 171 (7th Cir.1993), cert. den. ___ U.S. ___, 114 S.Ct. 1062, 127 L.Ed.2d 382 (1994)) (emphasis in original).

Like the bank in Checkers, Household witnessed a borrower default on its obligations bare months after the making of the loan. Wieboldt's defaulted on its interest payment seven months after the closing of the LBO and was in bankruptcy two months after that. The...