Mid-State Fertilizer Co. v. Exchange Nat. Bank of Chicago

Decision Date19 June 1989
Docket NumberMID-STATE,No. 88-2532,88-2532
Citation877 F.2d 1333
Parties, 1989-1 Trade Cases 68,626, 13 Fed.R.Serv.3d 1407, RICO Bus.Disp.Guide 7247 FERTILIZER CO., Lasley Kimmel, and Maxine Kimmel, Plaintiffs-Appellants, v. EXCHANGE NATIONAL BANK OF CHICAGO, et al., Defendants-Appellees.
CourtU.S. Court of Appeals — Seventh Circuit

Thomas E. Leiter, Leiter, Brady & Associates, Peoria, Ill., Douglas A. Antonik, David M. Raymond, Mount Vernon, Ill., for plaintiffs-appellants.

David L. Piercy, Howard & Howard, Mount Vernon, Ill., David N. Missner, Franklin S. Schwerin, Angel Rodriguez, Schwartz, Cooper, Kolb & Gaynor, Chicago, Ill., for defendants-appellees.

Before COFFEY, EASTERBROOK, and RIPPLE, Circuit Judges.

EASTERBROOK, Circuit Judge.

Mid-State Fertilizer Co. sold fertilizer in mid-state Illinois. It needed money to buy supplies, pay its workers, and run the business until it could collect from customers. Mid-State arranged for revolving credit from the Exchange National Bank of Chicago, which promised to lend Mid-State 70% of its inventory and receivables to a maximum of $2 million; Mid-State promised to direct its customers to make all payments to a postal box that Exchange would control (the "lock box"). Exchange would retrieve the checks and deposit them to an account from which it alone could withdraw cash (the "blocked account"). After the instruments cleared, Exchange applied the money to pay amounts due on the loan; anything left over Exchange would deposit to Mid-State's operating account. Exchange also deposited advances into the operating account when notified by Mid-State that new inventory was available for sale. So Mid-State received money both from advances and from the excess of receivables over what was necessary to repay the bank. Exchange's arrangement with Mid-State was a variant of factoring, which banks call "asset-based financing". See Grant Gilmore, 1 Security Interests in Personal Property 129-33 (1965). Unlike traditional factoring, this arrangement did not shift to the lender the risk of customers' defaults. Mid-State remained liable for the full amount of any loan; Exchange also took guarantees from Lasley and Maxine Kimmel, Mid-State's sole shareholders.

In December 1985 Mid-State gave Exchange a financial statement showing that it had lost between $200,000 and $300,000 in the preceding year. Concerned about the soundness of its borrower, Exchange limited the amount of fertilizer in transit that would count as "inventory" for the purpose of new advances. By May 1986 Mid-State was in default. Exchange spoke with some of Mid-State's customers and discovered that a receivable Mid-State had represented to be worth $135,000 did not exist. Exchange soon stopped making new advances to Mid-State and contacted all of Mid-State's customers, demanding that they send payments to the lock box. It discovered in the process that customers had paid $1 million direct to Mid-State, bypassing the lock box and increasing the bank's risk. Unable to find new financing, Mid-State crumpled. It is now in liquidation under Chapter 7 of the Bankruptcy Code.

Mid-State commenced this suit, joined as plaintiff by the Kimmels. Their principal grievances arise under state law. Mid-State contends that Exchange broke its contract by refusing to make additional advances and by collecting all of the receivables even after declining to loan more money. But there is no basis of federal jurisdiction over these claims, as all parties are citizens of Illinois. To get into federal court the plaintiffs needed a federal claim. * They picked two: the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. Secs. 1962(a) and 1964(c), and the anti-tying provisions of the Bank Holding Company Act (BHCA), 12 U.S.C. Secs. 1972 and 1975. Plaintiffs portrayed the bank's repeated failure to apply the money in the blocked account to reduce the loan the same day funds became available as a "pattern" of "fraud", allowing recovery under RICO; they depicted the lock box as a banking service "tied" to the advances in violation of the BHCA.

The district court granted Exchange's motion for summary judgment on the federal claims, dismissing the pendent claims without prejudice. 693 F.Supp. 666 (N.D.Ill.1988). Although concluding that the Kimmels, as guarantors of Mid-State's loans, could sue under both RICO and the BHCA, it rejected all claims on the merits. Delay in crediting money against the loans could not be "fraud", the district judge reasoned, when the bank sent statements showing what it was doing. Linking the lock box to the loan was not tying, as the judge saw things, but was only what a prudent bank would demand to control its risk; Mid-State was free to withdraw the sums in the operating account and use another bank for its daily business.

I

Exchange reiterates an argument that did not persuade the district court: that the Kimmels are not entitled to recover under RICO and the BHCA. Both statutes authorize litigation by "[a]ny person who is injured in his business or property by reason of anything forbidden in ...". 12 U.S.C. Sec. 1975; 18 U.S.C. Sec. 1964(c) (which modifies the language slightly to "by reason of a violation ...". This business-or-property formula tracks Sec. 4 of the Clayton Act, 15 U.S.C. Sec. 15, the damages provision of the antitrust laws. Both this court, Carter v. Berger, 777 F.2d 1173 (7th Cir.1985) (dealing with RICO), and other courts, e.g., Sundance Land Corp. v. Community First Federal Savings & Loan Ass'n, 840 F.2d 653, 659-61 (9th Cir.1988) (an anti-tying provision of the banking laws), have noticed the identity and held that the rules established in anti-trust cases for identifying the proper plaintiffs should be applied to RICO and the BHCA too.

Lasley and Maxine Kimmel were the managers and shareholders of Mid-State. They guaranteed its obligations to Exchange. Their wealth obviously was tied to Mid-State's success: to injure Mid-State was to wound the Kimmels. Equally obviously, the Kimmels' injury was derivative. Investors gain or lose with the firm; stockholders receive what's left after the corporation pays its debts. Lenders (guarantees are a form of contingent loan) also gain or lose with the firm, although lenders have more protection than equity investors. Employees, too, invest in the firm: they invest their human capital. If that capital is specialized--that is, if it is worth more when used in connection with the employer than doing something else--the employee is an "investor" to the extent of that specialization. If the employee's skills are not tied to the firm, so that the employee can go elsewhere and make as much, then there is no "investment", no loss in the event the firm collapses. Unspecialized employees, like the suppliers of gasoline and typewriters, can turn elsewhere and still earn a market return. In all of these roles--as equity investors, as debt investors (guarantors), and as human capital investors (managers)--the Kimmels gained and lost with Mid-State. A blow costing Mid-State $1 could not cost the Kimmels more than $1. An award putting the $1 back in Mid-State's treasury would restore the Kimmels to their former position.

The derivative nature of such injuries leads courts in antitrust cases to hold that neither investors nor employees may recover. E.g., In re Industrial Gas Antitrust Litigation (Bichan), 681 F.2d 514 (7th Cir.1982), and, in other courts, Bubar v. AMPCO Foods, Inc., 752 F.2d 445 (9th Cir.1985); Meyer Goldberg, Inc. v. Fisher Foods, Inc., 717 F.2d 290 (6th Cir.1983); In re Municipal Bond Reporting Antitrust Litigation, 672 F.2d 433 (5th Cir.1982); Jones v. Ford Motor Co., 599 F.2d 394 (10th Cir.1979). RICO and bank tying cases have followed the path blazed in antitrust. See, in addition to Sundance Land, cases such as Rose v. Bartle, 871 F.2d 331, 357-58 (3d Cir.1989) (RICO); Ocean Energy II, Inc. v. Alexander & Alexander, Inc., 868 F.2d 740, 744-46 (5th Cir.1989) (RICO); Campbell v. Wells Fargo Bank, N.A., 781 F.2d 440 (5th Cir.1986) (bank tying); Parsons Steel, Inc. v. First Alabama Bank, 679 F.2d 242 (11th Cir.1982) (bank tying) (a subsequent decision in this case was reversed on other grounds, 474 U.S. 518, 106 S.Ct. 768, 88 L.Ed.2d 877 (1986)); Costner v. Blount National Bank, 578 F.2d 1192 (6th Cir.1978) (bank tying). Antitrust, RICO, and bank tying cases are not off by themselves in a corner. It is commonplace to rebuff efforts by investors and employees to collect damages for injuries done to their firms. E.g., Kush v. American States Insurance Co., 853 F.2d 1380 (7th Cir.1988); In re Deist Forest Products, Inc., 850 F.2d 340 (7th Cir.1988). A big chunk of the law concerning corporate derivative litigation consists in separating "direct" injury (which the investor may redress through independent suit) from "derivative" injury (which the investor may redress only through litigation in the name of the corporation). The Kimmels' injury is derivative no matter which body of rules we consult.

Good reasons account for the enduring distinction between direct and derivative injury. When the injury is derivative, recovery by the indirectly-injured person is a form of double counting. "Corporation" is but a collective noun for real people--investors, employees, suppliers with contract rights, and others. A blow that costs "the firm" $100 injures one or more of those persons. If, however, we allow the corporation to litigate in its own name and collect the whole sum (as we do), we must exclude attempts by the participants in the venture to recover for their individual injuries. A fire that causes $100 worth of damage to "the corporation", and therefore reduces the value of investors' stock by $100, does not cause a total injury of $200--the net loss is $100, and everyone is made whole by an award of that sum to the firm. To avoid double counting courts must either restrict...

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