As receiver for a bank in Illinois, the Federal Deposit Insurance Corp. filed suit against the title company that conducted fraudulent closings for four properties in Chicago and the appraisal company that aided the transactions. After winning a verdict for less that it believed was warranted, the FDIC appealed the court’s decision regarding the judgment.
The case is Federal Deposit Insurance Corp. as receiver for Founders Bank v. Chicago Title Insurance Co. and Chicago Title and Trust Co. (Seventh U.S. Circuit Court of Appeal, No. 20-1572).
Founders Bank made loans in 2006 to finance four purchases of Chicago properties that the buyers were planning to convert into condominiums. Jo Jo Real Estate Enterprises, doing business as Property Valuation Services LLC, conducted the real estate appraisals and Chicago Title conducted the closings.
The loans were part of a scheme whereby for each purchase financed by Founders, the property had changed hands earlier the same day at a significantly lower price paid to the original owner. When Founders funded the loans, it was misled to believe the buyer was putting in substantial equity. However, there was only phantom equity.
The buyers never completed the proposed condominium conversions. They defaulted on their loans and in 2008, Founders foreclosed on the four properties. It then purchased them with partial credit bids at foreclosure sales based on new appraisals by Property Valuation Services (PVS). Founders later obtained deficiency judgments against the borrowers and their guarantors.
After obtaining the deficiency judgments, Founders learned about the secret double sales and the phantom equity. It also discovered that PVS’s appraisals at the time of funding and the foreclosures overstated the values of the properties.
Founders ran into broader problems and was closed by its state regulator on July 2, 2009. The FDIC was appointed receiver and in 2012, the FDIC filed suit against Chicago Title for breaches of contract, breaches of fiduciary duty, negligence and negligent misrepresentation. It also brought claims against PVS for separate breaches of contract and negligent misrepresentation.
Before trial, the district granted Chicago Title’s motion for partial summary judgment, finding the credit bid rule capped damages at the sum of deficiency judgments obtained by Founders after the foreclosure sales. The FDIC reached a settlement with PVS under which PVS agreed to pay the FDIC $500,000. Before the case against Chicago Title went to trial, Chicago Title filed a pretrial order arguing it was entitled to a setoff based on the settlement between the FDIC and PVS.
The jury found Chicago Title liable for breach of contract, breach of fiduciary duty, negligence and negligent misrepresentation. The jury verdict included a finding Chicago Title’s conduct was a proximate cause of Founder’s injuries. It awarded the FDIC a total verdict of $1.45 million for the four properties.
The FDIC appealed, challenging three post-verdict decisions by the district court. First, the court denied its request to award it prejudgment interest under state and federal law. The court also denied the FDIC’s request that it amend the judgment to award it the full amount of all four deficiency judgments. In addition, despite the pretrial rulings, Chicago Title asked the court to grant it a setoff, deducing $500,000 from the jury verdict to account for the FDIC’s settlement with PVS, which the court granted.
The Seventh Circuit court affirmed the judgment for the FDIC as far as it went but remanded with instructions to add the setoff amount bank into the judgment.
“The FDIC’s appeal raises three issues. The first is whether the district court erred by denying prejudgment interest to the FDIC,” the court stated. “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. 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.”
It noted that the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) authorizes the FDIC to act as receiver for failing insured depository institutions. It also prescribes the damages that may be available to it when, as a receiver, it pursues claims against the other parties. The FDIC argues that in FIRREA, the phrase “shall include principal losses and appropriate interest” mandates some award of prejudgment interest. Chicago Title argued that “appropriate” gave the district court discretion to decide whether prejudgment interest should be awarded at all. The district court, and the appellate court, agreed with Chicago Title. The appellate court noted that as a matter of federal law, it has long applied a presumption in favor of awarding prejudgment interest to victims of federal law violations, but said presumptive does not mean mandatory.
“Even if federal law presumes prejudgment interest should be awarded for financial damages in most situations, § 1821(l) addresses an unusual situation that makes it easy to understand why Congress added the ‘appropriate’ qualifier,” the court stated. “The statute applies when the FDIC steps into the shoes of a failed bank as receiver. But for the FDIC’s role under FIRREA, the bank that would have been the proper plaintiff in such cases would often have pursued relief under state law. That’s true in this case, with claims for breach of contract, negligence, and breach of fiduciary duty. Congress could easily have concluded that in such cases arising all over the nation under the law of every state, one size would not comfortably fit all. The types and merits of different cases and significant variation in states’ laws governing prejudgment interest defy an attempt to write a precise but generally applicable rule. ‘Appropriate’ makes for a workable delegation to courts to exercise sound discretion. Accordingly, we read the words ‘shall’ and ‘appropriate’ to give effect to both: the district court shall consider only that interest which is appropriate, leaving courts to consider all relevant circumstances, which may include the state law that would have governed the case but for the FDIC’s role as a receiver.”
The court also noted that the district court investigated Illinois law to determine whether prejudgment interest was appropriate and that the FDIC argued that the court erred in relying on state law.
“Where the FDIC steps in as a receiver to pursue in federal court claims that first arose under state law, FIRREA instructs courts to apply an unusual blend of state and federal law,” the court stated. “The Supreme Court has explained generally that FIRREA leaves the FDIC to ‘work out its claims under state law, except where some provisions in the extensive framework of FIRREA provide otherwise. The FIRREA provision on interest, § 1821(l), offers little substantive guidance on prejudgment interest. With the guidance of O’Melveny, it is natural for federal courts addressing FIRREA claims that originally arose under state law to turn, at least for guidance in exercising discretion, to the state law that would have applied absent the FDIC receivership. Accordingly, the district court properly looked to Illinois state law for guidance on whether prejudgment interest was appropriate here.”
The appellate court did disagree with the district court’s finding that Chicago Title was entitled to a setoff of $500,000 from the total verdict, the amount PVS agreed to pay the FDIC in the settlement. It agreed with the FDIC that Chicago Title was not entitled to this setoff because it failed to carry the burdens of proving that any portion of the settlement sum was attributable to the same injuries for which Chicago Title was found liable.
“The critical point in this case is that, where there may arguably be both joint and non-joint injuries, the non-settling defendant bears the burden of proving the allocation of settlement proceeds between them,” the court said. “Chicago Title failed to meet that burden.”