Federal Deposit Insurance Corporation v The Coleman Law Firm et al
Filing
143
MEMORANDUM Opinion and Order:For the foregoing reasons, the Court denies defendants' motion to dismiss 131 . Signed by the Honorable Thomas M. Durkin on 3/19/2015:Mailed notice(srn, )
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
FEDERAL DEPOSIT INSURANCE CORPORATION, )
AS RECEIVER FOR GEORGE WASHINGTON
)
SAVINGS BANK,
)
)
Plaintiff,
)
)
v.
)
)
THE COLEMAN LAW FIRM AND KEVIN FLYNN )
& ASSOCIATES,
)
)
Defendants.
)
No. 11 C 8823
Judge Thomas M. Durkin
MEMORANDUM OPINION AND ORDER
The Federal Deposit Insurance Corporation (“FDIC-R”), as receiver for
George Washington Savings Bank (the “Bank”), has sued defendants The Coleman
Law Firm (“Coleman”) and Kevin Flynn & Associates (“Flynn”) to recover retainer
payments that the defendants accepted from the Bank several months before the
Bank failed. In exchange for the payments, the defendants agreed to defend the
Bank’s officers and directors (the “D&Os”) in litigation stemming from actions taken
within the scope of their employment. The FDIC-R alleges that the retainer
agreements violate 12 U.S.C. § 1828(k)(3) and has sued to recover the payments.
The defendants argue that the D&Os are “required” parties under Rule 19(a), but
cannot be joined in this lawsuit. They have moved under Rule 12(b)(7) to dismiss
the complaint on the grounds that the court cannot “in equity and good conscience”
proceed with case in the D&Os’ absence. Fed. R. Civ. P. 19(b). For the following
reasons, the Court denies the defendants’ motion to dismiss.
BACKGROUND
In November 2009, the defendants, the Bank, and certain of the D&Os
executed “Advance Payment Retainer Agreements” (the “Retainer Agreements”). R.
132-1 at 2-7. Pursuant to those agreements, the defendants agreed to provide legal
services to the D&Os in connection with any lawsuit filed against them in their
capacities as officers and directors of the Bank. Id. at 2. In exchange, the Bank
agreed to “advance” $150,000 to Coleman, and $100,000 to Flynn, on the D&Os’
behalf. Id. at 2, 5. On February 19, 2010, the Illinois Department of Financial and
Professional Regulation, Division of Banking, seized the Bank’s assets and
appointed the FDIC as receiver. R. 1 ¶ 11. In November 2013, the FDIC-R filed this
lawsuit alleging that the prepayments violated 12 U.S.C. § 1828(k)(3):
(k) Authority to regulate or prohibit certain forms of benefits to
institution-affiliated parties
[. . .]
(3) Certain payments prohibited
No insured depository institution or covered company may prepay the
salary or any liability or legal expense of any institution-affiliated
party if such payment is made–
(A) in contemplation of the insolvency of such institution or covered
company or after the commission of an act of insolvency; and
(B) with a view to, or has the result of–
(i) preventing the proper application of the assets of the
institution to creditors; or
(ii) preferring one creditor over another.
12 U.S.C. § 1828(k)(3). The FDIC-R’s three-count complaint asks the Court to
declare that the prepayments were “void ab initio” (Count I) and order Coleman and
Flynn to return the payments to the FDIC-R as the Bank’s receiver (Counts II and
III).
In July 2014, while this case was still in discovery, the FDIC-R settled
separate claims against the D&Os. R. 132-2. 1 In exchange for $2.075 million and a
release from the D&Os and their insurer, the FDIC released the D&Os from all
claims relating to their performance as directors and officers of the Bank. Id. at 3-4.
The Settlement and Release Agreement expressly provided that the FDIC was not
releasing its claims against the D&Os’ attorneys. Id. at 6. Fact discovery in this
case closed on December 14, 2014, at which point the case appeared ready for
summary-judgment briefing or trial. Then, on January 26, 2015—more than 3 years
after the FDIC-R filed its complaint—the defendants filed the present motion to
dismiss.
LEGAL STANDARD
The defendants have moved to dismiss the FDIC-R’s complaint pursuant to
Rule 12(b)(7) for “failure to join a party under Rule 19.” Fed. R. Civ. P. 12(b)(7).
Applying Rule 19, the Court must first decide whether the D&Os are “required”
parties. See Fed. R. Civ. P. 19(a); Askew v. Sheriff of Cook Cnty., 568 F.3d 632, 635
(7th Cir. 2009). If they are, and joinder is feasible, the Court must join them. See
Fed. R. Civ. P. 19(a)(2); Askew, 568 F.3d at 635. If the D&Os are required parties,
The Settlement and Release Agreement recites that the FDIC-R had “asserted
claims in certain writings dated November 10, 2010, December 24, 2013, and
February 5, 2014 (the ‘Claims’ or the ‘FDIC-R’s Claims’) against” the D&Os. R. 1322 at 2. The FDIC-R’s “Claims” are not in the record, and it is unclear whether it
ever filed a lawsuit against the D&Os.
1
but joinder is not feasible, then the Court must decide “whether, in equity and good
conscience, the action should proceed among the existing parties or should be
dismissed.” See Fed. R. Civ. P. 19(b); Askew, 568 F.3d at 635.
ANALYSIS
I.
Whether the Defendants’ Motion is Timely.
The parties dispute whether the defendants’ motion to dismiss is timely.
Under Rule 12(h)(2), the defendant “may” raise the plaintiff’s failure to join an
indispensable party in its answer, in a Rule 12(c) motion for judgment on the
pleadings, or at trial. Fed. R. Civ. P. 12(h)(2). The defendants have long-since
answered the FDIC-R’s complaint and they have not filed a Rule 12(c) motion for
judgment on the pleadings. The FDIC-R argues, therefore, that the defendants’
motion is procedurally untimely, even though it concedes that: (1) the defendants
have not waived the issue; and (2) they could raise the issue in a motion for
summary judgment. R. 138 at 3-4. It would serve no purpose to require the
defendants to await trial to raise this issue, see Fed. R. Civ. P. 12(h)(2)(C), or else
refile the same arguments as a motion for summary judgment. Cf. Shield Tech.
Corp. v. Paradigm Positioning, LLC, 908 F.Supp. 2d 914, 917 (N.D. Ill. 2012)
(denying the defendants’ motion to dismiss as untimely under Rule 12(h), but
nevertheless addressing on its own motion the arguments that the defendants had
raised). The Court will proceed to decide the defendants’ motion on the merits.
II.
Rule 19(a) – Required Parties.
The defendants contend that the D&Os are required parties under both Rule
19(a)(1)(A) and Rule 19(a)(1)(B). R. 132 at 4-6.
A.
Whether the Court Can Accord the Existing Parties Complete
Relief in the D&Os’ Absence.
Under Rule 19(a)(1)(A), a non-party must be joined if “in that person’s
absence, the court cannot accord complete relief among existing parties.” Fed. R.
Civ. P. 19(a)(1)(A). “[T]he term ‘complete relief’ refers only to relief between the
persons already parties, and not as between a party and the absent person whose
joinder is sought.” See Davis Co. v. Emerald Casino, Inc., 268 F.3d 477, 484 (7th Cir.
2001) (citation and internal quotation marks omitted). The defendants argue that
the FDIC-R cannot obtain complete relief from the defendants because, under the
Retainer Agreements, the D&Os must repay the Bank “if it shall ultimately be
determined that they are not entitled to be indemnified against such costs and
expenses as provided in the” Bank’s bylaws. R. 132-1 at 2-3; R. 132 at 5. The FDICR is not seeking to enforce the Retainer Agreements according to their terms. It is
seeking to invalidate the agreements, or at least the portion of the Agreements
pursuant to which the Bank advanced money for the D&Os’ legal representation.
Whether or not the D&Os are entitled to indemnification under the Bank’s bylaws
is irrelevant. The defendants also argue that the D&Os are personally liable to the
defendants for any legal services that they received. R. 132 at 5; see also 132-1 at 2
(“Clients understand and agree that they are legally responsible for and shall pay
the Law Firm an hourly fee for [legal services] based on the normal hourly billing
rates of the Law Firm.”). But as the Seventh Circuit explained in Davis, Rule
19(a)(1)(A) focuses on relief between the existing parties, “not as between a party
and the absent person whose joinder is sought.” 268 F.3d at 484. The FDIC-R can
obtain a judgment against the defendants under § 1828(k)(3) without joining the
D&Os. And for their part, the defendants have not filed any claim for affirmative
relief. The Court concludes that it can accord complete relief among the existing
parties without joining the D&Os.
B.
Whether the D&Os’ Interests Will Be Prejudiced If They Are
Not Joined.
Under Rule 19(a)(1)(B)(i), a person who “claims an interest relating to the
subject matter of the action” must be joined if disposing of the action in that party’s
absence may “as a practical matter impair or impede the person’s ability to protect
the interest.” Fed. R. 19(a)(1)(B)(i). As the defendants point out, in an action to
rescind or cancel all or a portion of a contract, the parties to that contract are
ordinarily considered required. U.S. ex rel. Hall v. Tribal Development Corp., 100
F.3d 476, 479 (7th Cir. 2006). The Court does not believe, however, that it must
apply this principle mechanically in every case. See id. (acknowledging that the
principle “has its limits”). This case is atypical. The FDIC-R and the D&Os have
executed mutual releases discharging all claims among them that “arise from or
relate to . . . the Bank.” R. 132-2 at 4-5. Given this broad language, it is highly
doubtful that the D&Os have any right to oppose the FDIC’s efforts to claw back the
retainer payments for the benefit of the Bank’s creditors. So, the D&Os’ interests in
the “subject of the action” are more theoretical than “practical.” The fact that they
have not sought to intervene in this lawsuit in the 3 years it has been pending
supports the conclusion that they do not “claim[] an interest relating to the subject
of the action.” See Burger King Corp. v. Am. Nat’l Bank & Trust Co., 119 F.R.D. 672,
678 (N.D. Ill. 1988) (“[A]n absent person’s decision to forego intervention indicates
that he does not deem his own interests substantially threatened by the litigation;
and if he does not, the court should not, absent special circumstances, second-guess
this decision.”); accord Levin v. NC12, Inc., No. 10 C 1606, 2011 WL 2582138, *3
(N.D. Ill. June 29, 2011). The D&Os are certainly aware of the lawsuit. The FDIC-R
contends (and the defendants do not dispute) that three of the five D&Os have been
deposed in this case. Also, the FDIC-R’s settlement agreement with the D&Os
expressly carved out this litigation from the scope of the releases. The Court
concludes, given the unique circumstances of this case, that the D&Os are not
required parties under Rule 19(a)(1)(B)(i).
C.
Whether the Parties Face a Substantial Risk of Inconsistent
Obligations.
The defendants argue that they will face a substantial risk of incurring
inconsistent obligations if the Court does not join the D&Os: “[t]his Court could rule
that the [D&Os] were not entitled to indemnification but another court presiding
over a suit between Coleman, Flynn and the [D&Os] could rule that the [D&Os]
were entitled to indemnification.” R. 132 at 6. This argument is based upon the
same flawed premise as the defendants’ Rule 19(a)(1)(A) argument. See supra. The
FDIC-R is not seeking to enforce the Agreements; it is seeking to rescind the portion
of those Agreements authorizing the Bank to advance funds for the D&Os’ legal
defense. As a practical matter, the D&Os cannot oppose the FDIC-R’s claim in this
lawsuit or any other. See supra. So, there is no risk—much less a “substantial
risk”—that the defendants will incur inconsistent obligations. Fed. R. Civ. P.
19(a)(1)(B)(ii).
III.
Whether the D&Os Can Be Joined in This Lawsuit.
Because the Court has concluded that the D&Os are not required parties
under Rule 19(a), it need not decide whether their joinder is infeasible.
Nevertheless, the Court rejects the defendants’ argument that the D&Os cannot be
joined. The fact that the FDIC-R settled its claims against the D&Os does not
“moot” any claim that the defendants may have against the D&Os for unpaid legal
fees. R. 132 at 6-7. 2 (That they may not want to file a third-party complaint against
their clients is irrelevant to their motion.) Finally, even if the D&Os were required
parties, and could not be joined, the Court would still deny the defendants’ motion
to dismiss. If the defendants are entitled to keep the retainer payments, then the
D&Os are not liable for legal expenses within the scope of the Retainer Agreements.
The defendants have vigorously defended their rights to retain those payments,
meaning that the D&Os’ interests in this lawsuit (if any) are adequately protected.
The defendants imply that Majkowski v. Int’l Group, Inc., No. 08 C 4842, 2008 WL
5272193, at *2 (N.D. Ill. Dec. 16, 2008) supports their argument that the D&Os
cannot be joined in this lawsuit. See R. 132 at 7. It does not. The plaintiff in that
case settled a coverage dispute with his company’s insurers. Id. at *1. He then
attempted to relitigate that issue by suing the defendant, the insurers’ parent
corporation. Id. The defendant moved to dismiss the complaint for failing to join the
insurers, whose presence in the case would destroy diversity jurisdiction. Id. It also
moved to dismiss because the claim was moot: the plaintiff had already settled all
claims arising from the insurance policies. Id. The district court dismissed the
lawsuit on the second ground. Id. at *2-4. Here, the FDIC and the D&Os have not,
and could not, settle the defendants’ claim for unpaid legal expenses against the
D&Os.
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Conversely, if the Court dismisses the lawsuit, the FDIC-R will be unable to recover
possibly improper payments to the detriment of the Bank’s creditors. The Court
could not, “in equity and good conscience,” dismiss this case under those
circumstances. Fed. R. Civ. P. 19(b).
Conclusion
For the foregoing reasons, the Court denies the defendants’ motion to
dismiss, R. 131.
ENTERED:
Dated: March 19, 2015
Honorable Thomas M. Durkin
United States District Judge
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