Federal Deposit Insurance Corporation v The Coleman Law Firm et al
Filing
60
MEMORANDUM Opinion and Order Signed by the Honorable Milton I. Shadur on 11/7/2012:Mailed notice(srn, )
IN THE 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.
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No. 11 CV 8823
MEMORANDUM OPINION AND ORDER
Federal Deposit Insurance Corporation, as Receiver for George Washington
Savings Bank (“FDIC-R”) has brought a motion for judgment on the pleadings on its
Complaint Counts II and III pursuant to Fed. R. Civ. P. (“Rule”) 12(c). Counts II
and III seek the return of $250,000 that George Washington Savings Bank (the
“Bank”) paid to The Coleman Law Firm (“Coleman”) and Kevin Flynn & Associates
(“Flynn”) for not-yet-rendered legal services. FDIC-R alleges that the payment was
made in violation of the Federal Deposit Insurance Act (“Act”), more specifically 12
U.S.C. §1828(k)(3).1 For the reasons set forth in this memorandum opinion and
order, FDIC-R’s motion is denied.
1
That and other provisions of Title 12 will hereafter be cited simply as
“Section --,” omitting the prefatory “12 U.S.C.” Citations to FDIC-R’s reply
memorandum will take the form “FDIC R. Mem. --,” citations to the Complaint will
take the form “Compl. ¶--” and citations to the Answer will take the form “Ans. ¶--.”
1
Standard of Review
For purposes of a Rule 12(c) motion that seeks to dispose of the case on its
substantive merits, “the appropriate standard is that applicable to summary
judgment, except that the court may consider only the contents of the pleadings”2
(Alexander v. City of Chi., 994 F.2d 333, 336 (7th Cir. 1993)). All well-pleaded
allegations in the nonmovant’s pleadings must be taken as true, and all facts and
reasonable inferences from those facts must be construed in the light most favorable
to the nonmovant (id.). Legal characterizations of the facts by the nonmovant,
however, are not binding (Nat'l Fid. Life Ins. Co. v. Karaganis, 811 F.2d 357, 358
(7th Cir. 1987)).
In terms of this case, not only Complaint allegations that Coleman and Flynn
have admitted but also allegations to which Coleman and Flynn had an opportunity
to respond but that they have not contested are taken as true (Flora v. Home Fed.
Sav. & Loan Ass'n, 685 F.2d 209, 211 (7th Cir. 1982)). Conversely, allegations that
Coleman and Flynn have denied properly will, for purposes of the present motion,
be considered false (Austad v. United States, 386 F.2d 147, 149 (9th Cir. 1967)).
As to allegations to which Coleman and Flynn have filed a Rule 8(b)(5)
disclaimer asserting a “lack of knowledge or information sufficient to form a belief,”
FDIC R. Mem. 5 argues that they are “uncontested factual allegations” under Rule
2
Documents incorporated by reference into the pleadings may also be
considered, and the Court may take judicial notice of matters of public record
(United States v. Wood, 925 F.2d 1580, 1582 (7th Cir. 1991)).
2
8(b)(6) and “[a]ccordingly, for purposes of FDIC-R’s 12(c) Motion, this Court should
consider as true all relevant allegations in response to which Defendants claimed
they lack knowledge.” That contention flies in the face of Rule 8(b)(5) itself
(emphasis added):
A party that lacks knowledge or information sufficient to form a belief
about the truth of an allegation must so state, and the statement has
the effect of a denial.”
There are to be sure limited exceptions to that principle, such as a case where
the matters disclaimed under Rule 8(b)(5) are matters of public knowledge or where
the defendants could have informed themselves on the issues in question “with the
slightest effort” (Exch. Nat’l Bank of Chi. v. Brown, No. 84 C 10801, 1985 WL 2274,
at *2 (N.D. Ill. Aug. 9)). But this is not certain to be such a case. Most of the
disclaimed allegations here concern meetings or conversations between Bank
directors or between Bank directors and FDIC officials in the months before
Coleman and Flynn were retained (see Compl. ¶¶29-36), matters of which Coleman
and Flynn by definition can have no first-hand knowledge.
True enough, the required disclaimer hurdle under Rule 8(b)(5) is much
higher than the absence of actual knowledge--for example, any lawyer who comes
onto the scene after an event occurs and becomes involved in developments that
grow out of that event would certainly seem most likely to be provided with enough
information to form a belief about the occurrences that antedated his or her
involvement. If then the facts when developed in this case were to establish such a
scenario, one or both defendants might perhaps become vulnerable under Rule 11(b)
3
or even 28 U.S.C. §1927 for having improperly brought Rule 8(b)(5) into play.
But no such speculative possibility can justify a judicial rewriting of that rule
to convert a deemed denial into an admission. Instead the Complaint’s allegations
that Coleman and Flynn have disclaimed under Rule 8(b)(5) will be considered as
false for purposes of the present motion (Cagan v. Intervest Midwest Real Estate
Corp., 774 F. Supp. 1089, 1091 nn. 1 and 2, 1093 (N.D. Ill. 1991)).
Statement of Facts3
On November 19, 20094 Bank directors George and Mark Weigel (“the
Weigels”) executed an Advance Payment Retainer Agreement (the “Coleman
Retainer Agreement”) with Coleman (Compl. ¶22 and Ex. 1). That Agreement
stated that Coleman would represent the Weigels and “advise, counsel and defend
[the Weigels] in any action, suit or proceeding, . . . in which [the Weigels] are made,
or are threatened to be made, a party to, or a witness in, such action, suit or
proceeding by reason of the fact that he is or was an officer, director or employee” of
the Bank (id.). Next day the Bank paid Coleman $150,000 pursuant to the Coleman
Retainer Agreement (Compl. ¶24).
On November 30 the Bank executed a similar Advanced Payment Retainer
Agreement with Flynn (the “Flynn Retainer Agreement”) (Compl. ¶25 and Ex. 2).
That Agreement was similar to the Coleman Retainer Agreement, except that
3
Unless otherwise indicated, all of the facts discussed below are undisputed
by the Coleman-Flynn Answer.
4
All other dates referred to are also in 2009 unless otherwise indicated.
4
Flynn was to provide legal services to Grant Currie, John Kovatch, Marty Lucas
and other directors and officers of the Bank (the “Outside Directors”) (Compl. ¶25
and Ex. 2). On December 2 the Bank paid Flynn $100,000 pursuant to the Flynn
Retainer Agreement (Compl. ¶27).
Crucially, each of the Retainer Agreements (collectively “the Agreements”)
contained this language (id. ¶28 and Exs. 1 and 2 (emphasis added)):
Generally, a “security” retainer agreement best serves the interest of a
client because the payment remains the property of the client or, as in
this case, the entity that is advancing payment on behalf of the client.
However, under the unique and special circumstances present at this
time, the Law Firm, Clients and George Washington Savings Bank
believe the use of an Advance Payment Retainer is advantageous to
the Clients because of the present and likely risk that George
Washington Savings Bank will be seized or otherwise taken over by
the Federal Deposit Insurance Corporation (the “FDIC”) before the
services provided for herein are fully provided. Under a “security”
retainer, any funds that have not been billed against for services
performed are subject to a demand of immediate freeze and repayment
to the FDIC as an asset of the estate of George Washington Savings
Bank. As a consequence, the Clients may be left with inadequate
resources to pay the Law Firm for the legal services it is providing the
Clients pursuant to this Agreement.
That and all other relevant language is the same in the two Agreements. Hence
the Agreements will be discussed together throughout this opinion, and all of the
analysis here should be understood to apply to both documents.
While the events just discussed are undisputed, the details of the interactions
between FDIC Corporate (“FDIC-C”) and the Bank in the months leading up to the
Bank’s failure are not. FDIC-R alleges that after noticing a decline in the Bank’s
5
condition in June 2009 (Compl. ¶29)5 it began to send a series of letters and have a
series of meetings with Bank officials in which it detailed its concerns (id. ¶¶29-36).
Coleman and Flynn, however, do not credit many of those allegations (either
through a denial or by invoking Rule 8(b)(5)) (see Ans. ¶¶29-36). Although, as
stated earlier, allegations that Coleman and Flynn have not admitted will not be
credited here, the parties do agree that the following interactions took place:
1. First, the Bank restated its June 2009 Call Report (Compl. ¶31).
2. Next FDIC-C advised the Bank that an early comprehensive
examination was scheduled (id.).
3. Regulatory counsel (separate from Coleman and Flynn) represented
the Bank in October and November (id. ¶33).
4. On November 24 FDIC-C wrote the Bank a letter concerning its full
scale examination, stating (a) that the Bank’s asset quality was of significant
concern and (b) that the Bank had an excessive amount of adversely
classified loans (id. ¶36). FDIC-C recommended that Bank management
make an immediate minimum provision to ALLL (allowances for loan and
lease losses) of $27 million to lower its Tier 1 Leverage Capital to 0.81% (id.).
It is also undisputed that on December 4 the Illinois Department of Financial
and Professional Regulation issued an Order To Cease and Desist (the “Order”)
pursuant to Sections 5007, 9015 and 11011 of the Illinois Savings Bank Act (id. ¶37
5
That, it should be noted, was more than four months before the first Agreement--the
Coleman Retainer Agreement--was executed and implemented.
6
and Ex. 3).6 That Order stated (1) that the Bank’s capital was “less than the
minimum permitted” and (2) that the Bank was “operating in an unsafe and
unsound condition” and was “likely to experience a substantial dissipation of assets
or earnings that will weaken the condition of [the Bank] and will prejudice the
interests of its depositors contrary to the Savings Bank Act 205 ILCS/10001(a)(9)”
(Compl. ¶37, Ex. 3). Finally, it is undisputed that only a few months later, on
February 19, 2010, the Bank failed and FDIC-R was appointed as its receiver
(Compl. ¶38).
Application of Rule 12(c)
Section 1828(k)(3) states:
No insured depository institution . . . may prepay . . . any liability or
legal expense of any institution-affiliated party if such payment is
made–
(A)
in contemplation of the insolvency of such institution . . . 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.
It is undisputed that the Bank is an “insured depository institution,” that Weigels
and the Outside Directors are “institution-affiliated part[ies]” and that the
payments to Coleman and Flynn were in fact made. Whether the payments were
6
Ex. 3 to the original Complaint was corrected in an amendment (Dkt. No.
20). References to “Ex. 3” are to the amended version.
7
made “in contemplation of insolvency” thus becomes the primary issue.
While not given a definition in the statute itself, the phrase “in
contemplation of insolvency” was well defined by the Fifth Circuit in FDIC v.
Goldberg, 906 F.2d 1087 (5th Cir. 1990).7 Goldberg, id. at 1091 (internal citations
and quotation marks omitted, emphasis in the original) teaches:
A bank is in contemplation of insolvency when the fact becomes
reasonably apparent to its officers that the concern will presently be
unable to meet its obligations, and will be obliged to suspend its
ordinary obligations. In other words, if the officers of the bank knew,
or ought to have known that at the time of the transfers the
suspension of the regular business of the bank was imminent, the
transfers were made in contemplation of insolvency.
Given the demanding standard of review applicable to Rule 12(c) motions,
with all Complaint allegations that are denied or disclaimed treated as false
(Austad, 386 F.2d at 149) and with all reasonable inferences drawn in favor of
Coleman and Flynn, (Alexander, 994 F.2d at 336), this Court cannot find as a
matter of law that the payments were made “in contemplation of insolvency.” It
must be remembered that the necessary “contemplation” is that of the Bank (that
is, its officers and directors), and neither the Bank nor the Directors are parties to
this lawsuit. So despite the obvious and strong inferences conveyed by the timing of
events and by the language of the Advance Payment Retainer Agreements
7
Goldberg involved Section 91 of the National Bank Act (id.). Both Section
1828(k)(3) of the Federal Deposit Insurance Act and Section 91 of the National
Bank Act “contemplate[ ] ratable distribution of the assets of an insolvent bank
among its several creditors . . . ” (906 F.2d at 1094 (internal quotation marks
omitted); see also May 22, 2012 Order, Dkt No. 26 at 9).
8
themselves, at this threshold pleading stage Coleman and Flynn can effectively play
ostrich.8
That said, it is only fair to send a shot across Coleman’s and Flynn’s bows. If
when the evidence comes in it becomes clear that they have indeed played
ostrich--for example, that the Bank’s situation about which its Directors and officers
“knew or ought to have known” (see Goldberg) was conveyed to Coleman and Flynn
during the negotiation of their Agreements (as would appear to be highly
likely)--this Court would not contemplate9 joining their ostrich flock.10 Instead it
seems entirely possible that the factual development will leave no room for
reasonable inferences in favor of Coleman and Flynn. That however remains for
the future.
Conclusion
What has been said is enough to defeat FDIC-R’s motion, and it is
8
In that respect it seems quite inconceivable that responsible counsel for the Bank and
the Directors, if they were confronted by the Complaint’s allegations that have been disclaimed
by Coleman and Flynn, would feel free to interpose Rule 8(b)(5) disclaimers where Coleman and
Flynn have asserted them.
9
That locution is not accidental--it reflects the common usage and meaning of the
counterpart noun “contemplation.” In each instance the meaning, the thought being conveyed, is
that of thinking about and anticipating the prospect of insolvency (in Webster’s Third New
International Dictionary--the big one--the relevant definition of “contemplation” is “the act of
intending or considering a future event”). Though the Bank did not of course “intend” its
insolvency when it entered into the Agreements with Coleman and Flynn, it cannot be gainsaid
that it was considering that prospect when it provided the Directors with the $250,000 now in
controversy.
10
With apologies to ornithologists, who probably know the collective term for ostriches
that corresponds, for example, to a gaggle of geese, this opinion has fallen back on the generic
term “flock.”
9
unnecessary to address the other arguments raised by the parties. And because
FDIC-R has acted prematurely in seeking an early disposition under Rule 12(c), its
motion is denied and the parties are expected to go forward with discovery in the
regular course. For that purpose such matters as the possible cost to Coleman and
Flynn over and above their potential return of the $250,000 at issue here are to be
considered as part of the total picture. This action is set for a status hearing at
8:45 a.m. November 13, 2012 to discuss the course of future proceedings in the case.
________________________________________
Milton I. Shadur
Senior United States District Judge
Date: November 7, 2012
10
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