Nabil Saleh v. Federal Deposit Insurance Corporation, et al

Filing 183

MEMORANDUM Opinion and Order Signed by the Honorable John J. Tharp, Jr on 1/4/2018: For the reasons outlined in the accompanying memorandum opinion, the motions to dismiss the Second Amended Cross Complaint filed by Cross-Defendants Edward Fitzgerald 148 , Chandarakant Patel and the State Bank of Texas 145 , SmithAmundsen 156 , Wolin and Rosen 150 , and Federal Deposit Insurance Corporation 142 are granted. Cross-Defendant Hiren Patel's motion to dismiss the Second Amended Cross-Complaint 153 is granted in part and denied in part. Any Third Amended Cross Complaint is due by 2/1/2018. A status hearing is set for 2/8/2018 at 9:00 a.m. Mailed notice(air, )

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
NABIL SALEH, as Trustee of the Nabil
Saleh M.D. LTD Pension Plan,
Plaintiff,
v.
HASAN MERCHANT, et al.,
Defendants.

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No. 14-CV-09186
Judge John J. Tharp, Jr.

-----------------------------------------------------------------------------------------------------------------MUSKEGAN HOTELS LLC, M.D. 1
LLC, GLOBAL DEVELOPMENT,
INC., MD GLOBAL LLC and
MICHAEL I. MERCHANT, as
Administrator of the Estate of Hasan G.
Merchant
Cross-Plaintiffs,
v.
FEDERAL DEPOSIT INSURANCE
CORP., as Receiver for The National
Republic Bank of Chicago, THE STATE
BANK OF TEXAS, CHANDRAKANT
PATEL, ADVANCED APPRAISAL
GROUP, INC., ADVANCED
APPRAISAL CONSULTANTS, INC.,
ADVANCED APPRAISAL
CONSULTANTS, LLC, WILLIAM
DADDONO, HIREN PATEL,
EDWARD FITZGERALD, WOLIN &
ROSEN LTD. and SMITHAMUNDSEN
LLC,
Cross-Defendants.

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MEMORANDUM OPINION AND ORDER
This is a case about hotels that, as it turns out, were not such lovely places.1 After they
were sued by disgruntled underlying investors in hotel properties that they had purchased, crossplaintiffs Muskegan Hotels, LLC, M.D.1 LLC, Global Development, Inc., MD Global LLC, and
Michael I. Merchant, as administrator of the Estate of Hasan G. Merchant, filed a crosscomplaint against several financial institutions, appraisal companies, law firms, and individuals,2
alleging that cross-defendants used fraudulent appraisals to induce them to purchase hotel
properties at inflated prices that the properties could not support. According to cross-plaintiffs,
principals of the now-defunct National Republic Bank of Chicago worked with other crossdefendants to devise and participate in a widespread scheme to defraud hotel purchasers and,
after National Republic Bank went into receivership, the Federal Deposit Insurance Corporation
(FDIC). The cross-complaint alleges violations of the Racketeer Influenced and Corrupt
Organizations Act (RICO), 18 U.S.C. § 1962, as well as Illinois state law claims for fraud,
tortious interference with contract, negligence, breach of fiduciary duty, quantum meruit, and
equitable subordination. Seven cross-defendants now move to dismiss.

1

See THE EAGLES, HOTEL CALIFORNIA (Asylum Records 1977).

2

Cross-defendants are Hiren Patel and Edward Fitzgerald (former principals of National
Republic Bank of Chicago), William Daddono, Advanced Appraisal Group, Inc., Advanced
Appraisal Consultants, Inc., Advanced Appraisals Consultants, LLC, State Bank of Texas,
Chandrakant Patel (Chairman of State Bank of Texas), Wolin and Rosen Ltd., SmithAmundsen
LLC, and the Federal Deposit Insurance Corporation. The Advanced Appraisal entities have not
yet appeared in this litigation. All other defendants except Daddono now move to dismiss the
Second Amended Cross-Complaint.

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I. BACKGROUND3
A.

General Allegations

In 2003, the United States Comptroller of the Currency and National Bank Examiner
determined that National Republic Bank of Chicago (“NRB”) had an excessive outstanding
balance of loans to the hotel and motel industry. Second Amended Cross-Complaint (SACC)
¶ 16. As a result, the Treasury Department and NRB’s directors, CEO Hiren Patel and President
Edward Fitzgerald, entered into a consent decree designed to decrease NRB’s balance of
hotel/motel loans. Id. The consent decree required Hiren Patel and Fitzgerald to make capital
injections into the bank out of their own pockets if the bank did not meet certain reduction
targets. Id. ¶¶ 17-18.
Starting in 2003, NRB hired William Daddono and his companies (the Advanced
Appraisal cross-defendants) to perform appraisals of foreclosed hotel and motel properties in
NRB’s possession. According to the complaint, Daddono’s appraisal reports grossly overvalued
the properties to match a pre-arranged target valuation set by Hiren Patel and Fitzgerald. Id.
¶¶ 21-22, 42. NRB in turn used the appraisals to sell its foreclosed properties and write loan
packages to the purchasers. When many purchasers were inevitably unable to repay the inflated
loans, NRB (and its successors, as discussed below) would file foreclosure actions and make
other endeavors to collect delinquent payments.
To arrive at inflated property values, Daddono employed several questionable
methodologies, including using underlying data from properties that were not comparable to the
subject

properties,

underestimating

operating

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expenses

(including

marketing,

utility

As this is a motion to dismiss, the Court accepts all well-pleaded facts as true and
construes all inferences in favor of the plaintiff. Zemeckis v. Global Credit & Collection Corp.,
679 F.3d 632, 634 (7th Cir. 2012).

3

maintenance, and insurance expenses as well as franchise fees), overestimating income potential,
omitting key costs and required capital expenditures, and improperly adjusting sales
comparisons. Id. ¶ 25. A typical Daddono appraisal inflated the value of the property by 100%.
Id. ¶ 39. Hiren Patel and Fitzgerald would then meet prospective purchasers of a hotel property,
tell them that Daddono’s appraisal was “good,” and instruct the purchaser to sign documents
purchasing the property using loans from NRB. Id. ¶¶ 28-30.
NRB eventually failed, and in October 2014, it was liquidated by the FDIC. Non-party
TPG Capital purchased and accepted assignments of NRB’s non-performing loans, which had a
face value of $600 million. The State Bank of Texas purchased and accepted assignments of
NRB’s performing loans, with a face value of $300 million. Id. ¶¶ 36-37. According to the
complaint, Hiren Patel and Fitzgerald planned to continue defrauding hotel purchasers through
the assignment of loans to State Bank of Texas and various TPG Capital entities. Id. ¶¶ 43-44.
From 2006 to 2017, Hiren Patel and Fitzgerald “had contacts and communications” with TPG
Capital entities and officers and with Chandrakant Patel of the State Bank of Texas “to arrange
continuation of the fraud scheme and profit-sharing among members” and “to arrange the
transfer of illegal profits and revenue after [NRB] failed.” Id. From 2014 to 2017, State Bank of
Texas executed security agreements with lenders pledging the acquired NRB accounts as
collateral, but failed to disclose to the lenders that the NRB loans were obtained by fraud. Id. ¶
77. State Bank of Texas and the TPG Capital entities also filed numerous collection lawsuits
based on the fraudulent loans, and State Bank of Texas transmitted false account statements and
payment demands as part of its collection efforts. Id. ¶¶ 81, 89, 91, 92. State Bank of Texas, TPG
Capital, and TPG’s servicer, Capital Crossing, used Daddono’s fraudulent appraisals in their
collection efforts, arranged new and modified loan packages based on the fraudulent appraisals,

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seized commercial properties based on a borrower’s failure to repay the fraudulently inflated
loans, and supervised the successful underwriting of commercial loans based on the false
appraisals. Id. ¶ 92. State Bank of Texas, TPG Capital, and Capital Crossing also failed to report
the false appraisal scheme to U.S. Treasury Department regulators, and maintained an off-thebooks fund from which illegal payments to Daddono were made. Id. ¶ 103.
Two law firms, Wolin and Rosen and SmithAmundsen, were hired to assist with the
scheme. Wolin and Rosen and SmithAmundsen sent demand letters to entities who had taken out
loans from NRB based on Daddono’s fraudulent appraisals. They also filed thousands of
collection lawsuits in order to secure payment on the fraudulent loans. Id. ¶¶ 104-110.
B.

Cross-Plaintiff Specific Allegations

Although the complaint alleges that fraud by the cross-defendants was pervasive, the
allegations focus on three particular transactions. In 2006, Hiren Patel and NRB sent Muskegan
Hotels and Hasan Merchant a fraudulently inflated appraisal of a hotel property in Benton
Harbor, Michigan that listed the property’s value at $2.34 million. In reality, the property was
worth only $1.1 million. Id. ¶¶ 62-63. Muskegan Hotels and Merchant relied on the false
appraisal in purchasing the Benton Harbor property for $2 million. Id. ¶ 63. Similarly, the
complaint alleges that in 2007, Hiren Patel NRB presented Muskegan Hotels LLC and Hasan
Merchant with fraudulent appraisals performed by Daddono of hotel properties at 3380 and 3450
Hoyt Street in Muskegon, Michigan. Id. ¶ 55. The appraisals noted that the 3380 Hoyt property
was worth $1.45 million, and the 3450 Hoyt property was worth $11 million. In reality, the 3380
Hoyt property was worth $800,000 and the 3450 Hoyt property was worth $500,000. Muskegan
Hotels and Merchant relied on the fraudulent appraisals to purchase the properties for $1,417,500
and $1,067,500, respectively. Id. ¶¶ 52-58. Merchant and Muskegan Hotels discovered the fraud

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when Vimeshkumar N. Patel, a former friend of Hiren Patel, revealed that NRB had been under
government pressure for years to rid itself of non-performing hotel loans and that NRB had been
making secret payments to customers to hide foreclosed hotels from regulators. Id. ¶ 71.
C.

Procedural History

In 2010, Nabil Saleh, an investor in the hotel properties purchased by cross-plaintiffs,
filed suit against Hasan Merchant and fifteen other defendants, including Muskegan Hotels LLC,
M.D. 1 LLC, MD Global LLC, Global Development LLC, and NRB, alleging a scheme to
defraud investors in the hotel properties. See Dkt. 1-4. Most of the defendants named by Saleh—
including every current cross-plaintiff—filed cross-claims against NRB alleging fraud, tortious
interference with contract, unjust enrichment, and quantum meruit claims. See Dkt. 1-6. In late
2014, NRB failed and the FDIC took NRB into receivership. The FDIC removed the case to
federal court pursuant to 12 U.S.C. § 1819(b)(2), after which the current cross-plaintiffs filed a
new cross-complaint alleging three claims under the Racketeer Influenced and Corrupt
Organizations Act (RICO), 18 U.S.C. § 1962, in addition to their Illinois state law claims. See
Dkt. 14. The case was then stayed for several months while cross-plaintiffs pursued their claims
through the FDIC’s administrative process, which resulted in a denial of all claims. See Dkt. 2627. In May 2017, cross-plaintiffs filed a Second Amended Cross-Complaint, the subject of the
instant motions to dismiss, alleging quantum meruit claims against all counter-defendants, RICO,
fraud, and tortious interference with contract claims against all counter-defendants except the
FDIC, negligence and breach of fiduciary duty claims against Hiren Patel and Edward
Fitzgerald, and an equitable subordination claim against the FDIC. See Dkt. 127. With the

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exception of Daddono (who is presently incarcerated, a prisoner of his own device4) and the
Advanced Appraisal entities (who have not yet appeared), each cross-defendant now moves to
dismiss the claims against them.5
II. DISCUSSION
A.

Statute of Limitations

As a preliminary matter, several cross-defendants argue that all of cross-plaintiffs’ claims
are time-barred, citing to a representation made by Hasan Merchant in an affidavit earlier in this
litigation noting that Merchant learned that his properties were improperly appraised from a

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Daddano pled guilty to federal tax evasion in 2016 and was sentenced to 30 months of
imprisonment, which he will begin serving when he completes two consecutive six year state
court sentences he received following a convictions for aggravated DUI in Illinois and another
consecutive six month sentence for a similar offense in Wisconsin. See United States v.
Daddono, No. 15 CR 176 (N.D. Ill.), Updated Presentence Investigation Report, ECF 41, at ¶¶
41-43; Amended Plea Agreement, ECF No. 44 (Aug. 8, 2016), at ¶¶ 6, 9.c.iv - vi; Sentencing
Order, ECF No. 54.
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In view of its conclusion that the SACC fails to adequately allege violations of RICO,
and that the equitable subordination count against the FDIC should be dismissed, the court has
considered whether it is appropriate to address the remaining state law claims against the cross
defendants. At a minimum, this court has supplemental jurisdiction over those claims pursuant to
28 U.S.C. § 1367, and the court concludes that in light of the age and complexity of this
litigation, and the interrelationship between the RICO and state law theories, and the possibility
that the cross plaintiffs will replead their RICO claims, it is appropriate to exercise its
supplemental jurisdiction with respect to the state law claims. See Patel v. Wagha, 866 F.3d 846,
847 (7th Cir. 2017). Further, the court’s jurisdiction over this suit derives from 12 U.S.C. §
1819(b)(2)(A), which states in relevant part that “all suits of a civil nature at common law or in
equity to which the Corporation, in any capacity, is a party shall be deemed to arise under the
laws of the United States.” Most circuit courts construing this language have concluded that it
provides original jurisdiction to federal courts over any claims asserted in a suit to which the
FDIC is, or was, a party, whether or not those claims would otherwise be sufficient to confer
jurisdiction on the court. See Lindley v. FDIC, 733 F.3d 1043, 1055-59 (11th Cir. 2013) (citing
cases and holding that “when the FDIC is a party to a civil suit and removes that case to federal
court, the District Court has original jurisdiction over claims against non-FDIC defendants, and
this jurisdiction is not lost if the FDIC is later dismissed from the case”). If that is correct, this
court has original jurisdiction over the remaining state law claims and lacks the discretion not to
decide them. See id. (reversing district court’s dismissal of state law claims, which was based on
court’s assumption that jurisdiction over those claims was based on 28 U.S.C. § 1367 rather than
on 12 U.S.C. § 1819(b)(2)).

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subsequent appraisal dated April 28, 2009, almost six years before Merchant filed the initial
cross-complaint in this case (on March 24, 2015). See Declaration of Hasan Merchant ¶ 31, Dkt.
117-11. Because the statute of limitations is an affirmative defense, however, the court may only
dismiss a claim at the pleadings stage on statute of limitations grounds if “the allegations of the
complaint itself set forth everything necessary” to conclude that the claim is time-barred.
Chicago Bldg. Design, P.C. v. Mongolian House, Inc., 770 F.3d 610, 613-14 (7th Cir. 2014). If
Merchant knew of the fraudulent appraisal in April 2009, the statute of limitations might indeed
pose a problem, but the affidavit referenced by cross-defendants merely notes that the appraisal
at issue—which was not conducted concomitant to a transaction cross-plaintiffs were involved
in, but instead concerned a subsequent transaction involving the same properties—was dated
April 28, 2009; it does not indicate that Merchant, or any other cross-plaintiff, received or would
have had any reason to receive the appraisal on that day. Because it is not clear at what point
Merchant learned of the fraudulent April 2009 appraisal, the court cannot conclude, at this stage,
that cross-plaintiffs’ claims are “indisputably time-barred.” Small v. Chao, 398 F.3d 894, 898
(7th Cir. 2005).
Wolin and Rosen also argues that Illinois’ six-year statute of repose for claims arising out
of an act or omission in the performance of legal services, 735 ILCS 5/13-214.3(c), bars crossplaintiffs’ claims against it. In Wolin and Rosen’s view, because the allegedly fraudulent
appraisals were conducted over six years before cross-plaintiffs filed their first complaint, crossplaintiffs’ claims against it should be dismissed. The problem with this argument is that crossplaintiffs’ claims are based not only on the initial appraisals, but also on subsequent—and
undated—enforcement and collection actions allegedly taken by Wolin and Rosen. Once more,

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the court cannot conclude from the pleadings that cross-plaintiffs’ claims against Wolin and
Rosen are indisputably time-barred.
B.

RICO Claims

Cross-plaintiffs assert that each cross defendant (except the FDIC) violated the RICO
statute in three ways. They first allege that the defendants violated 18 U.S.C. § 1962(c), which
makes it “unlawful for any person employed by or associated with any enterprise engaged in, or
the activities of which affect, interstate or foreign commerce, to conduct or participate, directly
or indirectly, in the conduct of such enterprise’s affairs through a pattern of racketeering
activity.” 18 U.S.C. § 1962(c). Cross-plaintiffs also contend that the cross defendants reinvested
funds obtained by the enterprise into the enterprise, in violation of 18 U.S.C. § 1962(a). They
also charge that all of the cross defendants conspired together to pursue the alleged scheme,
violating 18 U.S.C. § 1962(d). A violation of 18 U.S.C. § 1962(d) is contingent on an agreement
to “participate in an endeavor which, if completed, would satisfy all of the elements of a
substantive violation of the substantive [RICO] statute.” Goren v. New Vision Int’l, Inc., 156
F.3d 721, 732 (7th Cir. 1998).
To state a RICO claim, a plaintiff must (among other things) identify an “enterprise.”
United Food and Comm. Workers Unions and Employers Midwest Health Benefits Fund v.
Walgreen Co., 719 F.3d 849, 853 (7th Cir. 2013). An “enterprise” includes “any individual,
partnership, corporation, association, or other legal entity, and any union or group of individuals
associated in fact although not a legal entity,” and is broadly defined. Id. (citing Boyle v. United
States, 553 U.S. 938, 944 (2009)). The type of enterprise alleged by cross-plaintiffs, an
“association-in-fact,” does not “require any structural features beyond ‘a purpose, relationships
among those associated with the enterprise, and longevity sufficient to permit these associates to

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pursue the enterprise’s purposes.’” Bible v. United Student Aid Funds, 799 F.3d 633, 655 (7th
Cir. 2015) (quoting Boyle, 556 U.S. at 946). “Despite the expansive nature of this definition, it is
not limitless.” Walgreen, 719 F.3d at 853. And critically, § 1962(c) also requires plaintiffs to
identify a “person” that is distinct from the RICO enterprise, and that “person” must have
“conducted or participated in the enterprise’s affairs, not just its own affairs.” Id. at 854. Where,
as here, the plaintiffs allege that the RICO enterprise was an association-in-fact among various
businesses and individuals, it is not enough to allege that a defendant was part of the enterprise;
they must plausibly allege that a defendant conducted the affairs of the enterprise, not just its
own. Jay E. Hayden Foundation v. First Neighbor Bank, N.A., 610 F.l3d 382, 389 (7th Cir.
2010) (affirming dismissal of RICO complaint because “defendants did not use the conspiracy
(the enterprise); they were the conspiracy.”).
As set forth in the cross complaint, the defendants each participated in a scheme to profit
by continuously defrauding hotel purchasers using Daddono’s appraisals and taking aggressive
collection actions when the hotels inevitably could not sustain the loans used to purchase them.
The parties debate whether the complaint adequately alleges the prerequisites to a RICO
association-in-fact enterprise, but for purposes of this opinion the court will assume that it does.
The principal problem with the cross-plaintiffs’ invocation of RICO is not that they have failed
to allege that the putative association-in-fact enterprise did not have a purpose, or that there were
no relationships among the component entities of the enterprise, or that the alleged conduct did
not continue for a sufficient period to support a contention that it was engaged in a pattern of
racketeering activity. Id. at 388-89. The principal problem is that the allegations of the complaint
fail to plausibly allege that the cross defendants were conducting the affairs of this alleged
enterprise rather than simply pursuing their own individual affairs and interests. That is, it fails to

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allege facts sufficient to permit a plausible inference that the cross defendants used the enterprise
itself to carry out the object of their alleged scheme. Id. at 389.
Cross-plaintiffs maintain that the interactions between cross-defendants and other entities
and individuals since 2003 establish that the cross-defendants were working jointly together to
carry out the purpose of the alleged association-in-fact enterprise. As the cross-plaintiffs frame it
in the complaint, the alleged enterprise had multiple “tiers,” or participants, each of which was
critical to the success of the overall scheme. The first such tier, the complaint alleges, involved
Hiren Patel, Edward Fitzgerald, NRB, and Daddono and the Advanced Appraisal entities, who
allegedly joined forces to defraud hotel and motel purchasers. The second involved State Bank of
Texas, Chandrakant Patel, and non-parties TPG Capital, and Capital Crossing, who purchased
NRB’s loans after NRB failed. The third tier of the enterprise included Wolin and Rosen and
SmithAmundsen, who were hired to collect outstanding payments on the allegedly fraudulent
loans and whole filed thousands of lawsuits in support of that effort. But even assuming that the
interactions ascribed to the participants in each of these so-called “tiers” were as alleged, they do
not suffice to plausibly infer that the participants were seeking to use and promote a distinct
enterprise with its own objectives, as opposed to simply conducting their own affairs and
pursuing their own individual interests (whether legitimate or illegitimate).
1.

NRB and Daddono

The allegations pertaining to Daddono in the complaint are essentially that NRB
repeatedly paid Daddono excessive rates, and in exchange, Daddono delivered appraisals valuing
the properties in question at an inflated rate pre-determined by NRB. These allegations are
insufficient to establish that NRB and Daddono conducted the affairs of an association-in-fact
enterprise. In Walgreen, the Seventh Circuit considered a relationship between Walgreens and

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Par Pharmaceuticals, in which Par persuaded Walgreens to systematically fill certain
prescriptions with the most expensive form of the prescribed drug (capsules or tablets, depending
on the drug), even if the prescription called for the less expensive form. Notwithstanding
extensive communication between Walgreens and Par—which were alleged to include
presentations by Par highlighting the millions of dollars of profits to be earned by engaging in
the prescription-switching scheme—the court of appeals concluded that the complaint failed to
plausibly allege “that Walgreens and Par were conducting the affairs of this [alleged enterprise],
as opposed to their own affairs.” Because the complaint did not allege that “officials from either
company involved themselves in the affairs of the other” and because “nothing in the complaint
reveal[ed] how one might infer that [Par and Walgreens’s] communications or actions were
undertaken on behalf of the enterprise as opposed to on behalf of Walgreens and Par in their
individual capacities,” the court concluded that the complaint failed to adequately allege that Par
and Walgreens engaged in conduct that used or promoted the alleged enterprise rather than
merely alleging conduct that was entirely consistent with the individual interests of each actor
rather than the interests of a distinct entity—the enterprise. See also, e.g., Jay E. Hayden
Foundation, 610 F.3d at 389 (holding that, while plaintiffs had adequately alleged a RICO
enterprise comprised of an attorney-executor, a bank, two law firms and various principals of
those entities, they had failed to allege that in defrauding the plaintiffs the defendants had
conducted or participated in the affairs of the alleged enterprise rather than simply pursuing their
own affairs).
So too here. There are no indications that Daddono conducted the affairs of NRB or vice
versa; instead, the allegations are merely that NRB paid Daddono to perform an illegal service.
True, one can infer from the complaint, based on the repeated nature of the behavior described,

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that Daddono knew that NRB was using the false appraisals to defraud hotel purchasers and
continued to supply false appraisals nonetheless. Daddono, therefore, had a shared purpose to
continue the fraud scheme because he would continue to be paid for appraisals as long as it was
active. The problem for cross-plaintiffs, however, is that this was precisely the nature of the
relationship at issue in Walgreen: it was alleged there that Par induced Walgreens to implement a
system that would defraud customers, insurance companies, and the government, and then
continuously sold products integral to the fraud to Walgreens. Like Daddono here, Par was
alleged to have an incentive to continue enabling Walgreens’ fraud by continuing to sell
Walgreens the necessary drugs, and did just that. But as the Seventh Circuit explained, that
amounted to nothing more than the “sheer possibility” that Walgreens and Par “were acting in
concert on behalf of a shadow enterprise while maintaining the outward appearance of a normal
commercial relationship.” Walgreen, 719 F.3d at 855. Par allegedly sold drugs it knew was being
used to perpetrate a fraud; Daddono is alleged to have sold appraisals for much the same reason.
If Par did not conduct the affairs of an association in fact, neither did Daddono.
That Daddono’s conduct was likely unlawful or tortious does not matter. The Walgreen
court considered the possibility that Par’s conduct was independently tortious, and noted that “[a]
corporation, after all, is perfectly capable of breaking the law on its own behalf. . . . RICO does
not penalize parallel, uncoordinated fraud.” Id. Cross-plaintiffs “cannot bootstrap [their]
allegations of illegal conduct into allegations that [cross-defendants] conducted the affairs of an
enterprise by asking [the court] to infer that because the activities were illegal, they therefore
must also have been coordinated activity undertaken on behalf of” a separate enterprise. Id.
Moreover, for an entity to be part of an enterprise, the entity must have “participated in the
operation or management of the enterprise” and “played some part in directing the enterprise’s

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affairs.” Goren, 156 F.3d at 728. “[M]ere participation in the activities of the enterprise is
insufficient.” Id. The complaint contains no allegations that Daddono or his companies directed
any activity; they were simply paid for a service—albeit one that was allegedly tortious—and
provided that service. Those allegations undermine, rather than support, an inference that the
relationship between NRB and its directors and Daddono and his companies constituted an
association-in-fact.
Nor is it of any moment that Daddono produced appraisals according to NRB’s
instructions. Bachman v. Bear, Stearns & Co., 178 F.3d 930 (7th Cir. 1999) is instructive on this
point. There, Bear Stearns was hired by a company to determine the fair market value of a
former employee’s stock in the company, which the company was entitled to buy back from the
employee after he was terminated. Id. at 931. The company allegedly directed Bear Stearns to
fraudulently undervalue the employee’s stock, and Bear Stearns complied, intentionally
misrepresenting the stock’s value numerous times, over the course of several years, in 66 mail or
wire communications. The Seventh Circuit determined that Bear Stearns “cannot be thought to
have been conducting, or to have agreed to conduct, the affairs” of an enterprise because Bear
Stearns did not “exercise . . . at least some measure of control” over the other entities involved in
the alleged enterprise. Id. at 932. Daddono’s conduct here was virtually identical to that of Bear
Stearns: he intentionally and repeatedly produced false appraisals at the instruction of another
party. Under Bachman, without more, there is no association in fact.
The Bachman court ultimately concluded that Bear Stearns “was merely a hireling, as is
shown by the fact that the only fee it received was its normal fee for determining a client’s fair
market value.” Id. at 933. True, here, the complaint alleges that Daddono received excessive pay
in exchange for the fraudulent appraisals. But the allegations here, that Daddono was paid

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excessive fees in exchange for his services, do not cure the central deficiency identified in
Bachman: there were no allegations that Bear Stearns ever exerted any degree of control over an
entity other than itself. Like Bear Stearns, Daddono was a mere hireling of NRB. And the
relationship between an entity and its hireling does not create an association-in-fact.6
Finally, it is worth noting that cross-plaintiffs have alleged an association-in-fact
consisting of myriad individuals and entities. They have not alleged or argued that NRB alone
was the RICO enterprise, and that the other entities, including Daddono, conspired together to
use NRB to perpetrate a fraud in a way that would render the other entities liable under
18 U.S.C. § 1962(d). Because that scenario has not been alleged, the court need not consider it.
What has been alleged is that NRB, its officers, and Daddono comprised the principal “tier” of
an association-in-fact enterprise, but there are no allegations that permit a plausible inference
that, in carrying out the alleged scheme to profit from fraudulent appraisals, those cross
defendants were conducting the affairs of a distinct enterprise rather than pursuing their own
individual interests and objectives.
2.

State Bank of Texas, TPG Capital, and Capital Crossing

The allegations concerning the relationship and interactions between State Bank of
Texas, TPG Capital, and Capital Crossing on the one hand, and NRB on the other, come closer
to the mark, but are also wanting. State Bank of Texas and Chan Patel argue that SBT acted
independently from NRB, as any typical bank or lender would: it purchased, made, serviced, and
collected loans, and therefore engaged in typical commercial activity. But that is not quite the
case. The complaint contains two allegations that suggest that SBT, TPG, and Capital Crossing

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Nor can NRB, Hiren Patel, and Fitzgerald form an enterprise, as “an employer and its
employees cannot constitute a RICO enterprise.” Fitzgerald v. Chrysler Corp., 116 F.3d 225,
226 (7th Cir. 1997).

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managed an enterprise including NRB, Fitzgerald, and Hiren Patel. First, the complaint notes
that Hiren Patel and Fitzgerald “had contacts and communications” with SBT, TPG, Capital
Crossing, and their employees “to arrange the continuation of the fraud scheme and profitsharing among members,” and “to arrange the transfer of illegal profits and revenue after the
bank failed.” SAC ¶ 43. Second, the complaint alleges that SBT, TPG, and Capital Crossing
“agreed to keep track of the extra costs that cannot be carried on the books, such as extra
compensation to William Daddono and his appraisers to produce new false appraisals, [and]
excessive compensation to the attorneys for preparation of the fraudulent loan documents.” Id. ¶
103.
These allegations—which are the only allegations in the complaint describing
interactions between SBT, TPG Capital, or Capital Crossing and NRB or its employees for the
purposes of defrauding hotel purchasers—are, however, insufficient to establish the existence of
a RICO enterprise. As an initial matter, the allegations that SBT, TPG, and Capital Crossing
“had contacts and communications . . . to arrange the continuation of the fraud scheme and . . . to
arrange the transfer of illegal profits and revenue” amount to little more than boilerplate
allegations of an enterprise, adding virtually no factual support to the complaint. See Goren, 156
F.3d at 727 (“It is not enough, however, for a plaintiff simply to allege [RICO] elements in
boilerplate fashion; instead, she must allege sufficient facts to support each element.”). The
complaint provides no detail concerning which individuals participated in those communications,
what the substance of those communications was, and when and where those communications
took place. In essence, the allegations are the rough equivalent of a pleading indicating that SBT,
TPG, and Capital Crossing “directed the enterprise’s affairs by continuing the fraud scheme and
profiting.” Such a bare bones pleading does not suffice, even under the less restrictive confines

16

of Rule 8, much less the heightened requirements for pleading fraud under Rule 9(b)—and the
allegations of the RICO counts, predicated on alleged mail and wire fraud schemes, plainly
sound in fraud. See Sabrina Roppo v. Travelers Commercial Ins. Co., 869 F.3d 568, 592 (7th Cir.
2017) (“Allegations of fraud in a RICO complaint are subject to the heightened pleading
requirements of Federal Rule of Civil Procedure 9(b). A RICO plaintiff must, at a minimum,
describe the predicate acts of fraud with some specificity and state the time, place, and content of
the alleged communications perpetrating the fraud.”) (internal citations and quotation marks
omitted).
Nor are the allegations that SBT, TPG, and Capital Crossing “agreed to keep track of the
extra costs that [could not] be carried on the books” sufficient to plead a RICO enterprise. First,
the complaint does not indicate with whom SBT, TPG, and Capital Crossing agreed to keep track
of the extra costs required to pay Daddono and others, or when such agreement occurred. The
complaint contains no facts from which it can be inferred that SBT, TPG, and Capital Crossing
worked with NRB to make excessive payments to Daddono and others. This is especially true in
light of the complaint’s allegations that SBT, TPG, and Capital Crossing “obtained fraudulent
appraisals” from Daddono and “arrang[ed] the writing of new loan packages” based on
Daddono’s fraudulent appraisals. SAC ¶ 92. Were SBT, TPG, and Capital Crossing keeping
track of payments to Daddono on NRB’s behalf, or were they separately tracking payments to
Daddono because they were also using his fraudulent appraisals in support of new loans and their
collection efforts? The complaint fails to answer that question because, as previously noted, the
complaint only speaks of SBT, TPG, and Capital Crossing’s communications with NRB, Hiren

17

Patel, and Fitzgerald in boilerplate fashion.7 While the former answer is possible, the complaint
simply lacks allegations that permit an inference that make it plausible to infer that these cross
defendants were promoting and conducting an enterprise distinct from their own businesses.
Moreover, even assuming that SBT, TPG, and Capital Crossing agreed to make payments
to Daddono on NRB’s behalf, there are still no allegations in the complaint permitting the
inference that SBT, TPG, and Capital Crossing exercised “at least some measure of control” over
NRB. Bachman, 178 F.3d at 932. Once again, merely participating in a fraud cannot be equated
with being a member of a RICO enterprise. The latter requires that SBT, TPG, and Capital
Crossing have “played some part in directing the enterprise’s affairs.” Goren, 156 F.3d at 728.
The complaint is devoid of such allegations. Without any substantive factual allegations
establishing how SBT, TPG, and Capital Crossing colluded with NRB, Hiren Patel, and
Fitzgerald, all the court is left with is a parallel fraud precisely like that alleged in Walgreen:
SBT, TPG, and Capital Crossing merely engaged in standard—albeit fraudulent—banking
activities, seeking to profit off of NRB and Daddono’s fraud by developing new loan packages
and initiating collection actions. But absent more robust factual allegations tethering SBT, TPG,
and Capital Crossing to NRB and its employees, the court cannot conclude that those entities
conducted the affairs of a RICO enterprise.
3.

SmithAmundsen and Wolin and Rosen

Finally, there are no allegations that SmithAmundsen or Wolin and Rosen ever directed
an enterprise’s activities. The allegations against SmithAmundsen and Wolin and Rosen are

7

Further, the complaint contains no allegations that SBT ever colluded with TPG or
Capital Crossing after SBT and TPG purchased NRB’s assets; it alleges only that SBT, TPG, and
Capital Crossing engaged in the parallel behaviors calculated to defraud borrowers. The court
need not assess whether TPG and Capital Crossing separately formed a RICO enterprise because
they are not named as cross-defendants.

18

simply that they performed routine legal services—including preparing loan documents and
initiating collection actions against borrowers—knowing that the loans were based on fraudulent
appraisals. There are no allegations, however, that either SmithAmundsen or Wolin and Rosen
were anything more than hirelings paid to perform legal work on behalf of NRB, STB, TPG, or
Capital Crossing. The allegations, therefore, fail to state a RICO claim against the law firms. See
Guaranteed Rate, Inc. v. Barr, 912 F. Supp. 2d at 688 (N.D. Ill. 2012) (holding that an attorney
whose “role in the alleged enterprise was to . . . perform[] the services of a closing attorney on
behalf of the seller [of a property]” was a “mere hireling” who did not “direct[], control[], or
conduct[] any aspect of the alleged enterprise”).
In short, the complaint is wholly devoid of allegations that any of the cross defendants
were conducting the affairs of the alleged association-in-fact enterprise rather than pursuing their
own affairs. As such, the allegations fall short of plausibly establishing liability under either
§ 1962(a), (c), or (d). Both subsections (a) and (c) require evidence that defendants conducted the
affairs of an enterprise, see RJR Nabisco, Inc. v. European Community, 136 S. Ct. 2090, 2105
(2016), and just as there are no allegations that the cross defendants conducted the affairs of the
alleged association-in-fact enterprise, there are no allegations that they agreed to do so. See
Walgreen, 719 F.3d at 856-57 (failure to allege that defendants conducted the affairs of an
enterprise also fatal to RICO conspiracy claim in absence of allegations that defendants agreed to
do so). Accordingly, the RICO counts are dismissed without prejudice.
C.

Fraud

With the exception of Hiren Patel, each defendant argues that cross-plaintiffs have failed
to substantively state a claim for fraud. Under Illinois law, the elements of a fraudulent
misrepresentation claim are: (1) a false statement of material fact; (2) known or believed to be

19

false by the party making it; (3) intent to induce the other party to act; (4) action by the other
party in reliance on the truth of the statement; and (5) damage to the other party resulting from
that reliance. Wigod v. Wells Fargo Bank, N.A., 673 F.3d 547, 569 (7th Cir. 2012).
With the exception of Hiren Patel, cross-plaintiffs do not allege that any of the crossdefendants at issue made any representations to them. The allegations specific to cross-plaintiffs
repeatedly note that NRB and Hiren Patel presented cross-plaintiffs with Daddono’s fraudulent
appraisals for three properties, and that cross-plaintiffs relied on those appraisals in purchasing
the properties. SACC ¶¶ 54-66. The cross-plaintiff-specific allegations never, however, mention
Fitzgerald, SBT, Chandrakant Patel, SmithAmundsen, or Wolin and Rosen. Nor are general
allegations that these cross-defendants conspired with Hiren Patel and NRB to defraud crossplaintiffs adequate. Federal Rule of Civil Procedure 9 requires fraud to be pled with particularity,
i.e., cross-plaintiffs must plead the “who, what, when, where, and how” of the alleged fraud.
Wigod, 673 F.3d at 569. Cross-plaintiffs have not pled any facts indicating that Fitzgerald, SBT,
Chandrakant Patel, SmithAmundsen, or Wolin and Rosen ever communicated with NRB or
Hiren Patel about the appraisals they specifically relied upon, or about the sale of hotel properties
to cross-plaintiffs. Instead, cross-plaintiffs provide only general allegations of a conspiracy that
fail to reveal the what, when, where, or why of any communications related to cross-plaintiffs.
The fraud claims against Fitzgerald, SBT, Chandrakant Patel, SmithAmundsen, and Wolin and
Rosen are therefore also dismissed without prejudice.
D.

Breach of Fiduciary Duty

Next, Hiren Patel and Edward Fitzgerald move to dismiss cross-plaintiffs’ breach of
fiduciary duty claims against them. To state a breach of fiduciary duty claim under Illinois law, a
plaintiff must allege that (1) a fiduciary duty exists; (2) the fiduciary duty was breached; and (3)

20

the breach proximately caused the injury of which the plaintiff complains. nClosures Inc. v.
Block and Co., Inc., 770 F.3d 598, 603 (7th Cir. 2014). “A fiduciary duty may be established
through relationships such as partnerships and joint ventures, as well as special relationships.” Id.
The typical relationship between a lender and a borrower does not create a fiduciary duty.
Singletary v. Continental Ill. Nat. Bank and Trust Co. of Chicago, 9 F.3d 1236, 1241 (7th Cir.
1993) (under Illinois law, “a lender is not his borrower’s fiduciary.”). Consequently, to the extent
cross-plaintiffs maintain their breach of fiduciary duty claims based on their lender-borrower
relationship between Hiren Patel and Edward Fitzgerald, their claims must be dismissed.
Cross-plaintiffs argue that Hiren Patel and Fitzgerald owed them duties not as their
lender, but as their escrowee with regard to the hotel transactions. Under Illinois law, an
escrowee “owes a fiduciary duty to act only in accordance with the terms of the escrow
instructions.” Freedom Mortgage Corp. v. Burnham Mortgage Corp., 720 F. Supp. 2d 978, 99798 (N.D. Ill. 2010). In cross-plaintiffs’ view, because NRB transferred funds from the closing
escrow account for the three properties in question and the underlying property sales were based
on fraudulent appraisals, they have stated a claim against Hiren Patel and Fitzgerald for breach of
fiduciary duty. As an initial matter, however, there are no allegations that Edward Fitzgerald had
anything to do with cross-plaintiffs’ hotel purchases; the complaint alleges only that Hiren Patel
and NRB transferred down payment money out of the closing escrow accounts. SACC ¶¶ 57, 61,
66. As for Hiren Patel, “[a]ny duty owed to [cross-plaintiffs] in [his] capacity as closing agent[]
must derive from the closing instructions, and not generally from law and industry standards.”
Freedom Mortgage, 720 F. Supp. 2d at 991 (quoting Bescor, Inc v. Chicago Title & Trust Co.,
113 Ill. App. 3d 65, 69, 446 N.E.2d 1209, 1213 (Ill. App. Ct. 1983)). The complaint does not
allege any facts concerning closing instructions for the hotel transactions at issue, nor does it

21

explain how Hiren Patel breached any closing instructions. Cross-plaintiffs’ breach of fiduciary
duty claims are therefore dismissed without prejudice.
E.

Negligence

Hiren Patel and Fitzgerald also move to dismiss cross-plaintiffs’ negligence claims,
arguing that they are barred by Illinois’ Moorman doctrine, which holds that a plaintiff may not
recover in tort for solely economic losses. See generally Moorman Mfg. Co. v. National Tank
Co., 91 Ill.2d 69, 435 N.E.2d 443 (Ill. 1982). Under the Moorman rule, an entity may not recover
on a negligence theory for “injuries suffered as a result of disappointed commercial
expectations.” Waldinger Corp v. CRS Group Engineers, Inc., 775 F.2d 781 (7th Cir. 1985).
Cross-plaintiffs assert that the Moorman rule does not apply because, in addition to economic
damages, they are also seeking compensation for mental stress, psychological damage,
degradation, humiliation, embarrassment, and anxiety. Although cross-plaintiffs are correct that
emotional distress damages are noneconomic, Illinois prohibits direct victims of alleged
negligence—or the entity that was directly affected by the alleged negligence—from recovering
for emotional distress absent a contemporaneous physical injury. See Hart v. Amazon.com, Inc.,
191 F. Supp. 3d 809, 821-22 (N.D. Ill. 2016) (citing Lewis v. CITGO Petroleum Corp., 561 F.3d
698, 703 (7th Cir. 2009)). Cross-plaintiffs allege that they were the direct victims of Hiren
Patel’s and Fitzgerald’s negligence, but fail to allege any physical injury. See id. (holding that
allegations of sleep disruption, mental anguish, depression, and anxiety are insufficient to
establish a physical injury).8 Consequently, their negligence claims against Hiren Patel and
Fitzgerald are dismissed with prejudice.

8

There is an “information provider” exception to the Moorman doctrine that permits tort
recovery for economic damages where a defendant whose job is to provide information to
another—like an appraiser—intentionally or negligently provides false information. See First
22

F.

Tortious Interference with Contract

All cross-defendants (except the FDIC, which was not named in this count) maintain that
cross-plaintiffs have failed to state a viable claim based on tortious interference with contract.
Under Illinois law, to state a claim for tortious interference with contract, cross-plaintiffs must
allege: (1) the existence of a valid and enforceable contract between the plaintiff and another; (2)
the defendant’s awareness of this contractual relation; (3) the defendant’s intentional and
unjustified inducement of a breach of the contract; (4) a subsequent breach by the other, caused
by the defendant’s wrongful conduct; and (5) damages. Healy v. Metropolitan Pier and
Exposition Authority, 804 F.3d 836, 841-42 (7th Cir. 2015). Cross-defendants argue that the
complaint does not identify the terms of any contract or include any facts indicating how a
contract was breached. Cross-plaintiffs respond by pointing to paragraphs in the complaint that
indicate that they had a “reasonable expectation of capital returns, income, dividends, equity
increases, increases in value of shares, and other pecuniary gains” from operating and
shareholder agreements pertaining to their hotel purchases. SACC Ct. 7 ¶¶ 4-5. But these
paragraphs merely note that cross-plaintiffs expected to profit from these contracts and failed to
do so. Cross-defendants are correct that the complaint fails to identify any terms of the operating
and shareholder agreements, and therefore also fails to identify who breached the terms of the
agreements and how they did so. Indeed, the complaint fails to even identify who the parties to
the operating and shareholder agreements were. The failure to identify a breach requires
dismissal, without prejudice, of cross-plaintiffs’ tortious interference with contract count. See,
e.g., Cromeens, Holloman, Sibert, Inc. v. AB Vovo, 349 F.3d 376, 398 (7th Cir. 2003) (rejecting a

Midwest Bank, N.A. v. Stewart Title Guar. Co., 218 Ill.2d 326, 335-36, 843 N.E.2d 327, 332-33
(Ill. 2006). Cross-plaintiffs have not argued, however, and it would not appear in any event, that
this exception applies to Hiren Patel or Fitzgerald.

23

tortious interference with contract claim where the plaintiffs had “not presented any evidence
that [any entity] breached already-existing agreements because of [the defendant’s] conduct”).
G.

Quantum Meruit

All cross-defendants also move to dismiss cross-plaintiffs’ quantum meruit count. Under
Illinois law, “[t]he elements of quantum meruit liability . . . are the performance of services by
the plaintiff, the receipt of the benefit of those services by the defendant, and the unjustness of
the defendant’s retention of that benefit without compensating the plaintiff.” Midcoast Aviation,
Inc. v. Gen. Elec. Credit Corp., 907 F.2d 732, 737 (7th Cir. 1990). Cross-defendants argue that
cross-plaintiffs have not alleged that they provided a service to cross-defendants. Cross-plaintiffs
respond that cross-plaintiffs suffered property losses and loss of management fees as a result of
cross-defendants’ actions, and that they provided a “service” to cross-defendants when they
made debt service payments on loans they took out from NRB. Debt service payments, however,
are not the type of “service” contemplated by the law of quantum meruit, which permits recovery
for parties who have performed labor for another’s benefit without compensation. See, e.g.,
Goyal v. Gas Tech. Institute, 718 F.3d 713, 719 (7th Cir. 2013) (holding that under Illinois law,
attorneys may “recover on a quantum meruit basis a reasonable fee for services rendered before
discharge”); Midcoast Aviation, 907 F.2d at 739 (holding that a subcontractor could recover
under a quantum meruit theory for work performed improving the interior of airplanes). Crossplaintiffs have not cited—and the court has been unable to locate—a single case applying Illinois
law where a court has considered debt repayment to be a “service” for which a party can recover
on a quantum meruit theory. Cross-plaintiffs’ quantum meruit count is therefore dismissed with
prejudice.

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H.

Equitable Subordination

Finally, the FDIC moves to dismiss cross-plaintiffs’ equitable subordination count,
arguing that this court does not have jurisdiction to entertain it because cross-plaintiffs failed to
present it to the FDIC before filing suit. Under the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA), “the FDIC has statutory authority to administer claims
against a depository institution for which the FDIC is receiver.” Farnik v. F.D.I.C., 707 F.3d
717, 720-21 (7th Cir. 2013). Except as otherwise provided in FIRREA, “no court shall have
jurisdiction over . . . any action seeking a determination of rights with respect to[] the assets of
any depository institution for which the [FDIC] has been appointed receiver, including assets
which the [FDIC] may acquire from itself as such receiver; or . . . any claim relating to any act or
omission of such institution or the [FDIC] as receiver.” 12 U.S.C. § 1821(d)(13)(D). FIRREA
permits “judicial review of claims that have exhausted [the FDIC’s] administrative claim
procedure.” Farnik, 707 F.3d at 721 (citing 12 U.S.C. § 1821(d)(6)(A)). “The party asserting
federal jurisdiction bears the burden of demonstrating its existence.” Id.
The FDIC contends that cross-plaintiffs never pursued their equitable subordination
theory in the FDIC’s administrative claim process, and therefore maintains that this court does
not have jurisdiction to adjudicate it. Cross-plaintiffs respond that they may pursue any legal
theory so long as the facts underlying it were presented to the FDIC. Alternatively, crossplaintiffs maintain that their presentation of an unjust enrichment theory to the FDIC sufficed to
exhaust administrative remedies as to their present equitable subordination count.
Neither of cross-plaintiffs’ arguments are availing. First, under FIRREA, the legal theory
that a plaintiff wishes to pursue—and not merely the facts underlying the theory—must be
presented to the FDIC. Even the case cited by cross-plaintiffs recognizes this: under FIRREA,

25

“FDIC is entitled to fair notice of the facts and legal theories on which a claimant seeks relief
from the failed institution.” Ravenswood, LLC v. F.C.I.C., No. 10–cv–1064, 2011 WL 1079495,
at *4 (N.D. Ill. Mar. 21, 2011); see also Farnik, 703 F.3d at 721 (“Courts lack jurisdiction to
hear such claims unless plaintiffs first present them to the FDIC.”). Indeed, permitting parties to
pursue in court any legal theory based on underlying facts presented to the FDIC would defeat
the purpose of FIRREA’s exhaustion requirement, which is to give the FDIC “a fair opportunity
to determine whether it is in fact obligated to pay [plaintiffs] before being hauled into court.”
Ravenswood, 2011 WL 1079495, at *4 (citing Brown Leasing Co. v. F.D.I.C., 833 F. Supp. 672,
675 (N.D. Ill. 1993)).
Second, cross-plaintiffs’ presentation of an unjust enrichment theory before the FDIC
does not suffice to exhaust their equitable subordination count. Unjust enrichment and equitable
subordination are two separate legal theories arising under different bodies of law. Unjust
enrichment is a creature of state common law; by contrast, equitable subordination is a federal
statutory theory arising out of the United States Bankruptcy Code. See Paul H. Schwendener,
Inc. v. Jupiter Elec. Co., 358 Ill. App. 3d 65, 72, 829 N.E.2d 818, 828 (Ill. App. Ct. 2005) (“As
equitable subordination is a federal statutory creation available only in bankruptcy proceedings,
we agree with the trial court's determination that no such cause of action is recognized in
Illinois.”). Although equity underpins both unjust enrichment and equitable subordination, an
assessment of whether an entity is entitled to relief for unjust enrichment would not necessarily
be determinative of whether the entity is entitled to a federal equitable subordination remedy,
and vice versa. A claim for equitable subordination, for example, requires consistency with the
United States Bankruptcy Code, which is obviously not a requirement of common law unjust
enrichment. See id. (“[E]quitable subordination of the claim must not be inconsistent with the

26

provisions of the Bankruptcy Code.”); see also In re Kreisler, 546 F.3d 863, 866 (7th Cir. 2008).
Consequently, cross-plaintiffs cannot be said to have presented their equitable subordination
theory to the FDIC.
Cross-plaintiffs also contend that because this lawsuit predated the receivership,
FIRREA’s exhaustion provisions do not apply. Although the Seventh Circuit has not definitively
resolved this issue, the available authority indicates that pre-receivership claims must be
exhausted before the court can continue to exercise jurisdiction over them. See Farnik, 707 F.3d
at 722 n.2 (“While there is no Seventh Circuit precedent on this issue, other circuits have
interpreted FIRREA as allowing courts to maintain jurisdiction over pre-receivership
claims and as requiring such claims to go through the administrative claims process through a
provision mandating that courts grant requests for stays made by the receiver.”) (citing Marquis
v. F.D.I.C., 965 F.2d 1148, 1154 (1st Cir. 1992); Glover v. F.D.I.C., 698 F.3d 139, 151 (3d Cir.
2012); Brady Dev. Co. v. Resolution Trust Corp., 14 F.3d 998, 1006 (4th Cir. 1993)); Brown
Leasing, 833 F. Supp. at 674-75 (“[C]ompliance with FIRREA’s procedure is mandatory for all
claims whether asserted as part of a pre- or post-receivership lawsuit.”). Moreover, this case was
stayed for several months in 2015—that is, post-receivership—during which time cross-plaintiffs
pursued their claims with the FDIC, which denied them. See Dkt. 27. Because cross-plaintiffs
failed, however, to raise their equitable subordination theory with the FDIC, this court lacks
jurisdiction to entertain it now, and it is dismissed without prejudice.9
*

*

*

For the foregoing reasons, cross-plaintiffs’ RICO, tortious interference with contract, and
breach of fiduciary duty counts are dismissed without prejudice as to all moving cross9

The FDIC has not argued that cross-plaintiffs will never be able to exhaust their
equitable subordination claim, so the court declines to dismiss it with prejudice.

27

defendants. Cross-plaintiffs’ fraud count is dismissed without prejudice as to all moving crossdefendants except Hiren Patel. Cross-plaintiffs’ negligence and quantum meruit counts are
dismissed with prejudice as to all moving cross-defendants. Cross-plaintiffs’ equitable
subordination count against the FDIC is dismissed without prejudice.

Dated: January 4, 2018

John J. Tharp, Jr.
United States District Judge

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