Delaware Motel Associates, Inc. et al v. Capital Crossing Servicing Company LLC et al

Filing 195

MEMORANDUM OPINION AND ORDER signed by the Honorable Matthew F. Kennelly on 5/1/2019: For the reasons stated in the accompanying Memorandum Opinion and Order, the Court denies the defendants' motion for sanctions [dkt. no. 184]. (mk)

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IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
DELAWARE MOTEL ASSOCIATES,
INC., INDEPENDENCE MANAGEMENT
ASSOCIATES, INC., TURKEY FOOT
LAKE ROAD LAND HOLDINGS, LLC,
C. PATEL CO. LLC, CHAMPAKBHAI N.
PATEL, and JASHVANTI C. PATEL,

)
)
)
)
)
)
)
Plaintiffs,
)
)
v.
)
)
CAPITAL CROSSING SERVICING
)
COMPANY LLC, CAPITAL CROSSING
)
HOLDINGS LLC, ADVANCED APPRAISAL )
GROUP, INC., ADVANCED APPRAISAL
)
CONSULTANTS, INC., ADVANCED
)
APPRAISAL CONSULTANTS, LLC,
)
WILLIAM DADDONO, WOLIN & ROSEN,
)
LTD., SMITHAMUNDSEN LLC, THE STATE )
BANK OF TEXAS, CHANDRAKANT PATEL, )
HIREN PATEL, EDWARD FITZGERALD,
)
PHOENIX NPL, LLC, PHOENIX REO, LLC, )
TARRANT CAPITAL ADVISORS, INC.,
)
TPG GLOBAL, LLC, TPG CAPITAL L.P.,
)
TPG GROUP HOLDINGS (SBS)
)
ADVISORS, INC., TPG SPECIALITY
)
LENDING, INC., TPG OPPORTUNITIES
)
PARTNERS, L.P., NICHOLAS LAZARES,
)
RICHARD WAYNE, DAVID BONDERMAN,
)
and JAMES G. COULTER,
)
)
Defendants.
)

Case No. 17 C 1715

MEMORANDUM OPINION AND ORDER
MATTHEW F. KENNELLY, District Judge:
The plaintiffs in this suit alleged that the defendants were involved in a
racketeering scheme involving commercial real estate loans that were issued based on

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false and inflated appraisals. After finding that multiple iterations of the plaintiffs'
complaint failed to state a claim for relief, the Court ultimately denied their motion to file
a fourth amended complaint and entered judgment in favor of the defendants. Two of
those defendants—the law firms SmithAmundsen LLC and Wolin & Rosen, Ltd.—have
moved for sanctions against the plaintiffs' attorney, Paul Caghan. For the reasons set
forth below, the Court denies the motion.
Background
The Court assumes familiarity with its prior written opinions in this case. See
Delaware Motel Assocs., Inc. v. Capital Crossing Servicing Co. (Ruling on Motions to
Dismiss), No. 17 C 1715, 2017 WL 4224618 (N.D. Ill. Sept. 22, 2017); Delaware Motel
Assocs., Inc. v. Capital Crossing Servicing Co. (Summary Judgment Ruling), No. 17 C
1715, 2017 WL 4512709 (N.D. Ill. Oct. 10, 2017); Delaware Motel Assocs., Inc. v.
Capital Crossing Servicing Co. (Order Denying Leave to File Second Amended Compl.),
No. 17 C 1715, 2018 WL 509956 (N.D. Ill. Jan. 23, 2018); Delaware Motel Assocs., Inc.
v. Capital Crossing Servicing Co. (Order Denying Leave to File Fourth Amended
Compl.), No. 17 C 1715, 2018 WL 4829598 (N.D. Ill. Oct. 4, 2018). What follows is an
abbreviated summary of the relevant procedural history.
The plaintiffs filed suit in Illinois state court in early 2017, alleging a far-reaching
scheme of appraisal fraud. They named seventeen defendants in their complaint,
including SmithAmundsen and Wolin & Rosen. They alleged that the defendants
engaged in a multi-part scheme to generate fraudulent appraisals for the plaintiffs' real
estate properties and issue loans based on those appraisals. The plaintiffs contended
that SmithAmundsen and Wolin & Rosen participated in the scheme by fraudulently

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withholding the false appraisal information, preparing fraudulent closing documents, and
securing the foreclosure of the plaintiffs' properties based on their prior fraud.
The defendants removed the case to federal court, and it was assigned to the
undersigned judge. Certain defendants moved to dismiss the complaint for failure to
state a claim, while others filed a motion for summary judgment. The Court granted the
motion for summary judgment filed by certain defendants but granted the plaintiffs leave
to file an amended complaint, in which they named ten additional defendants. See dkt.
no. 45.
The defendants again filed several motions to dismiss the amended complaint.
The Court granted those motions on September 22, 2017. See Ruling on Motions to
Dismiss, 2017 WL 4224618, at *1. It held that the plaintiffs had not adequately alleged
the existence of a RICO enterprise and had not alleged their fraud claims with the
required particularity. Id. at *8-15. The Court also dismissed the plaintiffs' state-law
claims for fraud, tortious interference, and unjust enrichment for failure to state a claim.
Id. at *16-18. Finally, the Court held that it lacked personal jurisdiction over two
individual defendants. Id. at *18-19.
In a separate opinion issued shortly thereafter, the Court granted summary
judgment in favor of two individual defendants. See Summary Judgment Ruling, 2017
WL 4512709, at *1. The Court found that the plaintiffs had introduced no evidence to
substantiate their allegations that those defendants had participated in the alleged fraud
scheme. Id. at *5-7.
The plaintiffs again moved to amend their complaint. After the parties fully
briefed the motion, the Court denied leave on January 23, 2018, reasoning that the

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amended complaint would be futile because it would not survive a motion to dismiss.
Order Denying Leave to File Second Amended Compl., 2018 WL 509956, at *5. With
respect to SmithAmundsen and Wolin & Rosen, the Court found that the proposed
second amended complaint failed to "adequately allege that the law firms conducted the
affairs of an enterprise or agreed to do so" as required to state a RICO claim against
them. Id. at *8.
That ruling did not dispose of the case, however, because several defendants
had filed motions to dismiss to which the plaintiffs had not yet had the opportunity to
respond. The Court ordered the plaintiffs to show cause why the claims in proposed
second amended complaint would survive motions to dismiss by those defendants. Id.
at *20.
The plaintiffs moved for reconsideration of the ruling denying leave to amend.
See dkt. no. 167. They attached a proposed third amended complaint to that motion.
Five days later, the plaintiffs filed a statement of cause why the remaining defendants'
motions to dismiss should not be granted, see dkt. no. 170, to which they attached a
proposed fourth amended complaint.
The Court ruled that the plaintiffs had failed to show cause and dismissed the
first amended complaint in its entirety. Dkt. no. 175. It also denied the motion for
reconsideration, dkt. no. 177, but set a briefing schedule on the motion for leave to file
the proposed fourth amended complaint, dkt. no. 178.
Finally, on October 4, 2018, the Court denied leave to amend the complaint. See
Order Denying Leave to File Fourth Amended Compl., 2018 WL 4829598. Noting that
the plaintiffs had repeatedly failed to adequately allege facts that stated a claim for

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relief, the Court denied the motion with prejudice and without leave to replead. Id. at
*15.
SmithAmundsen and Wolin & Rosen have moved for sanctions against the
plaintiffs' attorney, Paul Caghan. Caghan filed a cross-motion for sanctions, which the
Court denied. Dkt. no. 194. The Court now denies the motion by SmithAmundsen and
Wolin & Rosen.
Discussion
Federal Rule of Civil Procedure 11 "imposes a duty on attorneys to ensure that
any papers filed with the court are well-grounded in fact, legally tenable, and not
interposed for any improper purpose." Brunt v. Serv. Emps. Int'l Union, 284 F.3d 715,
721 (7th Cir. 2002). A court may sanction an attorney for breaching this duty after
giving the attorney notice and a reasonable opportunity to respond. Fed. R. Civ. P.
11(c)(1).
A court may also impose sanctions under 28 U.S.C. § 1927, which prohibits
attorneys from "multipl[ying] the proceedings in any case unreasonably and
vexatiously." Although sanctions under section 1927 are appropriate only if the attorney
has acted in bad faith, the Seventh Circuit has held that this requirement is satisfied if
the attorney "pursues a path that a reasonably careful attorney would have known, after
appropriate inquiry, to be unsound." Bell v. Vacuforce, LLC, 908 F.3d 1075, 1081-82
(7th Cir. 2018).
As a preliminary matter, the Court notes that in their motion for sanctions the
movants purport to incorporate "all arguments from their motions to dismiss, opposition
to plaintiffs' motions for leave to amend, and briefs in support of same." Mot. for

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Sanctions, dkt. no. 184, at 4. This is inappropriate. Rule 11(c)(2) requires a moving
party to make a motion for sanctions "separately from any other motion" and "describe
the specific conduct that allegedly violates Rule 11(b)." Motions under section 1927
similarly must articulate bases for relief in a separate filing. Mitchell v. NFL Player
Annuity Program, 255 F. Supp. 3d 781, 791 (N.D. Ill. 2017). Defendants' attempt to
incorporate their prior arguments by reference is particularly inappropriate given the
volume of filings in this case. For these reasons, the Court will consider only the
arguments raised properly within the motion.
A.

Improper purpose
The movants argue that Caghan brought this suit with the improper purpose of

collaterally challenging the judgments in Ohio state court that foreclosed on the
plaintiffs' properties. According to Rule 11(b)(1), improper purposes include
harassment, unnecessary delay, and needlessly increasing the cost of litigation. More
generally, the Seventh Circuit has characterized improper purposes as "abusive
litigation practices." Beeman v. Fiester, 852 F.2d 206, 209 (7th Cir. 1988), abrogated
on other grounds by Mars Steel Corp v. Cont'l Bank N.A., 880 F.2d 928 (7th Cir. 1989).
The movants point to no authority suggesting that a party's attempt to indirectly
challenge the outcome of an earlier case constitutes a similarly impermissible motive.
Indeed, the movants' reasoning would imply that every case that a court finds to barred
by claim preclusion was filed for an improper purpose—a proposition for which the
movants offer no authority.
The movants also argue that Caghan improperly attempted to use the plaintiffs'
complaint "as a vehicle for obtaining discovery" to which the plaintiffs were not entitled.

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Mot. for Sanctions, dkt. no. 184, at 10. The movants' sole evidence for this claim is that
the plaintiffs unsuccessfully sought discovery from one of SmithAmundsen's former
clients in a related case. But the inference that Caghan filed this suit for the purpose of
obtaining that discovery indirectly through SmithAmundsen is unsubstantiated
speculation that cannot support the movants' request for sanctions.
Because the movants have cited no evidence or authority to substantiate their
allegations of improper purpose, the Court declines to impose sanctions on that basis. 1
B.

Legal frivolousness
An attorney may be sanctioned under Rule 11(b)(2) or 28 U.S.C. § 1927 for

bringing legally frivolous claims. Maxwell v. KPMG LLP, 520 F.3d 713, 719 (7th Cir.
2008) (Rule 11); Lightspeed Media Corp. v. Smith, 761 F.3d 699, 709 (7th Cir. 2014)
(section 1927). The movants argue that the plaintiffs' claims were doomed to fail, citing
a bevy of immunity and privilege doctrines that they contend posed a total bar to relief.
The movants' arguments are largely unpersuasive. First, they cite the Illinois
Appellate Court's decision in Northern Trust Co. v. VIII South Michigan Associates, 276
Ill. App. 3d 355, 364-65, 657 N.E.2d 1095, 1102-03 (1995). The court in Northern Trust
held that lenders are not liable for fraud if they fail to disclose the indebtedness of other
borrowers on the same loan. The movants have not shown, however, that Northern
Trust is a bar to relief in this case. The court in Northern Trust did not consider, for
example, whether attorneys who prepared loan documents could be liable for knowingly
misrepresenting the value of property, as the plaintiffs alleged certain defendants did.

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The movants' other arguments concerning Caghan's allegedly improper purpose are
forfeited because they were raised for the first in a reply brief. See, e.g., De Silva v.
Cinquegrani, No. 11 C 4259, 2014 WL 3954990, at *4 n.4 (N.D. Ill. Aug. 13, 2014).
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The court's holding that a financial institution "owes no duty of care to the borrower
when preparing an appraisal of the borrower's collateral," id. at 365, 657 N.E.2d at
1102, is similarly irrelevant to the viability of the plaintiffs' claims.
Second, the movants point out that the plaintiffs' complaints failed to allege that
the law firm defendants participated in a RICO enterprise. They correctly note that law
firms do not participate in a RICO enterprise if they act as mere hirelings. See
Bachman v. Bear, Stearns & Co., 178 F.3d 930, 933 (7th Cir. 1999). But this principle
does not mean that the plaintiffs' claims were legally frivolous from the outset; the law
firms might have been liable if they exercised "at least some measure of control over"
the entities that conducted the pattern of racketeering activity. Id. at 932. The fact that
the plaintiffs ultimately failed to plead this element with the requisite specificity does not
mean that their complaints were sufficiently frivolous to warrant sanctions. See Harlyn
Sales Corp. Profit Sharing Plan v. Kemper Fin. Servs., Inc., 9 F.3d 1263, 1270 (7th Cir.
1993) ("[S]anctions do not inevitably flow from being wrong on the law. Otherwise Rule
11 sanctions would be imposed whenever a complaint was dismissed . . . [T]he Rule
may not be so interpreted.").
Third, the movants rely on three related privileges: the absolute litigation
privilege, the qualified attorney privilege, and the Noerr-Pennington doctrine. The Court
is not persuaded that any of these doctrines posed such a significant barrier to relief
that it rendered the plaintiffs' complaints frivolous. The absolute litigation privilege
originates in a rule designed to protect attorneys from liability for defamation based on
their statements during litigation, although it may apply more widely to other causes of
action. O'Callaghan v. Satherlie, 2015 IL App (1st) 142152, ¶¶ 25-27, 36 N.E.3d 999,

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1008-09. But the litigation privilege is limited "to instances where the administration of
justice and public service require immunity." Id. ¶ 42, 36 N.E.3d at 1008. In light of this
limitation, the movants have not shown that the privilege would necessarily preclude the
plaintiffs' claims based on allegations that the defendants systematically defrauded
them.
The qualified attorney privilege protects attorneys who advise their clients in
good faith. This privilege bears no relation to the plaintiffs' contentions in this case,
however. The only remotely relevant case the movants cite concerns an attorney who
gave bad advice to a client, causing the client to enter into a contract with a third party.
See, e.g., Schott v. Glover, 109 Ill. App. 3d 230, 234-35, 440 N.E.2d 376, 379 (1982).
The attorney's limited privilege protects her from liability to the client or the third party
based on that faulty advice. Id. The movants altogether fail to explain how this doctrine
is relevant to their motion.
The Noerr-Pennington doctrine is equally inapposite. It applies in antitrust cases
where groups use "courts to advocate their causes and points of view respecting
resolution of their business and economic interests vis-à-vis their competitors." BE&K
Constr. Co. v. NLRB, 536 U.S. 516, 525 (2002). One federal court of appeals explained
that the doctrine is designed to "avoid burdening conduct that implicates protections
afforded by the Petition Clause" of the United States Constitution. Sosa v. DIRECTV,
Inc., 437 F.3d 923, 931 (9th Cir. 2006). But the movants do not cite any binding
authority holding that Noerr-Pennington creates immunity for RICO claims in addition to
antitrust claims. Even if they had, however, there is at least a colorable argument that
the sham exception to Noerr-Pennington would apply given the plaintiffs' allegations of

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fraud. See Mercatus Grp., LLC v. Lake Forest Hosp., 641 F.3d 834, 843 (7th Cir. 2011)
("[A] misrepresentation renders an adjudicative proceeding a sham only if the
misrepresentation (1) was intentionally made, with knowledge of its falsity; and (2) was
material, in the sense that it actually altered the outcome of the proceeding.").
Fourth, the movants argue that the plaintiffs' state-law claims were doomed to
fail. They contend that they cannot be liable for a breach of fiduciary duty because they
owed no duty to non-clients. The plaintiffs point out that under Illinois law, escrowees
have a fiduciary duty to act in accordance with the terms of the escrow instructions.
Freedom Mortg. Corp. v. Burham Mortg., Inc., 720 F. Supp. 2d 978, 997-98 (N.D. Ill.
2010). Although the Court previously found that the plaintiffs did not plead this claim
with sufficient particularity, the fact that escrowees sometimes owe fiduciary duties
makes prevents this claim from being legally frivolous.
Relatedly, the movants contend that attorneys and law firms can never be liable
under the Illinois Consumer Fraud and Deceptive Business Practices Act (ICFA), citing
Kosydor v. American Express Centurion Services Corp., 2012 IL App (5th) 120110, 979
N.E.2d 123. The plaintiffs argue, however, that despite its seemingly broad holding,
Kosydor should not apply to the movants' alleged pattern of criminal activity because
their misconduct was so extreme. Whether or not the plaintiffs would have ultimately
prevailed on this argument, it constitutes "a nonfrivolous argument for extending,
modifying, or reversing existing law." Foreman v. Wadsworth, 844 F.3d 620, 626 (7th
Cir. 2016).
Lastly, the movants' strongest argument in favor of sanctions concerns Caghan's
repeated efforts to file complaints that he knew or should have known were not legally

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viable. The fact that Caghan's proposed amended complaints contained many of the
same defects arguably supports the conclusion that he persisted in filing claims that a
reasonable lawyer would have recognized as meritless.
The argument fails, however, because it was not properly raised in the movants'
motion for sanctions. Before imposing a monetary sanction, due process requires the
Court to afford Caghan a "meaningful opportunity to be heard." Boyer v. BNSF Ry. Co.,
832 F.3d 699, 702 (7th Cir. 2016). It is not enough that Caghan was notified that the
movants generally sought sanctions; he must be specifically apprised of the reasons he
could be sanctioned. Cf. Johnson v. Cherry, 422 F.3d 540, 553 (7th Cir. 2005) ("Any
further proceedings as to potential sanctions must . . . afford [the attorney] notice of the
specific bases on which the court is contemplating sanctions and an adequate
opportunity to respond."). The movants only vaguely hint at this argument in their
motion by stating that "Mr. Caghan has persisted in pursuing claims of the nature that
were [] rejected by this Court." Mot. for Sanctions, dkt. no. 184, at 11. This brief and
conclusory observation gave Caghan insufficient notice of this alleged basis for
sanctions, and the movants' more substantial explanation in their reply brief cannot cure
that omission.
C.

Lack of factual basis
The movants argue that sanctions are appropriate because the plaintiffs' claims

lacked an adequate basis in fact. In their opening brief, the movants cite Jimenez v.
Madison Area Technical College, 321 F.3d 652 (7th Cir. 2002), to argue that Caghan
should be sanctioned for making false allegations. But that case does not support the
imposition of sanctions against Caghan. Jimenez concerned a plaintiff who, as the

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district court determined in an evidentiary hearing, knowingly submitted fraudulent
documents to support her claim of employment discrimination. Id. at 655. In this case,
by contrast, the Court has made no findings about the truth of the plaintiffs' allegations.
The movants also contend that it was improper for Caghan to file complaints that
"lumped SmithAmundsen in with all other Defendants when SmithAmundsen is not
alleged to have been involved with any particular loan closings." Mot. for Sanctions,
dkt. no. 184, at 5. They fail to explain, however, why the allegations about
SmithAmundsen were improper or why they amounted to false statements of fact that
warrant sanctions under Jimenez.
The movants significantly expand their argument in their reply brief, listing
numerous allegations in the complaints that they argue are implausible and
inflammatory. The movants appear to argue, though they do not expressly say, that
Caghan breached his duty to conduct a reasonable inquiry into the factual basis for the
pleadings. See, e.g., Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 393 (1990) ("Rule
11 imposes a duty on attorneys to certify that they have conducted a reasonable inquiry
and have determined that any papers filed with the court are well grounded in fact. . . .").
As the Court previously noted, however, a movant may not raise new bases for
sanctions in its reply brief. The allegation that Caghan failed to adequately investigate
the plaintiffs' claims appears nowhere in the motion for sanctions, and the discussion of
the alleged falsehoods is too cursory in the movants' opening brief to permit sanctions
against Caghan. The Court therefore declines to sanction Caghan for filing a suit with
an inadequate basis in fact.
D.

Vexatious litigation conduct

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The Court has already addressed most of the movants' allegations of vexatious
conduct under section 1927. They make one additional argument in their reply brief,
however: that the Court should sanction Caghan for filing pleadings that were
unnecessarily long and repetitive. Although it is true that the plaintiff's proposed fourth
amended complaint was excessively long, spanning 193 pages and 744 separate
numbered paragraphs, the movants yet again failed to raise this argument in their initial
motion. The Court therefore declines to consider this as a separate basis for sanctions.
E.

Pattern of similar litigation
Finally, the movants argue that sanctions are appropriate in light of Caghan's

pattern of filing unsuccessful cases alleging the existence of a similar appraisal fraud
scheme. They first cite Saleh v. Merchant, No. 14-CV-9186 (N.D. Ill.), a parallel case in
front of Judge John Tharp. Their reference to Saleh proves unhelpful, however.
Recently, Judge Tharp partially denied a motion to dismiss the crossclaim after the
cross-plaintiffs alleged facts sufficient to state a claim under RICO. Saleh v. Merchant,
No. 14-CV-9186, 2019 WL 1331788 (N.D. Ill. Mar. 25, 2019). Although Judge Tharp
dismissed the claims against SmithAmundsen and Wolin & Rosen, he noted that the
allegations against Wolin & Rosen presented a close question, and he ultimately
resolved them with reference to an issue—the statute of repose—that the movants do
not even mention in their briefs in support of sanctions. Id. at *6-8. The decision in
Saleh suggests that Caghan has pursued these same claims with at least limited
success, suggesting that the plaintiffs' allegations are not facially meritless.
The movants cite several other cases that they contend illustrate a pattern of
frivolous and vexatious conduct by Caghan. They offer only a cursory description of the

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circumstances of those cases, however, and the Court is unwilling to conclude that they
justify the imposition of sanctions in this case. Although the fact that Caghan did not
prevail on RICO claims he brought in other cases may constitute some evidence of a
pattern of vexatious conduct, the Court concludes that it has limited value to
determining whether Caghan's conduct in this case warrants a monetary sanction.
Conclusion
For the foregoing reasons, the Court denies the defendants' motion for sanctions
[dkt. no. 184].

________________________________
MATTHEW F. KENNELLY
United States District Judge
Date: May 1, 2019

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