Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca7-14-02736/USCOURTS-ca7-14-02736-0/pdf.json

Parties Involved:
Federal Deposit Insurance Corporation
Appellee
RLI Insurance Company
Appellant

Document Text:

In the 

United States Court of Appeals 

For the Seventh Circuit ____________________

No. 14Ȭ2736

FEDERAL DEPOSIT INSURANCE CORPORATION, as receiver for

PARK NATIONAL BANK,

PlaintiffȬAppellee,

v.

RLI INSURANCE COMPANY,

DefendantȬAppellant.

____________________

Appeal from the United States District Court for the

Northern District of Illinois, Eastern Division.

No. 12 C 3790 — Milton I. Shadur, Judge.

____________________

ARGUED JANUARY 23, 2015 — DECIDED APRIL 30, 2015

____________________

Before WOOD, Chief Judge, and KANNE and TINDER, Circuit

Judges.

WOOD, Chief Judge. In 2001, representatives from the

Moody Bible Institute of Chicago and a company called

Sysix Financial signed a master lease agreement. The docuȬ

ment laid the groundwork for future leases of equipment

from Sysix to Moody. Seven years later, in 2008, two lease

schedules for various computer items were executed; they

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2 No. 14Ȭ2736

appeared to have been signed by Moody’s vice president

and Sysix’s president. Sysix assigned its end of both leases to

another company, Rockwell Financial Group, which in turn

acquired loans from Park National Bank (PNB) to finance the

two individual leases between Sysix and Moody. PNB proȬ

cured indemnification coverage for its loans to Rockwell

from RLI Insurance Company in the form of a financial instiȬ

tution bond. There was, however, a problem at the heart of

these transactions: Sysix’s president had forged the signature

of Moody’s vice president on each of the two lease schedules.

Moody never agreed to either schedule nor did it ever reȬ

ceive any of the promised equipment.

PNB notified RLI of its potential loss under the bond RLI

had issued, but PNB itself soon went under. Acting as reȬ

ceiver for PNB, the Federal Deposit Insurance Corporation

(FDIC) sued RLI in federal court, arguing that the language

of the bond obligated RLI to indemnify PNB (and thus

FDIC) for its losses related to the forgeries on the lease

schedules. Eventually the district court granted summary

judgment in FDIC’s favor. Because we agree with the district

court that the plain language of the bond covered FDIC’s

losses, we affirm.

I

This series of transactions began when Robert Gunter,

vice president and general counsel of Moody, and John

Sheaffer, president of Sysix, signed a document entitled

“Master Equipment Lease Agreement” in December 2001.

The master lease referred to future lease schedules that the

parties would execute “from time to time,” and stated that

each lease schedule “shall constitute a separately enforceable

lease ... for the Equipment therein.”

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No. 14Ȭ2736 3

In March 2008, Moody and Sysix purportedly executed a

lease schedule (Lease Schedule S080), which bore the signaȬ

tures of Sheaffer and Gunter. The minimum term of the lease

was 48 months beginning April 1, 2008, with a monthly rent

of $72,691.73 for hundreds of pieces of computer equipment

listed in an attached exhibit. Schedule S080 stated that the

total monthly rent was for equipment, the total purchase

price of which was not to exceed $2,977,135.49. It also noted

that it incorporated the terms and conditions of the 2001

master lease. The two men supposedly executed a similar

lease schedule that same year, in December 2008, again for a

large batch of computer equipment (Lease Schedule S084).

The monthly rent for Schedule S084 was $32,410.51, with the

purchase price of the described equipment not to exceed

$1,111,024. Like Schedule S080, Schedule S084 incorporated

the terms of the master lease between Moody and Sysix. But

like Schedule S080, Schedule S084 was a forgery. Sheaffer

signed Gunter’s name to both schedules and created the

terms of each out of whole cloth. Sheaffer admitted as much

in a letter in December 2008, where he wrote, “The Moody

Bible Institute has no idea and never excueted [sic] schedule

80 0r [sic] 84 and for that matter Rockwell Financial is comȬ

plete un asare [sic] that I compeltly [sic] fabricated these

deals.” It appears from the record that Rockwell and Moody

discovered the forgeries around July 2009; Sheaffer commitȬ

ted suicide that month.

In 2008, before Sheaffer’s forgeries were discovered, Sysix

assigned all of its rights in both lease schedules to Rockwell.

After each assignment, Rockwell sought loans from PNB to

cover its end of the deal. A PNB loan presentation document,

dated March 7, 2008, indicates that Rockwell initially sought

$3.1 million from PNB; this sum was associated with SchedȬ

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4 No. 14Ȭ2736

ule S080, which was executed less than two weeks later. AnȬ

other PNB loan presentation document dated December 10,

2008, shows Rockwell seeking $1.12 million, presumably asȬ

sociated with Schedule S084, which was executed just a few

days after the presentation. A few weeks after each loan

presentation, Rockwell and PNB signed a document called

“Assignment and Security Agreement.” This document speȬ

cifically referred to both the lease schedule in question and a

separate promissory note Rockwell had executed for a speȬ

cific amount. These amounts were slightly different from

those on the loan presentations. For Schedule S080, RockȬ

well’s promissory note was for $2,978,334.28, with monthly

installments of $72,691.73. (Recall that the maximum purȬ

chase amount for Schedule S080 was $2,977,135.49, with a

monthly amount due of $72,691.73.) For Schedule S084,

Rockwell’s promissory note was for $1,131,989.75, with a

$32,410.51 monthly payment (compared to $1,111,024 on

Schedule S084, which had the same monthly amount of

$32,410.51).

In May 2009, PNB acquired a bond from RLI to cover poȬ

tential losses flowing from its loans to Rockwell during the

period from May 1, 2009 to May 1, 2010. Of particular interȬ

est here, the bond’s Insuring Agreement E stated that RLI

agreed to indemnify PNB forȱȱ

[l]oss resulting directly from the Insured havȬ

ing, in good faith, for its own account or for the

account of others, ... acquired, sold or delivȬ

ered or given value, extended credit or asȬ

sumed liability, on the faith of, any Written,

Original ... Security Agreement, which (i)

bears a handwritten signature of any maker,

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No. 14Ȭ2736 5

drawer, issuer, endorser, assignor, lessee, transȬ

fer agent, registrar, acceptor, surety, guarantor,

or of any other person whose signature is maȬ

terial to the validity or enforceability of the seȬ

curity, which is a Forgery, or (ii) is altered, or

(iii) is lost or stolen ... .

Agreement E also stated that “[a]ctual physical possession of

the items listed ... by the Insured, its correspondent bank or

other authorized representative, is a condition precedent to

the Insured’s having relied on the faith of such items.” A few

other provisions of the bond concern us as well. The bond

defines a “Security Agreement” as “a Written agreement

which creates an interest in personal property or fixtures

and which secures payment or performance of an obligaȬ

tion.” “Original” documents, it says, are “the first rendering

or archetype.” It also specifies time limits on lawsuits: they

“shall not be brought prior to the expiration of 60 days after

the original proof of loss is filed with the Underwriter or afȬ

ter the expiration of 24 months from the discovery of such

loss.” Finally, the bond contains what it terms an “antiȬ

bundling” provision: it states that for documents containing

forgeries, “the alteration or counterfeit or signature must be

on or of the enumerated document itself not on or of some

other document submitted with, accompanying or incorpoȬ

rated by reference into the enumerated document.”

At some point in August 2009, PNB demanded that

Moody and Rockwell submit payments on Schedules S080

and S084. No money came, and so PNB sued them for nonȬ

payment in September 2009. A month later, PNB gave RLI

notice that it had discovered a potential loss covered by the

bond. By the end of October, however, PNB had failed. The

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6 No. 14Ȭ2736

Office of the Comptroller of the Currency closed PNB and

named FDIC as PNB’s receiver. At the same time, FDIC enȬ

tered a purchase agreement with U.S. Bank National AssociȬ

ation, under which U.S. Bank bought PNB’s assets and asȬ

sumed its liabilities. Under the purchase agreement, FDIC

paid U.S. Bank for 80% of PNB’s losses under the two lease

schedules, and U.S. Bank absorbed the remaining 20%; U.S.

Bank also settled PNB’s original lawsuit against Rockwell.

FDIC determined that it was left with losses of $2,103,365. It

filed a claim for that amount with RLI in June 2010, but RLI

denied the claim in November 2010.

Believing that RLI’s denial violated the terms of the bond

RLI had issued to PNB, FDIC filed a breachȬofȬcontract claim

against RLI in May 2012. The district court had subjectȬ

matter jurisdiction over the suit under 12 U.S.C.

§ 1819(b)(2)(A), which provides that civil suits to which

FDIC is a party arise under the laws of the United States. In

June 2014 it resolved the suit with a grant of summary

judgment for FDIC.

II

RLI offers five reasons why, in its view, the bond it issued

to PNB does not cover FDIC’s loss. We will address each in

turn.

A

The bond covers losses resulting directly from PNB’s reliȬ

ance on a document that bears a forged signature. It gives

several examples of documents that qualify for coverage, inȬ

cluding security agreements, which as we have noted must

be in writing and must create “an interest” in property to

secure payment or performance of an obligation. RLI conȬ

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No. 14Ȭ2736 7

tends that the lease schedules at issue in this case do not fit

that description and thus do not warrant RLI’s coverage of

FDIC’s losses. (No one asserts that the lease schedules are

properly classified as any of the other documents qualifying

for coverage under the bond.)

As RLI sees it, the lease schedules did not create an interȬ

est in any property. Instead, they merely reflected Sysix’s exȬ

isting interest in the computer equipment and memorialized

Moody’s obligation to make payments. Moody had no obliȬ

gation to buy the equipment, RLI says, and thus the schedȬ

ules could not convey title to anyone. The problem with this

argument is that the bond does not specify what sort of “inȬ

terest” had to have been retained in the property in order for

the lease to qualify as a security agreement. The word “inȬ

terest” does not, contrary to RLI’s assumption, describe only

an ownership interest. The lease schedules here conveyed

something less than full ownership: a possessory interest in

the computer equipment that Sysix was supposedly leasing

to Moody. In keeping with that conveyance, the schedules

anticipate Moody’s taking possession of the listed computer

equipment. PNB reasonably viewed this language as creatȬ

ing an enforceable interest for Moody in the listed property.

The language of the bond requires nothing more.

RLI pushes back with several cases that consider whether

certain documents could be considered security agreements

for purposes of the Uniform Commercial Code. Section 9Ȭ102

of the UCC defines “security agreement” as “an agreement

that creates or provides for a security interest”—that is, an

interest sufficient to permit the secured party to look to that

property for repayment. The idea is similar to the one reȬ

flected in the bond, but RLI has provided no reason why the

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8 No. 14Ȭ2736

UCC taken as a whole should dictate the result here. As the

district court noted, the bond and the UCC employ the terms

“lease” and “security agreement” for different reasons and

in different contexts. We need not wade into the discussions

about, for example, the differences for UCC purposes beȬ

tween true leases and installment sales contracts. The plain

language of the bond requires only that “an interest” in

property be conveyed through a document in order for it to

be a security agreement. Nothing in the UCC undermines

that language.ȱȱ

RLI also argues briefly that PNB did not “treat” the lease

schedules as security agreements, but it fails to explain why

that is relevant to the language of the bond. We agree with

FDIC that the interest conveyed in the lease schedules is sufȬ

ficient to treat those lease schedules as security agreements

under the bond and thus as something that entitles FDIC to

indemnification coverage for its losses.

B

RLI also argues that FDIC has not shown that its loss reȬ

sulted directly from a forgery. If that were true, it would be a

problem, because the bond requires (as RLI puts it) “a direct

nexus between the forgery and the loss” in order to trigger

coverage. More precisely, the bond promises indemnification

for “[l]oss resulting directly from the Insured having, in

good faith, ... assumed liability, on the faith of, any Written,

Original ... Security Agreement, which ... bears a handwritȬ

ten signature ... which is a forgery.” RLI contends that the

forged signatures on the lease schedules did not directly

cause PNB’s loss, because the computer equipment deȬ

scribed in each schedule did not exist, and so there was

nothing for Sysix to lease to Moody in the first place. ThereȬ

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No. 14Ȭ2736 9

fore, even if the signature had been genuine, RLI says, the

underlying “collateral” would have been worthless. It conȬ

cludes that in this situation the real source of the loss would

be worthless collateral, not forgery, and thus the loss would

not be covered by the bond.ȱȱ

RLI’s reading of the bond overlooks a critical detail. The

bond does not say that the loss must have resulted directly

from a forgery; it says that the loss must have resulted diȬ

rectly from reliance upon a security agreement that contained

a forgery. Contrary to RLI’s contention, the bond does not

require FDIC to show that the forged signature by itself

harmed PNB’s ability to recoup its loss. If PNB relied in good

faith on the lease schedules to disburse funds to Rockwell,

and the lease schedules contained both the forged signatures

and the lists of fictitious equipment, FDIC can show that its

loss satisfies the terms of the bond.ȱȱ

Relying primarily on district court and some unȬ

published cases from outside this circuit, RLI urges us to

find an exception for coverage based on the “fictitiousȬ

collateral” doctrine. These cases take the position that RLI

advances, namely, that a bank’s loss for purposes of a bond

such as this must flow from the forgery itself. That condition

cannot be met if the underlying collateral is worthless or

nonȬexistent. This court, however, has expressed doubt

about a “fictitiousȬcollateral doctrine,” albeit in a case dealȬ

ing with slightly different bond language from that at issue

here. See First Nat’l Bank of Manitowoc v. Cincinnati Ins. Co.,

485 F.3d 971, 980 (7th Cir. 2007) (rejecting as “scantily reaȬ

soned” a state court case concluding that bond language

“does not cover losses resulting from the nonexistence of asȬ

sets assigned by a forged instrument”). RLI also urges us to

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10 No. 14Ȭ2736

adopt a “stringent” lossȬcausation standard different from

the one discussed in First National Bank of Manitowoc.ȱȱ

Our primary reason for rejecting RLI’s argument is

straightforward: we are bound by the plain language of the

bond, and this bond does not make coverage dependent on

the quality of the collateral. It requires only a document

bearing a forged signature, and goodȬfaith reliance on that

document that caused the bank’s loss. For similar reasons,

RLI’s argument about loss causation is misplaced.ȱȱ

Furthermore, the district court offered an additional reaȬ

son, to which RLI has not adequately responded, for its reȬ

fusal to accept RLI’s fictitiousȬcollateral argument. The court

observed that the lease schedules were more than a simple

description of (fictitious) collateral; they were themselves

collateral that induced the transactions between PNB and

Rockwell. The district court’s rationale reflects the way that

transactions like this one actually operate: the signed docuȬ

ment itself serves as the basis for the transaction. The same is

true, for example, in futures markets, where contracts for

commodities, not the underlying commodities, are the items

of value. As the district court did, we conclude that FDIC’s

loss resulted directly from PNB’s reliance on the lease

schedules, each of which contained a forgery and each of

which was in itself an item of value to the bank.

C

Reliance is the next issue we must consider. RLI argues

that PNB did not “extend[ ] credit or assume[ ] liability, on

the faith of” the lease schedules, as the bond requires. In reȬ

ality, RLI continues, PNB approved Rockwell’s loan applicaȬ

tions before it ever saw the lease schedules, and there is no

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No. 14Ȭ2736 11

evidence that anyone at PNB who approved the loans made

any decisions based upon their contents. Thus, RLI conȬ

cludes, PNB cannot have extended credit to Rockwell “on

the faith of” those documents, which were the only ones

with forged signatures.

In this instance, RLI oversimplifies. PNB did possess the

lease schedules before it executed (on the same day) a securiȬ

ty agreement with Rockwell and Rockwell signed a promisȬ

sory note. Both events preceded PNB’s disbursement of

funds to Rockwell. This raises the question: at what point

did PNB actually “extend[ ] credit ... on the faith of” the

lease schedules? RLI proposes that the operative decision on

PNB’s part was the moment at which it gave preliminary apȬ

proval to the loans for Rockwell. That makes little sense,

however, given the fact that more needed to happen before

money changed hands. Only after PNB took those other

steps did it finally disburse the funds.ȱȱ

The loan presentations that preceded each of PNB’s two

loans to Rockwell are in the record, along with the other

documents we discuss here. The first presentation is dated

March 7, 2008. It preceded the execution of Lease Schedule

S080 by about two weeks and shows that Rockwell requestȬ

ed $3,100,000. Schedule S080 itself, purportedly executed on

March 20, bears the figure of $2,977,135.49 as the original

equipment cost, and shows a monthly rent of $72,691.73.

Eight days later, Rockwell executed a promissory note for a

total amount of $2,978,334.28, with monthly installments of

$72,691.73 (precisely what Schedule S080 called for). The

same day, PNB executed an assignment and security agreeȬ

ment regarding PNB’s loan to Rockwell. The agreement reȬ

fers to Schedule S080 by its date and name as the “related

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12 No. 14Ȭ2736

contract” and reflects the same $2,978,334.28 amount, over

$120,000 less than the amount proposed in the loan presentaȬ

tion. PNB’s second loan to Rockwell in December 2008 folȬ

lowed the same pattern. The initial loan presentation on DeȬ

cember 10, 2008, indicated that PNB would loan $1,120,000

to Rockwell. Lease Schedule S084, executed on December 15

and 16, was close but not identical: it reflected an equipment

purchase price of $1,111,024, with a monthly rent of

$32,410.51. Rockwell’s December 22 promissory note includȬ

ed a monthly payment amount of $32,410.51, and the securiȬ

ty agreement it signed with PNB that same day made specifȬ

ic reference to Schedule S084. (The total amount for the secȬ

ond loan was $1,131,989.75; neither party explains why it

was higher than both the loan presentation and the amount

on Schedule S084.)

These documents support the conclusion that the operaȬ

tive moment was when PNB actually disbursed the money,

not when it initially approved the loans—in other words,

when the money went out the door. That moment did not

arrive until PNB had in its possession the two lease schedȬ

ules that contained the forged signatures. There is little quesȬ

tion that PNB consulted those schedules before coming to

final agreement with Rockwell, given the specific references

to the lease schedules and the agreements’ use of the precise

monthly rental amounts from the schedules. RLI contends

that a reasonable juror could find that PNB did not rely on

the lease schedules, but we cannot see how on this record.

The only plausible conclusion is that PNB ultimately “exȬ

tended credit ... on the faith of” documents bearing forgerȬ

ies (the lease schedules).

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No. 14Ȭ2736 13

FDIC also points to testimony from PNB’s senior vice

president, Richard Dunbar, as evidence that PNB relied on

the lease schedules. Dunbar testified in a deposition that

PNB “had the original of [the lease schedules] prior to fundȬ

ing these loan transactions,” because PNB “always reȬ

quire[d] those originals,” and that PNB “rel[ied] in good

faith” on the lease schedules when making its loans to

Rockwell. RLI disparages this testimony, pointing out that

people other than Dunbar approved the loans at the loan

presentation stage. This suggests, RLI argues, that Dunbar

lacked personal knowledge of the decisions to make the

loans. But Dunbar was PNB’s signatory to the final security

agreements and assignments between Rockwell and PNB.

Those documents reflected the monthly amounts from the

lease schedules and referred to the schedules by date and

name. That is enough to show that Dunbar played some role

in the disbursement of the funds to Rockwell.ȱȱ

In sum, RLI has not pointed to enough to permit a reaȬ

sonable jury to find that PNB did not provide loans to

Rockwell on the faith of documents containing forged signaȬ

tures. To the contrary, the undisputed material facts demonȬ

strate that PNB possessed and reviewed the lease schedules

as it came to a final arrangement with Rockwell, and it exȬ

plicitly referred to the schedules and incorporated their

monthly payment terms in the final loan documents.ȱȱ

D

RLI’s next argument is that FDIC failed to comply with

the requirement in the bond requiring it to have actual physȬ

ical possession of the forged document. RLI interprets this to

mean actual possession of the original 2001 master lease. It is

undisputed that FDIC never possessed that document. Ergo,

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14 No. 14Ȭ2736

RLI says, FDIC cannot show that it assumed liability “on the

faith of ... any Written, Original” security agreement conȬ

taining a signature “which is a Forgery,” where “Original” is

defined as “the first rendering or archetype.”

RLI is again not taking the bond’s language in context.

The bond does not require the insured party to possess the

original of every document associated with a transaction,

including a master loan document that preceded an individȬ

ual lease agreement. We can assume that the master lease

began the business relationship between Moody and Sysix,

but each lease schedule represents a standalone transaction,

each with its own execution date and financing. It is undisȬ

puted that FDIC possesses the original of each lease schedȬ

ule. As we already have discussed, each lease schedule is a

security agreement as defined by the bond, and each conȬ

tains a forgery upon which PNB (and FDIC by extension)

sufficiently relied to trigger coverage. In short, FDIC posȬ

sesses the written originals of the operative security agreeȬ

ments—here, the lease schedules.

RLI suggests that because (as it sees it) the lease schedȬ

ules “contain no material terms” and “are simply lists of

leased equipment,” they do not qualify as agreements. A

look at the schedules, however, shows that they are not so

limited. In particular, the first page of each schedule proȬ

vides the material terms: the minimum term of the lease, the

commencement date, the monthly rent, the maximum purȬ

chase price of the leased equipment, and an automatic reȬ

newal provision in the event that the lessee fails to return the

equipment upon termination of the lease. Although the leasȬ

es also incorporate the master lease by reference, RLI conȬ

tends that this must be disregarded because of the “antiȬ

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No. 14Ȭ2736 15

bundling” provision within the bond. We need not address

this argument because in our view the incorporation of the

master lease does not change anything, given the lease

schedules’ status as the operative forgeryȬbearing security

agreements in this case.

E

Finally, RLI contends that FDIC’s claim falls outside the

bond’s contractual statute of limitations. PNB discovered its

loss in September 2009, yet FDIC did not file suit against RLI

until May 2012. The bond contains a provision imposing a

24Ȭmonth limit on the initiation of litigation, measured from

the date of discovery of the insured’s loss; RLI argues that

this controls. We can dispense with this argument easily. The

Financial Institutions Reform Recovery and Enforcement Act

(FIRREA), enacted in 1989 (long before these transactions),

says that “[n]otwithstanding any provision of any contract,”

the statute of limitations for any contract claim brought by

FDIC is the longer of six years or the applicable state statute

of limitations. 12 U.S.C. § 1821(d)(14); Pub. L. No. 101Ȭ73,

§ 212 (1989). The present case involves a contract claim

brought by FDIC in its capacity as receiver. RLI concedes

that if the FIRREA period applies, this suit was timely.

RLI fights this outcome with a convoluted argument that

starts with the proposition that the 24Ȭmonth limitation on

suits in the bond is not analogous to a statute of limitations.

If that is so, then (RLI contends), the period in the bond

overrides FIRREA’s sixȬyear (or greater) allowance for this

kind of suit by FDIC because it is a contractual provision,

and contractual provisions are favored by Illinois law when

contrary to statutes of limitations. Its argument, however,

utterly ignores the fact that FIRREA’s period applies

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16 No. 14Ȭ2736

“[n]otwithstanding any provision of any contract.” The statȬ

utory language could not be clearer. Congress provided that

FIRREA would override shorter contractual time limits, not

the other way around.

RLI’s only response is to argue that the language in

FIRREA is merely a choiceȬofȬlaw provision, not the firm

command we perceive it to be. RLI does not explain this arȬ

gument aside from a citation to our decision in FDIC v. WaȬ

bick, 335 F.3d 620 (7th Cir. 2003), which does not deal with

the “notwithstanding” language. Wabick addressed the lanȬ

guage in FIRREA instructing courts to use “the longer of”

either six years or the applicable state statute of limitations

(which was 10 years in Illinois). The statutory language here

unequivocally instructs courts to set aside “any provision of

any contract.” RLI also points to CTS Corp. v. Waldburger,

134 S. Ct. 2175 (2014), stating that the Supreme Court “reȬ

cently addressed this issue” in that case. The issue to which

RLI refers, however, is just the general distinction between

statutes of limitation and statutes of repose. Waldburger exȬ

amined an environmental statute, not FIRREA. The question

was whether that statute preempted only statutes of limitaȬ

tions, or also statutes of repose. Nothing in Waldburger casts

any doubt on our reading of FIRREA.ȱȱ

III

The bond that RLI issued to PNB covers the loss that

PNB (and thus FDIC as receiver) suffered in this case. BeȬ

cause FIRREA specifically overrides conflicting contractual

periods for bringing suit, and FDIC sued within the statutoȬ

ry time, its claim was not subject to dismissal as untimely.

We therefore AFFIRM the judgment of the district court in faȬ

vor of FDIC.

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