No. 2--06--0671 Filed: 6-25-07

______________________________________________________________________________ IN THE AP PE LLATE COU RT OF ILLIN OIS SECOND DI STRICT

______________________________________________________________________________ OTTAWA SAVINGS BANK, ) Appeal f rom the Cir

cuit ) Co ur t o f D u P ag e C ou nt y. Plaintiff -Appella nt, )

) v. ) No. 05--MR--391 ) JDI L OANS, I

NC.; JDI JOLI ET, L LC, d/b

/a ) JDI L oans, I

nc.; JEFF REY AEDER ; ) KEVI N CONNOR; and DAVI

D RATTNER , )

) Defendants-Appellees ) ) (Flower Bank, FSB, f/k/a Umbrel la Bank, FSB; ) Honorab le West Town Sa

vings B ank; and L

incoln Sta

te ) Bonnie M. Wheaton, Bank, Plaintiffs). ) Judge , Pres idin g.

______________________________________________________________________________ JUSTICE BYRNE de livered

the opinion of the c ourt: OnApril 4, 2005, plaintiffs, Ottawa Savings Bank (Ottawa) ; Flower B ank , FSB, f /k/a Umbrella Bank, F SB; West To wn Saving s Bank; a nd Lin coln State

Bank, br ought a n action t o recover compensatory

and punitive damages agains t defend ants, JDI L oans, I

nc.; JDI Joliet, L LC, d/b/a JDI L oans, Inc.; Jeffrey

Aeder; Kevin Connor; and David Rattner (collectively , defendants), f or losses all egedly

sustaine d from the

improper sale of a portfolio of loans by Co mmercia

l Loa n Corpora tion (CL C) to JDI

Loan s, Inc. I

n the comp laint, pla

intiffs a lleged causes o f action

agains t defenda nts for conv ersion ( count I ), turnov er of pr

operty (count II ), imposition of trust (count II I), unjust enrichment (c ount IV), an acc ounting (count V), temporary , preliminary, and pe rmanentNo. 2--06--0671

-2-

injunctive relief (count VI) , and declar atory relief ( count VI

I). T he trial c ourt gr

anted de fendant s' motion to dismiss pu

rsuant to section 2--615 of the Code of Civil Procedure (735 I LCS 5/2--615 (West 2004)), with leave to amend. Plaintiffs subsequent ly f il ed an amended complaint alleging

causes of action fo rtortious interference with existing business relationships (count I), tortious interferencewith contract (count II ), recovery

of the loan proceeds pursuant to section 3--306 of the UniformCommercial Code (UCC) (810 IL CS 5/3--306 (West 2004)) (count II I), an acc ounting (count IV), and dec larator

y r elief (c ount V). T

he trial c ourt also

dismissed t

he amend ed compla

int, with leave to amend. Thereafter, plaintiffs F lower Bank, West Tow n Sav ings Ba

nk, and L incoln State Bank voluntarily dismissed themselves f rom the action. Ottawa then filed a second-amende d complaint against defendants, asserting only a single cause of action, for induce ment of breach of fiduciary duty . The tria

l court a gain g ranted d efenda nts' sec tion 2--6 15 motion to

dismiss, thi s time with prejudice. Ottawa appeals, claiming that the tria l court erred in dismissing its second-amended complaint and in dism

issing its origina l and firs t-amend

ed compla

ints. For the reasons that follow, we affi rm. BACKGROUND OnApril 4, 2005, Ottawa brought its original complaint ag ainst defe ndants, alleging conversion, tu rnover o f property, imposition of trust, and unjust enrichment, a nd seeking an

accoun ting, temporary, pr eliminary, and per

manent injunctive relief

, and dec laratory r

elief. The claims were ba sed on Otta wa's a nd the othe

r plaintif fs' re lationship s with CL C. CLC was prima rily engaged in the business of extending, making, and servicing to third parties business loans that we re secured by real e state and per sonal prop erty . CLC so ld to vario us banks, including

plaintiff s, particip ation inte

rests in mo st of these

loans.No. 2--06--0671

-3-

The origina

l and ame nded comp laints all eged e ssentiall y th e same f

acts. In March

2004, JDI Loan s, Inc. (JDI) purcha sed a por tfolio of s even loa

ns from CLC pursuan

t to a mortg age loa

n sale and servicing agreeme

nt (the JDI agree

ment). Under the agreement, JDI paid more than $3.2 million to CLC for th e lo ans . In r etu rn, CLC agree d to "sel l, assig n, transf er and c onvey

unto [JDI ] *** all of [CLC' s] right, t

itle and in

terest in and to the

Loan s. " T he agreement further pr ovided that the "ownership of each Loan *** sha l l be vested in [JDI]," and identified JDI as " the owner of the Loan(s)." CLC transferred, and JDI received, a 100% ownership interest in the loans. I n return, JDI obtained the original notes from CLC. Prior to t he sale, CL C had ente red into p articipa

tion agr eements with vari ous lende

rs, including Ottawa and the other plaintiffs, whereby

some portion of CLC's loan portfolio, including the JDI loans, were funded. Those pa rticipation agreements required CLC to repay the particip ants their investment if the loans were ever sold or repaid. CLC fa

iled to sat isfy its obligations to Ottawa under the participation agreement when CLC diverted the $3. 2 m il li on p aid to it by JD I. Included inthat amount was the balance due for Ottawa' s portion of the loan portfolio, in the ag gr egate amount of over $2 million. Accord ing to the terms and cond

itions of th e partic ipation a greements, CL C did

not reta in any ownersh ip intere st in the pa

rticipat ion loans. However, CLC held leg al title to the participation lo ans as trus tee for

the part icipants. CLC, a s trustee , could no t assign or trans fer leg al title to particip atio n lo ans. The participants were considered the be neficial owners of the participation loans. CLC fi le d b an kr up tc y in Ma y 2004 and is now out of busines s. A Chapter 11 bankruptcy

trustee was appoint ed immediate ly a fter the commencement of the CL C bankruptcy ca se, primaril y based up on CLC' s pre-ba nkruptcy fraud a nd mismana

gement of its entire loan portfolio.No. 2--06--0671

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JDI was an active participant in the CL C bankruptcy ca se and JDI Joliet filed a proof of claim in the

casein an unsta

ted amoun

t. In t his proof of claim, JDI Jolie

t affirmatively

stated tha t it did business as JDI Loa

ns, Inc. Ottawa alleged that, prior to the closing of the JDI agreeme

nt, JDI was informed

that CLC had previously sold participation interests in the loan por tfolio. CLC also provided JDI with a copy of the participation agreement form that was used in conjunc

tion with the loan portfolio. In light of this informat

ion, JDI request ed that th e partic ipati on intere sts in the loa n portfol io be paid

in full fromthe proceeds being paid by JDI at the closing of the JDI agreement. Specifically

, JDI requested payoff le tters from the participants, which included Ottawa, and confirmation that the p articipa

nts would be paid in full from the proceeds that JDI was tende ring to CLC at closing. CL C refused to comply with JDI 's request. Ottawa further alleged that, u

p on such refusal by

CLC, JDI then reque sted that CLC's counsel act as an escrow agent

of the proceeds that JDI was tenderi ng to CL C pursuan

t to the JDI

agree ment. JDI also req

uested th at CLC 's coun sel assume the additional responsibility of forwar ding pay ment infull to th e pa rti cip ant s fr om th e pr oce eds JD I was payi ng t o C LC. CLC and its counsel refused to comply with JDI' s request. Ottawa alleged that JDI next requested that CL C and its counsel pr o vide a side letter agreement

to JDI insuring that the proceeds JDI was tendering to CLC at closing pursuant to the JDI agree ment would

be used to

pay the part icipants i n full for the bala nces due to them. CLC and its counsel refused to enter into such an ag reement. Ottawa alleged that, despite these refusals by CLC and i ts cou nsel a nd wit h know ledge and notice that CL C had pre viously sold part

icipatio n intere sts in the loan portfolio and thus hadNo. 2--06--0671

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fiduciary duties to the partic ipants, JDI procee ded to clo se the JDI agreeme nt. CLC never

paid from the proceeds paid by

JDI the balance due to Ottawa f or its portion of the loan portfolio. As of the closing of the JDI ag reement, Ottawa

asserted that defendants had taken possession of and asserted

ownersh ip right s in and tothe loan portfolio, to the unlawful exclusion of Ottawa. Ottawa asserte d that, ba sed on de fendant s' knowledge and notice of the pree xisting ownership r

ights inand to the loan p ortfolioand CLC's fiduciary duties to the participants, defendants purchased the loanportfolio subject to any and a ll claims and defenses of Ottawa. As a result of defenda nt' act ions, Ottawa and the ot

her plai ntiffs fi led suit on

April4, 2005, claiming that they were deprived of

their property; name ly, their portions of the loan portfolio and inter ests paid thereon. At the time of the execution of the JDI

agree ment and a

t all other releva nt times, JDI

was a dissolved corporation. Aeder and Connor were officer s, directors, and shareholders of JDI , and Rattner was an officer. Ottawa alleg ed that at all relevant times prior t o the closing of the JDI agree ment, defend ants k new of C LC's fiducia ry obligat ions to the

particip ants in

the loan p ortfolio being acquired by

JDI from CLC. Ottawa f urt her asserted that, as of the closing of the JDI agree ment, defendants took possession of and asserted ownership rig hts in and to Ottawa's portion of the loan portfolio. Ottawa alleged that, as of October 5, 2005, and as announced by defenda

nts' counsel in open court, J DI was paid all amounts due from the underly ing third-party

borrowers under the participation

loans, inc lusi ve of principal and interest. As a result, JDI re ceived in excess of $3.5 million for the loans it acquired from CLC for merely

$3.2 million . Ottawa

claimed t hat, as a result of defendants' actions, it has been deprived of its property ; namely, Ottawa' s portion of the loan portfolio and the monies colle cted and derived theref rom.No. 2--06--0671

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We note that, on November 1, 2006, Peter Heuser, the president of CLC , was sen

tenced t o imprisonmentfor bank fraud he enga ged in through CLC. A

judgmen t was also entere d again st him for $18.5 million, representing the amount he converted that was other wise due a number of participating banks, including Ottawa. Respondin

g to plai ntiffs'original complaint, defendants filed a motion to dismiss pursuant to section 2--615. Defendants argue d in generalthat they never owed Ottawa or the other plaintiffs any duty under any a

greement. Defendants ar

gued that a participating

bank can look only to its lead bank, which in th

is case wa s CLC, f

or satisf action of claims ar ising out of a tra nsaction and that a particip ati ng bank is n ot a creditor of a borrower and so ca nnot assert creditor claims against the borrower. Alterna

tively , defend

ants arg ued that none of the claims alleged by plaintiffs were properl y pled. The trial court agreed a nd dismissedplaintiff

s' compl aint but g

ranted t hem leav e to amend. Plaintiffs filed an amended

complain

t realle ging the same facts and the counts for an accountingand declaratory relief and alleging three new counts, for tortious interferen ce wit h existing business r

elationsh ips, tortio us interf erence with contr

act, and for proc eeds p ursu ant to section 3--306 of the UCC (810 ILCS 5/3--306 (West 2004)). Defend ants moved to dismiss plaintiffs' amended complaint, again invoking the ar gument that they never owed plaint

iffs any duty under an y a greement. Defend

ants addi tionally argued that the new cla

ims had not

been pro perly pled. The trial court agreed a nd dismissed plaintiffs' amended complaint, again granting plaintiffs le ave to amend. After the other plaintiff s voluntar ily dismissed themselves, Ottawa filed its second-amended complain t, alleging the same facts as in the previ ous complaints but alleging only one count, for inducement

of breach of fiduciary

duty. Defenda

nt s filed a sectio n 2--615 m otion to dism

issNo. 2--06--0671

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Ottaw a's second-amended complaint, raising the same arguments as before. This time the trial cour t granted defendants' motion with prejudice

. ANA LYSIS Ottawa purports to appeal not only fr om the trial court's final order dismissing with prejudice its se c ond-ame

nded comp laint but a

lso from th e previo

us order s dismissing

the orig inal and f

irstamended complaints. Defendants contend that Ottawa has waived all butits claim for inducement of breach of fiduciary

duty, because

in the second-amended complaint Ottawa did not refer to or adopt the claims from the original and the first-amende d complaints. We agree. "A plaintiff desiring to preserve for appe al the previous dismissal of claims either must stand

on the dismiss ed counts

and cha llenge the ruling

at the ap pellate level or real lege or incorporate the dismissedcounts in s ubsequent co mplaints ." Abrams v. Watchtower Bible &Tract Soc iety of New York, Inc. , 306 Ill. App. 3d 1006, 1014 (1999); see Boatmen's National Bank of Belleville v. Direct Line s, I nc. , 167 I ll. 2d 88, 99(1995); Doe v. Roe , 289 Ill. App. 3d 116, 120 (1997). A party who files an amended complaint waives any obje ction to the trial court's ruling on the forme

r compla int. Boatm en's National Bank , 167 Ill. 2d at 99. Where an amended ple ading is complete and does not refer to or adopt

the prior complaint, the earlier complaint ceases to be a pa rt of the r ecord, b eing in effect abandoned and withdrawn. Pfaff v. Chrysler Corp. , 155 Ill. 2d

35, 61 (19 92); Funes v. B&B Equipment , Inc. , 282 Ill. App. 3d 272, 274-75 (1996). Once a n amended pleading ha s been filed, allegations of

error in dismissing a prior pleading are waived. Foxcr oft To wnhom e Owner s Ass'n v. Hoffman Rosner Corp. , 96 Ill. 2d 150, 153 (1983). Inthis case, Ottawa abandoned and withdrew the original complaint's claims of conversion, turnover of property, impo sition of trust, unjust enrichment, and temporary , preliminary, and permanent

injunctive relief

when it fa

iled to re allege

or incor porate t hose cla ims in its first-amendedNo. 2--06--0671

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complain t. Like wise, Otta

wa aban doned the

first-a mended c omplaint' s c l aims for tortious interferencewith existing business relationships, tortious interference with contract, proceeds pursuant to section

3--306 of

the UCC (81 0 IL CS 5/3--30 6 (West 200 4)), an a ccounti ng , and declarat ory

reli ef when it failed to reallege or incorporate those claims in its second-amended complaint. Ottawa argues that the interpret ation of the Foxcroft rule is " ill conce ived, illog ical and in conflict with more compelling state law and should not be applied." While the Seventh Circuit Court of A ppe als has ma

de it clea r that a li tigant in federa l court ne ed not re

plead dis missed cla

ims to preserve them for appeal, the Foxcroft rule is a creature of state law that has y et to be overturned. See Bastian v. Petren Resources Corp

. , 89 2 F.2d 680, 682-83 (7th Cir. 1990); see also Smith v. Nation al Health Ca

re Servi ces of Pe oria , 934 F.2d 95, 98 (7th Cir. 1991) ("This court in Bastian stated that dismis sed clai

ms n eed not be i ncluded in an amended complaint, because the final judgment brings u p all pre vious rulin

gs in the case "). The i mport of Foxcroft is that Ottawa had alternatives to prese

rve the c ounts at issue f

or appel late review. First, it could have elected to stand

on the or igi nal or the

first-a mended c omplaint, w

ithout filin

g its sec ond-ame

nded comp laint. Al te rn at iv el y, it could have preserved the claims in the original and f irst-amen ded com plaints by realleging them in the second-a mended complaint. We note that , in response to def endants' motion to dis miss the fi rst-ame nded comp laint, Ot tawa admitted that it abandoned the original complaint's claims for conve rsion, turno ver , constructive tr us t, an d u nj us t e nr ic hm en t. Si mi la rl y, by failin g t o preserve any claims from the original and first-amended complaints so as to avoid the consequences of the Foxcroft

rule, Ottawa has waived this court's consideration of the trial court' s dismissal of all of its cla

ims save f or the onl y claim raised in the second-amended co mplaint: in du ce me nt of br ea ch of

fi du ci ar y du ty.No. 2--06--0671

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Ac co rd in gl y, we now a

ddress w hether t he trial c ourt prop erly

gran ted defendants' section 2--615 motion to dismiss Ottawa's claim for inducement of breach of fiducia ry duty

. A motion brought pursuant to section 2--615 (735 IL CS 5/2--615 (West 2004)) attacks the legal sufficiency

of the complaint. Abbasi v. Paraskevoulakos , 187 Ill. 2d 386, 391 (1999). I t must be determined wheth er the a lle gati ons of the

complain t, when vi ewed in a

light most

favora ble to the plaintiff, are sufficient to state a cause of a ction upon which relief can begranted. Abbasi , 187 Ill. 2d at 391. A section 2--615 motion admits as true all well-pleaded facts, but not conclusions of law or factual conclusions that are unsupported by allegations of specific facts. Lagen v. Balcor Co. , 274 Ill. App. 3d 11, 16 (1995). Orders g ranting or deny

ing such motions are subject to de novo review. Abrams , 306 Ill. App. 3d at 1010. Case law holds that in order to plead a cause of action for inducement of breach of fiduciary du ty, a plaintiff must allege that a third party : (1) colluded with the fiduciary in c ommitting a breach of duty; (2) induced or pa

rticipated in such breach; and (3) obtained the bene fits resulting fromthe breach of duty. See, e.g. , Paul H. Schwendener, Inc . v. JupiterElectric Co. , 358 Ill. App. 3d 65, 74 (2005). Ottawa

contends that it is attacking the sale to defendants of the underly ing loans and that its claim against

defendants is for

the improper transfer of the loans from CL C to defendants when defenda nts knew tha

t CLC ha d no ability

or righ t to trans fer th e loan s. How ever, O ttawa 's claim for inducement

of breach of fi du ciary

duty must be ba sed on its p articipa tion loans with CL C and its assumption that JDI owed O ttawa s ome legal duty or obligation by virtue

of its participation agreement

with CL C. Thus, we must determine whether Ottawa, as a par ticipant bank, has a right of action under the participation agree ment against any

one other than CLC. An o verview of participation

loans will lend a

n underst anding to whether there is a foundation to Ottawa's c laim for inducement of breach of fiduciary duty.No. 2--06--0671

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A participation is an undertaking by one financial institution, usually called the " lead bank," to divide a loan that it has or will put on its books into shares, which it then offers for sale to other "partic ipant" financial institutions. First National Bank of Belleville v. Clay -Hensley Comm' n Co. , 170 Ill. A pp. 3d 898, 901-02 (1 988). Pa rt icipants, like Ottawa, can look only to their lead bank, whichin this case was CLC, for satisfaction of c laims ar ising out of the transaction; they are not t hemselves creditors of the borrower and cannot a ssert claims against the borrower. B ank o f Chica go v. Park National Bank , 266 Ill. App. 3d 890, 899 (1994); see In re Okura & Co. (America), Inc. , 249 B.R. 596, 608 (S.D.N.Y. 2000) (courts are in agre ement that a participation does not allow the particip ant to ass ert clai ms agai nst the bor

rower) ; Fi rst Na tional Bank of Louisville v. Continental Illinois National Bank & Trust Co. o f Chi cago , 933 F.2d 466, 467 ( 7th Cir. 199 1) ("on ly the lead bank has a direct contractual rela tionship wi

th the bor rower" ); Federal Deposit I nsurance Corp. v. Adams , 187 Ariz. 585, 594, 931 P.2d 1095, 1104 (App. 1996) (holding that the participant cannot s ue t he borrower to enforce the loan a greement, because it has no leg al relationship to the borrower). In First Na

tional Ba nk of Be lleville , a case

similar to the present case, a participating bank brought suit aga inst third parties for

conversion of collateral that secured the loan issued by the lead bank. First Na

tional Ba nk of Be lleville , 170 Ill. App. 3d at 900. Th e court held that, because a participatingbank can

maintain a

cause of action a gainst only

the lead bank, the participating bank did not have a

n intere st inthe collateral securing the loan suffic ient to permit it to maintain a direct actionagainst the alleged conver ters. First National Bank of Bellevi lle , 170 Ill. App. 3d at 906. The court explained that" '[t]he participants can look only to their lead [bank] for satisfaction of claims arising out of the transaction; they a re not themselves creditors of

the borrower and so cannot assert creditor claims against theborrower.' " First Na tional Ba nk of Be lleville , 170 Ill. App. 3d at 904,No. 2--06--0671

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quoting A. Armstrong, The De veloping Law of Partic ipation Ag

reemen ts , 23 Bus. Law. 689, 693 (1968). Inthis case, the participation agreement states tha t CLC sold to Ottawa "an undivided interest in *** the right to receive its share *** of all co llections with resp ect to the Note(s)." The master participation

agreements reflect that, in selling various particip ation inte rests to plaintiffs, CLC was nottransferring any

legal ownership

interest s in the loa

ns. Instead, plaintiffs were merely " deemed to b e holders of an equitable interest in the L oan *** [and CLC] may de al with t he Loan *** a s though the absolut

e legal a nd equita ble owner th ereof. " CLC thus reta ined leg al title to t

he loans. Participationinterest s arise o ut of ag reemen ts betwee n lead ba nks and pa

rticipan ts. In this case, Ottawa never alleged that JDI was a party

to any of these a

greements. As the trial court noted, JDI was neve

r provide d with any

contracts CLC en

tered in to, and Ot tawa did not maintain a recorded security interest on the loans such that JDI wou ld have be en put on notice of a lega l claim. Nor was there a single allegation that JDI knew that Heuser

did not intend to pay to Ottawa the bala nce it was due from the $3.2 million CLC received from JDI . The fact remains, without a duty that runs from defenda nts to Ottawa a

nd a brea ch of tha t duty , we fail

to see how

Ottawa c an sustai

n a lega l cause of ac ti on fo r i nd uc em en t o f b re ac h o f f id uc ia ry d ut y. Moreover, ev en if

th er e w er e a du ty, Ottawa made no specific allegations of collusion or that defenda nts did anything to induce CLC to breach its fiduciary duty to Ottawa. Nor we

re there any specific all ega ti ons th at a ny br eac h by C LC of a duty to Ottawa was cau sed by

defenda nts' con duct. Ottawa did not ple ad that de fendant s knew who Ottawa w as, knew the contents, terms, or conditions of Ottaw a's co ntract o r relati onship with CLC, or caused or induced CLC to breach any obligation to Ottawa.No. 2--06--0671

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Ottawa cannot allege that defendants "induce d or participated" in such a breac h and obtained the benefits from

the brea ch. We fa

il to see ho

w defen dants could hav e induce d or part icipated in the breach of CLC' s fiduciary duty to Ottawa when

defenda nts neither knew of that duty nor saw the contract that cre ated the

duty . Had CL C been an

honest loanbroker, it would have taken JDI' s $3.2 million and repaid the participating banks what they were owed. The decision to breach the fiduciary duty that required CLC to pay the money that it owed to Ottawa was only CL C's decision. As explained by defenda

nts, JDI paid $3.2 million for the loan portfolio with an ap

proximate face value of

$3.5 million . JDI bo

ught a lo an portf

olio and " reaped " nothing at the time

of clo sing. It obtained the rig ht to colle ct princ ipal and i nterest on seven loans. If any

one of those loans went into default, or the value of the collateral diminished, JDI, like any other lender, would be at risk of notcollecti

ng its money . The "b enefit" obtained by JDI was paid for. It did not steal or conver t the

mo ne y. JDI wrote a

check for $3.2 million

to CLC, which was substantially more than Ottawa was owed at the time. The fact that CLC chose not to pay Ottawa is a matter betwee n Ottawa and CL C. Ottawa contends that, "by c losing th e transa ctio ns s et forth in the JDI agree ment with the prior notice and knowl edge d

escribe d above, the Defe

ndants int entional ly and unjustifiably induced

a breach of the pa rticipat ion agr eements e xistin g between CLC and the Plaintiff." However, as stated, Ottawa fails to allege how or in what manner the mere purchase of se veral loans in duc ed C LC notto pay Ottawa the

amount Ottawa was due. As defendants aptly assert, "[o]ther

than p utting money in the hands of

a person no one knew was acting illegally (until the house of cards collapsed) how exactly did JDI induc e Mr. Heuser to steal?" In sum, because defenda nts were not privy to any contracts entered into between Ottawa and

CLC, O ttawa wil l never b e able to allege that def endants in du ce d t he br ea ch of

a f id uc ia ry d ut y.No. 2--06--0671

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For the foregoing reasons, the judg ment of the circuit court of Du Page County is affirmed. Affirmed. GIL LERAN JOHNSON and ZENOF F, JJ., concur.