Opinion ID: 501744
Heading Depth: 2
Heading Rank: 1

Heading: The Collateral Estoppel Effect of the New York District Court's Factual Findings

Text: 10 The Fund contends that it is not collaterally estopped by the New York litigation from asserting justifiable reliance. It argues that the question of whether it had a right to rely on the defendants' alleged misrepresentations is a question of fact for the jury to decide rather than one that the court can address on a motion for summary judgment. It asserts that the New York litigation established only that it violated its ERISA duties by failing to seek expert assistance to evaluate the loan. According to the Fund's interpretation of Illinois law, its duty of inquiry does not require it to seek expert assistance but rather extends only to situations where the Fund actually was given the opportunity of knowing the truth of defendants' misrepresentations and omissions, and merely closed its eyes to the truth that plainly was before it. Appellant's Br. at 27 (emphasis in original). Thus, the Fund contends, the New York district court's factual findings do not bar the present suit because they establish only what an expert would have discovered had one been employed.
11 Summary judgment is appropriate where a party fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986). In addition, the court will consider the relevant standard of proof in determining whether the nonmoving party has met its burden under Fed.R.Civ.P. 56(c). Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). The summary judgment standard mirrors the standard for a directed verdict under Federal Rule of Civil Procedure 50(a), which is that the trial judge must direct a verdict if, under the governing law, there can be but one reasonable conclusion as to the verdict. Id., 106 S.Ct. at 2511. 12 The parties agree that Illinois law governs. Under Illinois law, one essential element of fraud is justifiable reliance on the alleged fraudulent statements. 2 Justifiable reliance must be shown by clear and convincing evidence. National Republic Bank v. National Homes Constr. Corp., 63 Ill.App.3d 920, 21 Ill.Dec. 80, 381 N.E.2d 15, 18 (1978). Thus, in order to avoid summary judgment, the Fund must set forth enough facts from which a jury could find by clear and convincing evidence that it was justified in relying on the defendants' alleged misrepresentation. If the Fund failed to meet this burden, then the district court was correct in granting summary judgment to the defendants. See Vaughn v. General Foods Corp., 797 F.2d 1403, 1415 (7th Cir.1986), cert. denied, --- U.S. ----, 107 S.Ct. 1293, 94 L.Ed.2d 149 (1987) (applying Indiana law) (where the evidence is so clear as to be susceptible of only one reasonable inference, it is for the court to determine as a matter of law whether plaintiff was justified in relying on the representation).
13 As we have already noted, the parties differ sharply as to whether the plaintiff, in order to show it was justified in relying on the statements of the defendants, must show that it undertook an investigation of the matter. We recognize that the approach of Illinois courts toward the question of justifiable reliance has not been entirely clear. See Chicago Title & Trust Co. v. First Arlington Nat'l Bank, 118 Ill.App.3d 401, 73 Ill.Dec. 626, 454 N.E.2d 723, 728-30 (1983). In Teamsters II, this court refrained from harmonizing the Illinois cases on justifiable reliance but indicated that it interpreted Illinois law as precluding a plaintiff from relying on misrepresentations where it has in fact investigated and discovered the truth (or at least discovered a substantial chance that the defendant's statements were false). 762 F.2d at 531 (dicta); see also Peterson Indus. v. Lake View Trust & Sav. Bank, 584 F.2d 166, 168 (7th Cir.1978) (applying Illinois law). 14 The dicta in Teamsters II and in Peterson certainly does not stand for the broad proposition that a plaintiff never has a duty to initiate an investigation. Indeed, the Illinois Supreme Court has said that the question of whether the plaintiff had a right to rely on a false representation is to be answered while viewing the representation in light of all the facts of which plaintiff had actual knowledge as well as those of which he 'might have availed himself by the exercise of ordinary prudence.'  Soules v. General Motors Corp., 79 Ill.2d 282, 37 Ill.Dec. 597, 402 N.E.2d 599, 601 (1980) (emphasis supplied) (quoting Schmidt v. Landfield, 20 Ill.2d 89, 169 N.E.2d 229, 232 (1960)). The exercise of ordinary prudence may thus include a duty to investigate: 15 In determining whether reliance was reasonable, all of the facts which plaintiff had actual knowledge of, as well as all of those it might have learned if it had used ordinary prudence, must be taken into account; if ample opportunity existed to discover the truth, then reliance is not justified. 16 Central States Joint Bd. v. Continental Assurance Co., 117 Ill.App.3d 600, 73 Ill.Dec. 107, 453 N.E.2d 932, 937 (1983) (plaintiff-pension plan could not establish justifiable reliance where plaintiff, along with its insurance expert and attorney, reviewed proposed contract containing alleged misrepresentation and had ample opportunity to determine its contents); see also National Republic Bank, 381 N.E.2d 15 (bank had no right to rely on alleged misrepresentations of general contractor regarding performance by subcontractor being financed by bank because bank had experience in making loans to subcontractors and had actual information that should have put it on inquiry plus ample opportunity to ascertain the truth of defendant's representations). 17 Thus, we believe that Illinois law imposes upon the plaintiff a duty to investigate when all the circumstances, evaluated in their totality, reasonably require, as a matter of prudence, that an investigation be undertaken. As one Illinois court recently summarized the law in this area: 18 In determining whether a party justifiably relies on another's representations, all of the circumstances surrounding the transactions, including the parties' relative knowledge of the facts available, opportunity to investigate the facts and prior business experience, will be taken into consideration. Only where the parties do not have equal knowledge, or access thereto, or where there are other peculiar circumstances inducing the injured party to rely solely on the representations of the other will a person be found to have justifiably relied upon the others' representations. The plaintiffs herein were experienced business persons.... There was ample opportunity for the plaintiffs to conduct their own investigation.... Apparently they chose not to do so. On these facts we do not hesitate to affirm the finding by the trial judge that no actionable fraud could be found. 19 Luciani v. Bestor, 106 Ill.App.3d 878, 62 Ill.Dec. 501, 436 N.E.2d 251, 256 (1982) (citation omitted) (emphasis supplied). In short, the crucial question is whether the plaintiff's conduct was so unreasonable under the circumstances and  'in light of the information open to him, that the law may properly say that this loss is his own responsibility.'  Chicago Title & Trust Co., 454 N.E.2d at 729 (quoting W. Prosser, Law of Torts Sec. 108, at 715 (4th ed. 1971)). 20 The Fund is precluded by the facts established in the federal litigation in New York from asserting that it undertook a reasonable investigation as required by Illinois law in order to maintain an action for fraud. The district court in New York found that the Fund accepted the defendants' representations without question, although information about the Bank's precarious financial position was readily available. After a two-hour presentation by Bancorporation representatives, the Trustees voted unanimously to approve the loan. Katsaros, 568 F.Supp. at 364. Although the Trustees were told that $1.5 million of the loan proceeds would be used by the Bancorporation to repay outstanding loans, they made no attempt to contact the prior lenders or to ascertain the history of the prior loans. Id. at 369. The Fund made no efforts to evaluate independently the information set forth on the financial statements given to it by the Bancorporation representatives. Had the Fund performed a proper analysis of the financial statements provided by the Bancorporation, it would have discovered that [n]either the Bank nor Bancorporation had ever earned the amount of money needed to service the debt.... Katsaros, 744 F.2d at 276. As the New York district court summed up the situation: 21 Here, the manner in which the loan to Bankcorporation was proposed and presented was designed to discourage inquiry into the merits. Urgency and speed overrode the need for calm deliberate inquiry and discussion. Colton apparently attended the meeting to advise the Board members on other matters on the agenda. No Trustee asked him to express his opinion on the advisability of making the loan. At any rate, he did not think that he was qualified to express an opinion with relation to the financial statements of Bankcorporation and the Bank. The Trustees considered only the information and representations given by the borrowers, as presented by Angelos and Howe. 22 An independent investigation would have disclosed that it would have been imprudent to make the loan based on the financial statements of Bankcorporation and the Bank. The sole source of income of Bankcorporation was the earnings of the Bank. An analysis of the financial statements by an expert would have revealed [that the Bank was in severe financial trouble.] 23 Katsaros, 568 F.Supp. at 367 (footnote omitted) (citation omitted). 24 To the extent that the plaintiff did undertake an investigation, these efforts were hardly those of a reasonably prudent trustee engaged in a sophisticated loan transaction. Certainly, when one does undertake to investigate, one must act with reasonable prudence in the conduct of that investigation. The district court in New York noted that, after approving the loan, two Trustees visited the Bank in Chicago. They also viewed certain Chicago real estate put up as partial security for the loan. This visit took place the day before the closing was scheduled. Id. at 364. Moreover, they did not attempt to secure an appraisal of the Bank stock, which was the primary security pledged for the loan, or of the property. Id. at 368. Although they visited the real estate, they did not even seek a title report. Had they done so, they would have discovered that one of the real estate parcels was subject to a tax delinquency which resulted in it being seized and sold the same day as the loan closing. Id. at 369. This meager investigation was not a reasonable one for these trustees in making such a loan. 3 25 These facts clearly establish, as a matter of law, that the Fund did not act with ordinary prudence in making this loan. A prudent trustee would not have made a $2 million loan without investigating the financial soundness of the debtor, whether or not such an investigation required the assistance of an outside expert. 26