Opinion ID: 584564
Heading Depth: 2
Heading Rank: 1

Heading: The FDIC's Entitlement to the Escrowed Funds

Text: 42 First, the Itex Trustee claims that the escrows set forth in the Itex and Covoil Contracts were never created. In its April 9, 1991 memorandum opinion the district court stated: 43 The contracts called for escrows with Western Bank in Houston. These escrows were not created. Instead the money was and is held by Larry W. Bass, an attorney for I-Tex. 44       45 The absence of an escrow agreement with Western Bank does not damage the F.D.I.C. position here. There is no disputing that an escrow in fact was established to which no one protested. Bass ... put the money in his trust account and kept it there. The contract and the conduct under it cannot be reasonably interpreted to defeat the escrow. 46 We agree with the district court. An escrow is defined as: 47 A legal document (such as a deed), money, stock, or other property delivered by the grantor, promisor or obligor into the hands of a third person, to be held by the latter until the happening of a contingency or performance of a condition, and then by him delivered to the grantee, promisee or obligee. 48 Black's Law Dictionary 545 (6th ed. 1990). When property is delivered in escrow, a trust is created. 1 Restatement (Second) of Trusts § 32(d) (1959). 49 The evidence shows that the escrows were created. Paragraph 21 of the Itex Contract and paragraph 10(f) of the Covoil Contract each clearly and definitely state the terms of an escrow. They designate who is to hold the funds and who is entitled to them under the conditions prescribed. Manning Production wired $4.5 million to attorney Larry Bass on about February 1, 1983. In his affidavit Bass stated that he retained $162,500 in his trust account pursuant to paragraph 21 of the Itex Contract and $100,000 in his trust account pursuant to paragraph 10(f) of the Covoil Contract. Further, he stated that he has held these sums, together with any accrued interest, since February 1983 under his name as trustee in either his trust account or other bank accounts, and [a]t all times since 1983, I have performed these duties as custodian of the funds which I received by wire transfer in 1983, and as the attorney for [Itex], Jack W. Smith, [Covoil], and William R. Coleman. It is undisputed that none of the parties to the two contracts requested Bass to prepare a formal escrow agreement. The funds were never deposited with Western Bank, but remained in his possession. That the contract provisions creating a formal escrow agreement and designating an escrow of the funds with Western Bank were not precisely followed is not decisive. Escrows were nonetheless created. 4 50 Next, the Itex Trustee asserts that there are genuine issues of material fact which preclude summary judgment. Specifically, he claims that the cash flow shortfalls and the performance of Manning Production under the contracts are disputed. 51 There is no material factual dispute concerning the cash flow shortfalls, because there is no evidence that the resolution of any factual dispute in this area might affect the outcome of the action. See Fed.R.Civ.P. 56(c); Anderson, 477 U.S. at 248, 106 S.Ct. at 2510. The district court recognized plaintiffs' expert Edwin Cable who determined that the calculated net income from the properties previously owned by Itex from February 1, 1983 through January 31, 1984 was $503,893 and the calculated net income from the properties previously owned by Covoil over that same time period was $182,990. In both instances the actual cash flow fell well below the cash flow required under the two escrows. The Itex Contract required a cash flow of at least $950,000 in the twelve months following the closing date and the Covoil Contract required a cash flow of at least $550,000. The Itex Trustee offered no independent proof of the cash flow from the properties. Rather, he submitted the affidavit of Robert C. Thomas criticizing Cable's evaluation on largely technical grounds. For example, Thomas claimed that Cable's use of the term net income, was not the same as the contracts' use of the term cash flow. Also, Thomas criticized Cable for not reviewing certain of the books and records of Itex, but then claimed that to his knowledge they do not exist. Thomas also asserted that Cable should have based the cash flow on the actual sales price of oil, the actual contract price of gas and the actual production expenses concerning the properties at issue which information is not available. Cable based his evaluation on the field production history of Itex, the records of oil and gas production reported to the Texas Railroad Commission and the direct operating expenses experienced by the operators of the oil and gas properties covered by the two contracts in 1983. Most of this information is public record. Cable also testified at the stay hearing in the bankruptcy court where he was cross-examined by the Itex Trustee. The district court was justified in relying on Cable's evaluation of the cash flow from the oil and gas interests. 52 Further, there is no genuine issue of material fact concerning Manning Production's performance under the two contracts. The district court stated: Indeed the contracts can and should be read to mean that I-Tex must show that the cash flow requirement was met and, absent this proof, it has no right to any funds in escrow. We agree. The objections of the Trustee concerning the use of mutually acceptable accountants and generally accepted accounting principles, consistent with those used by Itex and Covoil in the fiscal year preceding the closing, are technical. The fact is that the Itex Trustee offered no evidence creating an issue of material fact as to the cash flow shortfalls and Manning Production's performance. 53 The Itex Trustee did not produce any evidence showing that there was a genuine issue of material fact concerning the cash flow. The actual estimated cash flow from the properties were far below that required by the contracts. In other words, he did not show that either: (i) the required cash flow was met and Manning Production was entitled to none of the funds, or (ii) the cash flow was high enough that Manning Production was only entitled to part of the funds. Accordingly the FDIC, as receiver for Manning Savings, the parent corporation of Manning Production, was entitled to the escrowed funds. To come to any other conclusion would contradict the plain reading of the contracts and give Itex a windfall. The contractual provisions requiring a minimum amount of cash flow within the first twelve months of the signing of the contracts were of vital importance to both parties. 54 B. The Escrowed Funds and Itex's Bankruptcy Estate 55 The Itex Trustee contends that the escrowed funds were part of the bankruptcy estate of Itex. The evidence supports the district court's finding that the funds belonged to Manning Production in February 1984 when the cash flow requirements were not met. At that time the interest of Itex in these funds was extinguished. This was prior to the bankruptcy filing and accordingly the escrowed funds are not part of the bankruptcy estate. C. Jurisdiction Over Larry Bass 56 Finally, the Itex Trustee claims that the district court lost jurisdiction over Larry Bass and the escrowed funds when it dismissed the FSLIC's claims against Bass with prejudice pursuant to a settlement agreement. In its April 9, 1991 memorandum opinion and its May 15, 1991 judgment order the district court found that it had jurisdiction over Bass. The Itex Trustee agreed that the district court had jurisdiction to award declaratory relief to either the Itex Trustee or the FDIC concerning entitlement to the escrowed funds. Under the settlement agreement plaintiff FSLIC reserved its rights to the escrow accounts. We see no reason to find that the district court lacked jurisdiction over Bass and those funds. 57 Accordingly the district court's decision to grant summary judgment will be affirmed. 5 58 Dismissal of Plaintiff FDIC's Other Claims Without Prejudice 59 The dismissal of a plaintiff's action without prejudice under Rule 41(a)(2) of the Federal Rules of Civil Procedure is within the sound discretion of the district court and may only be reversed if the appellant shows an abuse of that discretion. Kovalic v. DEC Int'l, Inc., 855 F.2d 471, 473 (7th Cir.1988). The district court abuses its discretion only when it can be established [that] the defendant will suffer 'plain legal prejudice' as the result of the district court's dismissal of the plaintiff's action. Id. (quoting United States v. Outboard Marine Corp., 789 F.2d 497, 502 (7th Cir.), cert. denied, 479 U.S. 961, 107 S.Ct. 457, 93 L.Ed.2d 403 (1986)). Previously we have set forth certain factors to be considered in determining whether a defendant suffered plain legal prejudice: 60 [T]he defendant's effort and expense of preparation for trial, excessive delay and lack of diligence on the part of the plaintiff in prosecuting the action, insufficient explanation for the need to take a dismissal, and the fact that a motion for summary judgment has been filed by the defendant. 61 Id. at 473-74 (quoting Pace v. Southern Express Co., 409 F.2d 331, 334 (7th Cir.1969)). 62 After the district court granted the plaintiff FDIC's motion for partial summary judgment, the FDIC filed a motion to dismiss without prejudice and without costs pursuant to Rule 41(a)(2) all of its other claims not previously settled or resolved by the district court. The Trustee objected to the motion primarily because he wanted the remaining claims to be dismissed with prejudice. The district court granted plaintiff FDIC's motion. 63 We find that the Itex Trustee has failed to demonstrate that he will suffer plain legal prejudice if the district court's dismissal order is upheld. The Itex Trustee claims that he and his predecessor, Itex, have gone to considerable effort and expense to prepare for trial. He asserts that the FDIC engaged in excessive delay, because [a]fter seven and a half years of litigation, the FDIC filed a motion for summary judgment on a single, totally new cause of action, which necessitated the filing of an amended/supplemental complaint. However, the Itex Trustee conveniently omits the fact that the action against Itex was stayed from about March 18, 1985 until October 11, 1990 due to the filing of the bankruptcy petition by Itex. The bankruptcy estate of Itex was dissipated. As the district court pointed out in its April 9, 1991 memorandum opinion, once the stay was lifted the FDIC pursued a theory different from those stated in the original complaint, because it recognized that this was the only manner in which it would be able to recover. Both parties sought a final appealable order. In its motion to dismiss the remaining claims without prejudice, the FDIC stated that it would not be cost effective to pursue those claims due to the financial situations of the remaining defendants, including Itex. The FDIC represented that it did not anticipate seeking a reinstatement of any claims included in the motion. By filing this motion the FDIC sought to preserve its right to seek further remedies should the financial situation of the bankruptcy estate of Itex change. Under these circumstances we find that the district court did not abuse its discretion in dismissing plaintiff's claims without prejudice and without costs.