Court Opinion

ID: 6319569
Source: CourtListenerOpinion
Date Created: 2022-03-02 22:01:20.475529+00
Date Added: 2024-06-11T09:01:26.032224
License: Public Domain

In the

    United States Court of Appeals
                For the Seventh Circuit
                    ____________________
Nos. 21-2118 & 21-2307
BIRCH|REA PARTNERS, INC.,
                               Plaintiﬀ-Appellant, Cross-Appellee,
                                 v.

REGENT BANK,
STONEGATE BANK, and
HOME BANCSHARES, INC.,
                    Defendants-Appellees, Cross-Appellants.
                    ____________________

        Appeals from the United States District Court for the
         Northern District of Indiana, Fort Wayne Division.
             No. 18-cv-00030 — Holly A. Brady, Judge.
                    ____________________

    ARGUED JANUARY 7, 2022 — DECIDED MARCH 2, 2022
                ____________________

   Before EASTERBROOK, ST. EVE, and KIRSCH, Circuit Judges.
    ST. EVE, Circuit Judge. Almost ﬁfteen years ago, Birch|Rea
Partners, Inc. (“Birch|Rea”) prepared an appraisal report on
a property in Indiana. Regent Bank later acquired the prop-
erty and started to doubt the report prepared by Birch|Rea.
After consulting with independent appraisal experts, Regent
Bank hired a law ﬁrm, and together they employed a certiﬁed
2                                           Nos. 21-2118 & 21-2307

appraiser, John Potter, to prepare a new report evaluating the
original Birch|Rea report. Potter’s report detailed several de-
ﬁciencies in Birch|Rea’s 2007 appraisal of the property.
    After reviewing the Potter report, Regent Bank ﬁled a
complaint in federal court against Birch|Rea for various state
law claims, but soon reconsidered and moved to dismiss the
complaint. Birch|Rea then ﬁled its own lawsuit against Re-
gent Bank for malicious prosecution. Regent Bank, in turn,
counterclaimed for attorney’s fees under the Indiana frivo-
lous litigation statute. The district court dismissed both claims
at summary judgment, and each side appealed. We conclude
that Birch|Rea cannot establish the elements of a successful
malicious-prosecution claim, but its lawsuit was not frivolous
under Indiana law. We therefore aﬃrm.
                           I. Background
    On May 16, 2007, SunTrust Bank (“Sun Trust”) hired
Birch|Rea Partners, Inc. to perform a portfolio valuation on a
property located in Indiana. Birch|Rea prepared the report
(“the Birch report”) and valued the property at $3.23 million.
PNC Bank (“PNC”) provided the ﬁnancing for the mortgage
loan, and both PNC and Sun Trust accepted the report. On
October 19, 2007, the owner sold the property to a Sun Trust
aﬃliate subject to a $2.3 million loan PNC extended to Sun
Trust. A few years later, PNC assigned the loan to American
Capital Group, LLC, which would later sell the loan to Regent
Bank. 1

1Stonegate Bank and Home BancShares, Inc. are successors in interest of
Regent Bank. “Regent Bank” refers to all three defendants in this case.
Nos. 21-2118 & 21-2307                                        3

    In February 2016, Regent Bank began questioning the
property’s valuation. Regent Bank consulted with independ-
ent appraisal experts and reviewed appraisal authorities and
regulations. The appraisers determined that the “go-dark”
value of the property was only $200,000. Regent Bank em-
ployed a law ﬁrm to investigate the situation further. The law
ﬁrm and the bank together hired a certiﬁed appraiser, John
Potter, to examine the Birch report. Potter prepared a report
of his ﬁndings (“the Potter report”), which detailed nine deﬁ-
ciencies in the original Birch report. The report concluded,
“Overall, the appraiser ﬁnds this report in non-compliance
with USPAP [Uniform Standards of Professional Appraisal
Practice] and [Birch|Rea] breached their duty of care by fail-
ing to apply proper methods used to appraise the subject
property as set forth herein.”
    Based on the Potter report, Regent Bank sued Birch|Rea
for professional negligence, negligent misrepresentation, con-
structive fraud, and breach of contract in connection to its
preparation of the Birch report (“the underlying action”). The
complaint ﬁled by Regent Bank speciﬁcally cited the Potter
report as justiﬁcation for the underlying claims. Soon after in-
itiating the lawsuit though, Regent Bank reconsidered and
moved to voluntarily dismiss the case. The district court dis-
missed the suit with prejudice.
   Believing that the underlying action was frivolous,
Birch|Rea ﬁled a complaint against Regent Bank for malicious
prosecution. Thereafter, Regent Bank counterclaimed for
damages under the Indiana frivolous litigation statute. Dur-
ing discovery, Regent Bank failed to disclose the names of two
potential individuals, Doug Green and Andrew Wyman, who
had relevant information pursuant to Federal Rule of Civil
4                                          Nos. 21-2118 & 21-2307

Procedure 26(a), then later relied on aﬃdavits submitted by
Green and Wyman. Regent Bank moved for summary judg-
ment on its malicious-prosecution claim, and Birch|Rea
moved to strike Green and Wyman’s aﬃdavits and moved for
summary judgment on attorney’s fees under Indiana law. The
district court granted both motions for summary judgment
and denied the motion to strike. Both parties appealed.
                          II. Discussion
    Birch|Rea argues that the district court erred by granting
summary judgment for Regent Bank on its malicious-prose-
cution claim and that the district court abused its discretion
by denying the motion to strike Green and Wyman’s aﬃda-
vits. Regent Bank submits that the district court erred by
granting summary judgment for Birch|Rea on its claim under
the Indiana frivolous litigation statute.
A. Motions for Summary Judgment
    We review a grant of summary judgment de novo.
Driveline Sys., LLC v. Arctic Cat, Inc., 936 F.3d 576, 579 (7th Cir.
2019). On cross-motions for summary judgment, all facts and
inferences are drawn “in the light most favorable to the non-
moving party on each motion.” Lalowski v. City of Des Plaines,
789 F.3d 784, 787 (7th Cir. 2015) (quoting Wis. Alumni Research
Found. v. Xenon Pharm., Inc., 591 F.3d 876, 882 (7th Cir. 2010)).
“Summary judgment is appropriate if there is no genuine dis-
pute as to any material fact, and the moving party is entitled
to judgment as a matter of law.” Dunderdale v. United Airlines,
Inc., 807 F.3d 849, 853 (7th Cir. 2015) (citing Fed. R. Civ. P.
56(a)). A genuine issue of material fact exists only if “there is
suﬃcient evidence favoring the nonmoving party for a jury to
return a verdict for that party.” Anderson v. Liberty Lobby, Inc.,
Nos. 21-2118 & 21-2307                                           5

477 U.S. 242, 249 (1986); see also Aregood v. Givaudan Flavors
Corp., 904 F.3d 475, 482 (7th Cir. 2018).
   1. Malicious Prosecution
    The “essence of a malicious prosecution rests” on the idea
that the plaintiﬀ “has been improperly subjected to legal pro-
cess.” City of New Haven v. Reichhart, 748 N.E.2d 374, 378 (Ind.
2001). Under Indiana law, a malicious-prosecution claim has
four elements: “(1) the defendant instituted or caused to be
instituted an action against the plaintiﬀ; (2) the defendant
acted with malice in doing so; (3) the defendant had no prob-
able cause to institute the action; and (4) the original action
was terminated in the plaintiﬀ’s favor.” Ingram v. Diamond
Equip., Inc., 118 N.E.3d 1, 7 (Ind. Ct. App. 2018); see also Reich-
hart, 748 N.E.2d at 378. The tort, however, is “not generally
favored,” and its requirements “are construed strictly against
the party bringing the action.” Wong v. Tabor, 422 N.E.2d 1279,
1283 (Ind. Ct. App. 1981). Here, the parties only dispute the
second and third elements. Regent Bank maintains that it had
probable cause to bring the underlying action and never acted
with malice, each of which independently defeats Birch|Rea’s
claim. We agree with both points.
   Probable cause exists when “a reasonably intelligent and
prudent person would be induced to act as did the person
who is charged with the burden of having probable cause.”
Ingram, 118 N.E.3d at 8 (quoting Reichhart, 748 N.E.2d at 379).
In other words, “the inquiry is whether the defendant acted
reasonably in believing the plaintiﬀ was somehow responsi-
ble for the tortious actions.” Id. (citing Satz v. Koplow, 397
N.E.2d 1082, 1085 (Ind. Ct. App. 1979)).
6                                           Nos. 21-2118 & 21-2307

    Regent Bank had probable cause to initiate the underlying
action against Birch|Rea. Regent Bank consulted with inde-
pendent appraisers, who determined that the Indiana prop-
erty at issue declined in value by several million dollars. In
response, Regent Bank retained counsel to investigate any
possible legal action. The law ﬁrm, together with Regent
Bank, hired a certiﬁed appraiser, Potter, with extensive expe-
rience. Potter prepared a lengthy report, which opined that
Birch|Rea over-relied on a nonmarket sale, did not make the
appropriate adjustments, misused the gross income multi-
plier, failed to properly segment size under the right ap-
proaches, drew upon a bad description, lacked the necessary
veriﬁcation and reporting, disregarded market conditions,
and misrepresented a sale. The uncontradicted evidence
shows that Regent Bank relied on the Potter report to sue
Birch|Rea for professional negligence, negligent misrepresen-
tation, common law or constructive fraud, and breach of con-
tract as a third-party beneﬁciary. Indeed, Regent Bank specif-
ically referred to the report in its complaint for the underlying
action. Although Regent Bank withdrew its complaint, “the
fact that a party is ultimately” unsuccessful in litigation “does
not lead to the conclusion [that] the party had no probable
cause to ﬁle suit.” Id.; see also Trotter v. Ind. Waste Sys., Inc., 632
N.E.2d 1159, 1164 (Ind. Ct. App. 1994) (holding that a mali-
cious-prosecution claim failed because one party “had proba-
ble cause to believe that it had an enforceable purchase agree-
ment” even without a contract between the two parties). Re-
gent Bank needed only to be reasonably induced to act, which
it was.
   Birch|Rea contends that the Potter report itself lacks accu-
racy and, moreover, that the evidence in the record conﬁrms
Birch|Rea “valued the leased fee interest of the Property
Nos. 21-2118 & 21-2307                                            7

accurately.” The inquiry, however, is not whether Birch|Rea
was correct in 2007 or whether Potter was accurate in 2016. See
Ingram, 118 N.E.3d at 8. Rather, it is whether Regent Bank had
probable cause to commence the underlying action. For this
question, the Potter report provides the necessary answer,
and Birch|Rea has failed to identify any glaring error that
would discredit the report to “a reasonably intelligent and
prudent person.” Id.
     Next, Birch|Rea argues that Regent Bank could not rely on
its initial report as a matter of federal law. But Birch|Rea does
not provide any legal citations to support its point. Instead,
Birch|Rea states that its own expert witness, Ted Whitmer,
“testiﬁed in great detail as to why Regent Bank could not have
relied on” the report, “given the requirements of USPAP,
FIRREA [Financial Institutions Reform, Recovery, and En-
forcement Act], and the Interagency Guidelines.” At sum-
mary judgment though, only the nonmoving party’s factual
contentions are presumed correct, not its legal arguments. See
Lalowski, 789 F.3d at 787. A party cannot smuggle in legal con-
clusions masqueraded as factual contentions through a depo-
sition. Nor is it “our job to do the legal research” that a party
fails to do, particularly when presented with a complex stat-
utory or administrative scheme. United States v. Barr, 960 F.3d
906, 916 (7th Cir. 2020) (quoting Bretford Mfg., Inc. v. Smith Sys.
Mfg. Corp., 419 F.3d 576, 581 (7th Cir. 2005)); see also Schaefer v.
Universal Scaﬀolding & Equip., LLC, 839 F.3d 599, 607 (7th Cir.
2016) (“Perfunctory and undeveloped arguments are waived,
as are arguments unsupported by legal authority.”).
   For a malicious-prosecution claim under Indiana law,
malice “in fact” must be shown; malice “in law” does not suf-
ﬁce. Ingram, 118 N.E.3d at 8 (quoting Satz, 397 N.E.2d at 1085).
8                                         Nos. 21-2118 & 21-2307

Malice can be “inferred from a total lack of probable cause
necessary to bring suit,” but a mere failure in the original suit,
by itself, cannot independently establish malice—rather, “that
failure must be culpable, that is, malice that rises above the
level of mere negligence.” Id.
    Regent Bank did not act maliciously in commencing the
underlying action. As explained above, Regent Bank had
probable cause based on advice from outside counsel, a de-
tailed report by a certiﬁed appraiser, and justiﬁable reliance
on this report. And Birch|Rea has failed to show any other
malice that “rises above the level of mere negligence.” Id.
Even a failure to make a “suitable and reasonable inquiry into
the facts,” which Birch|Rea asserts, “is not enough in itself to
sustain an action for malicious prosecution.” Id. (citing Mirka
v. Fairﬁeld of Am., Inc., 627 N.E.2d 449, 451–52 (Ind. Ct. App.
1994)).
    2. Indiana Frivolous Litigation Statute
    Regent Bank seeks to collect attorney’s fees under the In-
diana frivolous litigation statute. A federal court sitting in di-
versity applies state substantive law and federal procedural
law. See DiPerna v. Chi. Sch. Pro. Psych., 893 F.3d 1001, 1006
(7th Cir. 2018) (citing Gasperini v. Ctr. for Humanities, Inc., 518
U.S. 415, 427 (1996)). When a federal rule conﬂicts with a state
law though, the federal rule governs. See Shady Grove Orthope-
dic Assocs., P.A. v. Allstate Ins. Co., 559 U.S. 393, 398–400 (2010).
Courts are divided as to whether state frivolous litigation stat-
utes conﬂict with Federal Rule of Civil Procedure 11. Compare
First Bank of Marietta v. Hartford Underwriters Ins. Co., 307 F.3d
501, 529 (6th Cir. 2002) (holding that the Ohio frivolous litiga-
tion statute “conﬂicts with Fed. R. Civ. P. Rule 11’s safe harbor
provision and, therefore, should not be applied in federal
Nos. 21-2118 & 21-2307                                          9

court”), with Showan v. Pressdee, 922 F.3d 1211, 1226–27 (11th
Cir. 2019) (holding that Rule 11 does not conﬂict with the
Georgia frivolous litigation statute and applying the law). We
need not decide whether Rule 11 conﬂicts with the Indiana
frivolous litigation statute because Birch|Rea’s malicious-
prosecution claim is not frivolous in the ﬁrst instance. See
O’Brien v. Caterpillar Inc., 900 F.3d 923, 928 (7th Cir. 2018)
(“[An appellate court] may aﬃrm on any ground supported
in the record so long as it was adequately addressed below
and the plaintiﬀs had an opportunity to contest the issue.”).
    Indiana law provides that “[i]n any civil action, the court
may award attorney’s fees … to the prevailing party” based
on (1) a claim or defense “that is frivolous, unreasonable, or
groundless”; (2) continued litigation after a claim or defense
“clearly became frivolous, unreasonable, or groundless”; (3)
or litigation “in bad faith.” Ind. Code § 34-52-1-1; see generally
River Ridge Dev. Auth. v. Outfront Media, LLC, 146 N.E.3d 906
(Ind. 2020). Regent Bank asserts both that Birch|Rea’s mali-
cious-prosecution claim was frivolous, unreasonable, or
groundless at its ﬁling and that it engaged in bad-faith litiga-
tion. See Ind. Code § 34-52-1-1(b)(1), (3).
    “A claim is ‘frivolous’ if it is made primarily to harass or
maliciously injure another; if counsel is unable to make a
good faith and rational argument on the merits of the action;
or if counsel is unable to support the action by a good faith
and rational argument for extension, modiﬁcation, or reversal
of existing law.” Staﬀ Source, LLC v. Wallace, 143 N.E.3d 996,
1008 (Ind. Ct. App. 2020) (quoting Kitchell v. Franklin, 26
N.E.3d 1050, 1057 (Ind. Ct. App. 2015)). An unreasonable
claim is one that, “based on the totality of the circumstances
… no reasonable attorney would consider the claim justiﬁed
10                                       Nos. 21-2118 & 21-2307

or worthy of litigation.” Id. (quoting Kitchell, 26 N.E.3d at
1057). And a claim is “groundless if no facts exist which sup-
port the legal claim relied on and presented by the losing
party.” Id. (quoting Purcell v. Old Nat. Bank, 972 N.E.2d 835,
843 (Ind. 2012)).
    Birch|Rea did not ﬁle a frivolous, unreasonable, or
groundless lawsuit against Regent Bank. There is no evidence
that the malicious-prosecution claim was brought to injure
Regent Bank. Indeed, Birch|Rea made a rational argument on
the merits, albeit an unconvincing one. See Kitchell, 26 N.E.3d
at 1057 (“[T]he law is settled that a claim is … [not] frivolous
merely because a party loses on the merits.”). The Potter re-
port potentially contained deﬁciencies of its own, and Regent
Bank may have had a tenuous argument for reliance on the
original Birch report. The fact that Regent Bank quickly
dropped its underlying claim suggests that it may have lacked
merit. Moreover, Birch|Rea supported its action with a color-
able claim that Indiana case law applied to these facts. See, e.g.,
Ingram, 118 N.E.3d at 8; Reichhart, 748 N.E.2d at 379; Satz, 397
N.E.2d at 1085; Wong, 422 N.E.2d at 1283.
   Bad-faith litigation occurs where the party commits more
than “bad judgment or negligence.” Staﬀ Source, 143 N.E.3d at
1008 (quoting Mitchell v. Mitchell, 695 N.E.2d 920, 924 (Ind.
1998)). Instead, it “implies the conscious doing of a wrong be-
cause of dishonest purpose or moral obliquity”—in other
words, “a state of mind aﬃrmatively operating with furtive
design or ill will.” Id. (quoting Mitchell, 695 N.E.2d at 924).
Like above, Regent Bank has produced no evidence that
Birch|Rea engaged in bad-faith litigation—that is, there is no
support for the notion that Birch|Rea acted with a “dishonest
purpose or moral obliquity.” Id. (quoting Mitchell, 695 N.E.2d
Nos. 21-2118 & 21-2307                                          11

at 924). Both parties seem to acknowledge the “acrimonious
history” of this litigation, but bitter litigation is not enough by
itself. While Birch|Rea ultimately cannot prevail, its actions
do not rise to bad-faith litigation.
B. Motion to Strike
    Federal Rule of Civil Procedure 26(a)(1)(A)(i) requires that
a party disclose, without any speciﬁc request as part of the
umbrella category of initial disclosure, “the name and, if
known, the address and telephone number of each individual
likely to have discoverable information—along with the sub-
jects of that information—that the disclosing party may use to
support its claims or defenses, unless the use would be solely
for impeachment.” Additionally, “[a] party who has made a
disclosure under Rule 26(a) … must supplement or correct its
disclosure or response.” Fed. R. Civ. P. 26(e)(1). A party that
does not disclose a witness cannot “use that … witness to sup-
ply evidence on a motion … unless the failure was substan-
tially justiﬁed or is harmless.” Fed. R. Civ. P. 37(c)(1); see also
David v. Caterpillar, Inc., 324 F.3d 851, 857 (7th Cir. 2003). We
review the denial of a motion to strike a summary judgment
aﬃdavit for abuse of discretion. Cont. W. Ins. Co. v. Cnty. Mut.
Ins. Co., 3 F.4th 308, 318 (7th Cir. 2021).
    The question of whether the district court should have ex-
cluded the aﬃdavits is moot. The operative facts above con-
cern the Potter report, its preparation, and Regent’s Bank re-
liance on the report—none of which are based on the disputed
aﬃdavits. Birch|Rea does not contest that the Potter report
exists, was turned over as part of discovery, and is relevant
for summary judgment. Nor does it challenge the admission
of Potter’s deposition. And a diﬀerent, unchallenged aﬃant
12                                    Nos. 21-2118 & 21-2307

stated that Regent Bank relied on the Potter report. Thus, the
district court did not err by denying the motion to strike.
                       III. Conclusion
   For these reasons, we aﬃrm the judgment of the district
court.