Court Opinion

ID: 2996397
Source: CourtListenerOpinion
Date Created: 2015-09-24 19:28:20.459497+00
Date Added: 2024-06-11T11:45:29.797389
License: Public Domain

In the
    United States Court of Appeals
               For the Seventh Circuit
                          ____________

No. 02-4081
FEDERAL DEPOSIT INSURANCE CORPORATION,
                                               Plaintiff-Appellant,
                                 v.

DAVID J. WABICK, PATRICIA A. WABICK,
LAWRENCE ETTNER, et al.,
                                  Defendants-Appellees.
                     ____________
            Appeal from the United States District Court
       for the Northern District of Illinois, Eastern Division.
             No. 01 C 8674—Milton I. Shadur, Judge.
                          ____________
       ARGUED JUNE 3, 2003—DECIDED JULY 10, 2003
                      ____________

  Before FLAUM, Chief Judge, and BAUER and EVANS,
Circuit Judges.
  FLAUM, Chief Judge. The defendants, David Wabick,
Patricia Wabick, Lorraine Wabick, Larry Ettner, Janelle
Ettner, and Paul Freitag,1 (collectively “defendants”) al-
legedly participated in a scheme to defraud the Resolution
Trust Corporation (“RTC”) in 1992. The scheme succeeded
with the defendants improperly winning a sealed auction

1
  Of these defendants only Larry and Janelle Ettner filed briefs
and only their counsel participated in oral arguments.
2                                              No. 02-4081

of financial assets. The assets were sold at an allegedly
depressed price to the defendants for $66,750,000. Despite
the magnitude of the transaction involved, the Federal
Deposit Insurance Corporation (“FDIC”), successor to the
RTC, did not bring suit against the defendants until nine
years after the fraud—seven years after the RTC became
aware of a Department of Justice (“DOJ”) investigation
into the scheme, and four years after the DOJ indicted
one of the defendants. The FDIC is now left struggling
to have the courts apply the most lenient statute of li-
mitations in order to keep this case from being removed
from court as untimely, and we in turn are faced with
questions of choice-of-law principles and statute-of-limita-
tions application. The FDIC argues that Erie R.R. Co. v.
Tompkins, 304 U.S. 64 (1938), requires us to apply
state choice-of-law principles in choosing which statute
of limitations to apply. The district court disagreed and
applied federal choice-of-law rules and determined that
under the limitations resulting from those rules the FDIC
is barred from bringing this suit. Though the district
court’s conclusion reasonably rejected the FDIC’s Erie
argument, we disagree with the parties and the district
court that this case even presents a choice between an
application of the Erie doctrine and federal common law;
instead, this case can be resolved by following a statutory
directive to apply state choice-of-law principles. We there-
fore reverse.

                     I. Background
  In 1992 the RTC became the receiver for Home Federal
Savings Association of Kansas City, F.A., a lending in-
stitution that had been declared insolvent. As receiver
RTC decided to sell various outstanding loans that were
owned by the insolvent lending institution. Among these
loans was a group of non-performing and sub-performing
No. 02-4081                                               3

real estate loans known as the Merit Loans. The debtors
on the Merit loans were all entities owned or controlled by
Albert Ichelson, Jr. The RTC grouped the merit loans into
a bid package with other loans to be auctioned off through
a sealed bidding process.
   Meanwhile, David Wabick and Larry Ettner formed
Gateway Capital under Illinois corporation laws in June of
1992. David’s wife Patricia owned one half of Gateway
Capital while Larry and his wife Janelle owned the other
half. David and Larry managed the company. David
also controlled Connaught Corporation (“Connaught”), an
Illinois corporation. This caused a problem for Gateway
Capital, which had as its purpose the purchase of the
Merit Loans in the auction, because Connaught had
previously defaulted on obligations to the RTC and the
FDIC. Corporations and their affiliates who had previously
defaulted on obligations to the RTC or the FDIC were
ineligible for bidding. To avoid the effects of this rule,
David set up what the FDIC calls a sham transaction
whereby his mother Lorraine obtained all the stock in
Connaught. Later, in an attempt to further disguise
David’s connections with Connaught, Lorraine transferred
the stock to Paul Freitag, a close friend of David’s.
  On top of this the FDIC claims that David began dealing
with Ichelson. David promised Ichelson payments, leases,
and employment opportunities for Ichelson’s son all
in return for Ichelson’s help in ensuring that Gateway
Capital won the bidding process for the Merit Loans. This
help took the form of confidential information and
Ichelson causing some of the entities he controlled to file
bankruptcy before the auction, thereby artificially reducing
the apparent value of the loans. These dealings were in
direct violation of RTC requirements that no bidder
could communicate with any debtor without RTC consent
or enter into business relationships with any debtor.
4                                               No. 02-4081

  With this elaborate scheme in place, Gateway Capital
entered the bidding process. The defendants received a
bid package sent by the RTC from Washington, D.C. In
accordance with the rules provided in the package, Gateway
returned certifications and agreements to the RTC and
sent credit histories to locations directed by the RTC.
Based on the representations in these documents, the
RTC informed Gateway Capital that it was eligible to
bid in the auction. Gateway Capital sent in a bid of
$66,750,000. As this was the highest bid, Gateway Capital
was successful in purchasing the loans. The deal was
closed in Washington, D.C., in January of 1993.
  The scheme, though initially successful, was not flaw-
less. Indeed, the DOJ opened an investigation into the
bidding process. In connection with this investigation an
FBI agent and a DOJ attorney interviewed Martin
Blumenthal in July of 1994. Blumenthal, a Contractor
Ethics Program Manager at the RTC, was told that an
unnamed bidder had engaged in prohibited contact with
the largest borrower involved in the loans being auc-
tioned. He was also asked to comment on the possible
ramifications on the auction process if David Wabick had
been involved with Connaught, which had been involved
in defaults on loans held by the RTC and the FDIC.
After the interview Blumenthal did not contact the RTC’s
Office of Inspector General even though he had the au-
thority to forward the information to that office. The DOJ
investigation continued and on June 12, 1997, David
Wabick was indicted.
  More than four years later, the FDIC finally initiated this
action against the defendants in the district court on
November 9, 2001. The suit was brought pursuant to the
Financial Institutions Reform, Recovery and Enforcement
Act of 1989 (“FIRREA”), which provides that all cases
brought by the FDIC are deemed to arise under the laws
of the United States. 12 U.S.C. § 1819(b)(2)(a). The FDIC
No. 02-4081                                                 5

asserted claims for conspiracy to commit fraud, common
law fraud, breach of contract, and unjust enrichment. The
district court recognized that there was a potential stat-
ute of limitations problem because FIRREA provides the
following rule for determining the limitations period:
   Notwithstanding any provision of any contract, the
   applicable statute of limitations with regard to any
   action brought by the [FDIC] as conservator or re-
   ceiver shall be—
       (i) in the case of any contract claim, the longer
           of—
           (I) the 6-year period beginning on the date the
               claim accrues; or
           (II) the period applicable under State law; and
       (ii) in the case of any tort claim . . . the longer of—
           (I) the 3-year period beginning on the date
               the claim accrues; or
           (II) the period applicable under State law.
12 U.S.C. § 1821(d)(14)(A). Using federal common law
choice-of-law rules, the district court determined that the
applicable state law was that of Washington, D.C. Because
the D.C. statute of limitations provided a period of three
years for both tort and contract claims, the district court
found that the default limitations provided in FIRREA
were longer and therefore applicable here. The district
court held on a motion to dismiss that the tort claims
(fraud and conspiracy to commit fraud) were barred by
the three-year limitations period. As for the contract
claims (breach and unjust enrichment) the district court
recognized that there was a question of when the injury
was or should have been discovered that could be dis-
positive under the six-year limitations period. The court
therefore ordered the FDIC to submit factual submissions
6                                               No. 02-4081

under Federal Rule of Civil Procedure 56(e) and considered
the issue as a motion for summary judgment. In the end
the district court held that the injury should have
been discovered at the time of the DOJ interview with
Blumenthal, and the contract claims were therefore
barred by the six-year limitations period. The FDIC now
appeals to this court the rulings on both the tort and
contract claims.

                      II. Discussion
  The FDIC argues that the district court chose the
wrong statute of limitations. In the FDIC’s view the dis-
trict court should have applied Illinois’ choice-of-law
rules because the district court was located in Illinois.
In Illinois the statute of limitations is considered purely
procedural and therefore the Illinois statute of limita-
tions would automatically apply. Belleville Toyota, Inc. v.
Toyota Motor Sales, U.S.A., Inc., 199 Ill. 2d 325, 351-52
(2002). The district court rejected this argument and
instead applied federal common law in choosing which
statute of limitations was applicable.
  According to the parties, the starting point for us is
the Erie doctrine, which provides generally that a federal
court is not authorized to apply a different substantive
law in a diversity case from the law that a state court
would apply were the case being litigated in a state court
instead. Under this doctrine it is well established that
in diversity cases state law is the appropriate source for
choice-of-law rules. Klaxon Co. v. Stentor Electric Mfg. Co.,
Inc., 313 U.S. 487 (1941). And generally speaking, the
Erie doctrine applies to non-diversity cases where state
law supplies the rule of decision. Zapata Hermanos
Sucesores, S.A. v. Hearthside Bakery Co., Inc., 313 F.3d 385,
390 (7th Cir. 2002). But the question the parties present
to us is whether the Erie doctrine requires non-diversity
No. 02-4081                                                        7

application of state choice-of-law rules. The FDIC correctly
identifies a split among the federal circuits on this issue.
Compare A.I. Trade Finance, Inc. v. Petra Int’l Banking
Corp., 62 F.3d 1454 (D.C. Cir. 1995) (applying state choice-
of-law rules in non-diversity case) with Edelmann v.
Chase Manhattan Bank, N.A., 861 F.2d 1291 (1st Cir.
1988) (applying federal common law choice-of-law rules
in non-diversity case). It then contends that we should
join the ranks of the D.C. Circuit in choosing state law
as the appropriate source of law. The defendants, not
surprisingly, suggest that we join the other side of the
split—something we have arguably already done in Resolu-
tion Trust Corp. v. Chapman, 29 F.3d 1120 (7th Cir. 1994).2

2
    In Chapman we explained as follows:
      What law Illinois courts would choose is, however, irrelevant.
      This is not a diversity case, where Erie would require the
      forum court to apply the whole law of the state, including its
      choice of law principles. Klaxon Co. v. Stentor Electric
      Manufacturing Co., 313 U.S. 487, 85 L. Ed. 1477, 61 S. Ct.
      1020 (1941). It is a suit by a federal agency invoking federal
      jurisdiction per 12 U.S.C. § 1441a(l)(1), which says that
      suits to which the RTC is a party “shall be deemed to arise
      under the laws of the United States”. Federal law may well
      look to state law for substantive principles, see United States
      v. Kimbell Foods, Inc., 440 U.S. 715, 727-29, 59 L. Ed. 2d 711,
      99 S. Ct. 1448 (1979), but which law to select is itself a
      question of federal law, as Kimbell Foods and O’Melveny &
      Myers [v. FDIC, 512 U.S. 79 (1994),] show. The Supreme
      Court in O’Melveny & Myers did not ask what law a state
      court would have selected; it approached the question as
      one for independent decision.
29 F.3d 1120, 1124 (1994). The primary holding of Chapman,
which is not relevant to this case, was later overruled by Atherton
v. FDIC, 519 U.S. 213 (1996). The ruling on choice-of-law,
however, presumably remains controlling precedent.
8                                                No. 02-4081

  As interesting as this circuit split may be, and as much
as the parties have to say about it, it simply is not impli-
cated by the case before us. What the parties fail to recog-
nize is that Erie questions about federal common law only
arise when we are faced with a legislative gap where
Congress declined to address certain questions of law. We
have no such gap here. The relevant statutory provi-
sion reads:
    Notwithstanding any provision of any contract, the
    applicable statute of limitations with regard to any
    action brought by the [FDIC] as conservator or re-
    ceiver shall be—
        (i) in the case of any contract claim, the longer
            of—
            (I) the 6-year period beginning on the date the
                claim accrues; or
            (II) the period applicable under State law; and
        (ii) in the case of any tort claim . . . the longer of—
            (I) the 3-year period beginning on the date the
                claim accrues; or
            (II) the period applicable under State law.
12 U.S.C. § 1821(d)(14)(A). As we read this provision it
contains an explicit direction of where to find the appro-
priate law. The question we must answer—one of statu-
tory interpretation—is therefore distinct from any ques-
tions about the application of the Erie doctrine. To
borrow the language of the Supreme Court in Richards
v. United States:
    [B]ecause the issue of the applicable law is controlled
    by a formal expression of the will of Congress, we
    need not pause to consider the question whether the
    conflict-of-laws rule applied in suits where federal
    jurisdiction rests upon diversity of citizenship shall
No. 02-4081                                               9

    be extended to a case such as this, in which jurisdic-
    tion is based upon a federal statute. In addition, and
    even though Congress has left to judicial implication
    the task of giving content to its will in selecting the
    controlling law, because of the formal expression found
    in the Act itself, we are presented with a situation
    wholly distinguishable from those cases in which
    our initial inquiry has been whether the appropriate
    rule should be the simple adoption of state law.
369 U.S. 1, 7 (1962) (footnotes omitted).
   Where Congress tells us which laws to look to we are
not authorized to disregard that directive. Under the
statute before us Congress has directed that for each type
of claim we have two possible sources for the limitations
period: the period provided in the federal statute (we
will refer to this as the “federal default period”) and the
period applicable under state law (we will sometimes
refer to this as the “the state alternative period”). We are
to choose whichever period is longer. Our first step is to
identify the “period applicable under state law.” To an-
swer the question of what period is applicable under
state law, we need only imagine what would have hap-
pened if this case had been brought in state court. If
this case had been brought in state court—in this case
Illinois—the Illinois choice-of-law laws would have ap-
plied and the period applicable under that law would be
the one provided in Illinois’ statute of limitations. Belle-
ville Toyota, supra.
  The logic of this approach is compelling. In determining
what period is “applicable under state law,” we simply
and logically ask which period would apply under state
law. The parties spend their entire briefs arguing about
which law we should look to in choosing the appropriate
period; but the statute answers this question in plain
English: “state law.” The parties’ arguments stem from
10                                               No. 02-4081

their misconception that the provision is silent on choice-of-
law. The parties seem to ignore the “under state law”
part of the provision: in determining which period is
applicable they look first to federal principles about which
choice-of-law rule to apply (they disagree about this—
the FDIC thinks federal principles require state choice-of-
law rules and the defendants think federal principles
require federal choice-of-law rules); then they apply that
choice-of-law rule to determine which state law is ap-
plicable in determining the appropriate period. We say
this ignores the term “under state law” because choice-of-
law rules—state or federal—will always get us to some
state law period in the end regardless of that phrase. The
period the parties’ method produces as the state alterna-
tive period is the same as the period that would have
resulted had the statute been completely silent on the
question of statute of limitations. It is also the same
state alternative period that would have resulted if,
after listing the federal default period, Congress had
said, “or the period otherwise applicable.” In those cases
Congress would have been silent as to what principles
should guide the courts in determining the applicable
period, thus implicating a choice between Erie and federal
common law. But here Congress modified “applicable”
with “under state law” and there is therefore no legisla-
tive gap—our applicability analysis is confined to state law.
  The failure of both parties to at least address this analy-
sis is surprising given that the result we reach is en-
tirely consistent with the conclusion reached, albeit less
explicitly, by the Eighth Circuit in Federal Deposit In-
surance Corp. v. Nordbrock, 102 F.3d 335 (8th Cir. 1996),
a case dealing with this exact question. In fact, as far as
we can tell, the Eighth Circuit is the only other fed-
eral appeals court to have addressed this precise issue
and in Nordbrock they concluded, apparently with little
hesitation, that the statute directs the courts to state
choice-of-law rules:
No. 02-4081                                                  11

    In order to make this determination [about whether
    the federal default period for contract claims was
    longer or shorter than the period applicable under
    state law], we must consider the statute of limita-
    tions period otherwise applicable under Nebraska
    law. 12 U.S.C. § 1821(d)(14)(A)(i)(II). This requires an
    examination of Nebraska’s choice of law principles.
Id. at 337 (emphasis added). This is all the majority in
Nordbrock says about the issue. Most notably there is
no reference to Erie or Klaxon or any of the other cases
the parties before us are arguing about. The only cita-
tion they have for their conclusion is the statutory provi-
sion itself. Though the majority never explicitly laid out
the rule that we adopt today, we think it clear that the
court was in fact basing its conclusion on the statutory
phrase “applicable under state law.”3 Still the FDIC cites
Nordbrock only as support for the proposition that we
should always apply state choice-of-law rules under the
Erie doctrine, and the defendants do not discuss Nord-
brock at all. But the failure of the parties to interpret
a statute correctly would not excuse such inaction on
the part of the court; and as we conclude that the stat-
ute requires us to look to state law rules in choosing
the appropriate period, we are in complete agreement
with the court in Nordbrock. The appropriate period is
therefore the period that would be applicable under Illi-
nois choice-of-law principles.
   Having resolved the choice-of-law question, there is
little more for us to do. As we have said, the statute of
limitations is procedural under Illinois choice-of-law

3
  Had the parties before us not focused their attention entirely
on the Erie question, we would likely have dealt with this
straightforward statutory interpretation in a similarly brief
fashion.
12                                               No. 02-4081

principles, and therefore the Illinois statute of limitations
automatically applies. Illinois law provides a ten-year
limitations period for the contract actions and a five-year
period for the tort actions. 735 ILCS 5/13-206 and 5/13-205.
Both of these periods are longer than the federal default
periods provided in the statute (six years for contracts
and three years for torts). Therefore, the Illinois limita-
tions periods are the appropriate periods to apply to this
case. Unquestionably, the contract claims survive under
the ten-year limitations period (the deal was closed in
1993 and the suit was brought in 2001), and those claims
should be remanded for consideration on the merits.
   As for the tort claims, it is not clear at this point wheth-
er they are barred by the five-year limitations period or
not. The district court, applying a three-year period, held
the claims to be barred on a motion to dismiss. In con-
trast to this was the district court’s decision on the con-
tract claims: applying the six-year federal default period,
the district court converted the motion to dismiss to a
motion for summary judgment and required the FDIC to
make necessary factual submissions. The reason for the
conversion was that the six-year period fell into a gray
area on the question of when the injury was discovered.
Seven years prior to the filing we find the Blumenthal
interview and four years prior to the filing we find the
indictment of Wabick. No one has argued that the FDIC
should have known about the injury prior to the
Blumenthal interview and no one could possibly argue
that any lack of knowledge position can be maintained
after Wabick’s indictment. Therefore, we have a dis-
putable area between seven and four years prior to the
filing. The district court properly reasoned that knowl-
edge within this period could not be determined on a
motion to dismiss. The FDIC submitted very little in the
way of factual material to aid the court in making it’s
determination on the converted motion for summary
No. 02-4081                                               13

judgment. The district court correctly concluded that
based on the submissions there was no way the FDIC
could show a lack of knowledge after the Blumenthal
interview under the federal discovery rule. As we have
said, this was for the contract claims. Of course now the
question is moot for the contract claims since we have
held that they are subject to the ten-year limitation, but
a virtually identical question now arises for the tort
claims. The tort claims, now subject to the five-year Illi-
nois limitation, fall into the gray area and we must deter-
mine whether there is any way the FDIC lacked knowl-
edge under the Illinois discovery rule after the Blumenthal
interview. We question whether the outcome will be any
different than it was for the contract claims. Nonetheless,
procedural fairness requires us to remand the case for
consideration under the summary judgment standard.
These are different claims than the contract claims and a
different jurisdiction’s limitations period is being applied.
That being the case, the FDIC’s tort case cannot be limited
to the facts and arguments as submitted in support of
their contract case. It is at least possible, though perhaps
unlikely, that the FDIC could produce factual submis-
sions relevant to when it discovered its tort injury that
were not relevant (or simply that the FDIC failed to sub-
mit) to when it discovered the contract breach. We there-
fore remand the tort claims for further consideration on
whether they are barred by the five-year Illinois statute
of limitations.

                     III. Conclusion
  Although the parties have framed this as a question of
what law to apply in filling legislative gaps, there is
no such gap in the legislation at issue here. Section
1821(d)(14)(A) tells us to look to state law in choosing the
applicable limitations period. We read this as prescribing
14                                            No. 02-4081

the appropriate choice-of-law principles for a court to
use. The district court should therefore have applied the
choice-of-law principles of the forum state—here Illinois—
in determining which limitations periods applied to the
FDIC’s claims. Under Illinois law, the Illinois limitations
periods apply. Those periods are five years for the tort
claims and ten years for the contract claims. We therefore
REVERSE and REMAND the contract claims for considera-
tion on the merits and REMAND the tort claims for fur-
ther consideration as to whether they are barred by the
five-year Illinois limitations period.

A true Copy:
      Teste:

                       ________________________________
                       Clerk of the United States Court of
                         Appeals for the Seventh Circuit

                  USCA-02-C-0072—7-10-03