Court Opinion

ID: 3143982
Source: CourtListenerOpinion
Date Created: 2015-10-22 18:01:26.527451+00
Date Added: 2024-06-11T09:17:15.576065
License: Public Domain

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

                                              IN THE

                               APPELLATE COURT OF ILLINOIS

                              SECOND DISTRICT
______________________________________________________________________________

OTTAWA SAVINGS BANK,                         ) Appeal from the Circuit
                                             ) Court of Du Page County.
       Plaintiff-Appellant,                  )
                                             )
v.                                           ) No. 05--MR--391
                                             )
JDI LOANS, INC.; JDI JOLIET, LLC, d/b/a      )
JDI Loans, Inc.; JEFFREY AEDER;              )
KEVIN CONNOR; and DAVID RATTNER, )
                                             )
       Defendants-Appellees                  )
                                             )
(Flower Bank, FSB, f/k/a Umbrella Bank, FSB; ) Honorable
West Town Savings Bank; and Lincoln State ) Bonnie M. Wheaton,
Bank, Plaintiffs).                           ) Judge, Presiding.
______________________________________________________________________________

       JUSTICE BYRNE delivered the opinion of the court:

       On April 4, 2005, plaintiffs, Ottawa Savings Bank (Ottawa); Flower Bank, FSB, f/k/a

Umbrella Bank, FSB; West Town Savings Bank; and Lincoln State Bank, brought an action to

recover compensatory and punitive damages against defendants, JDI Loans, Inc.; JDI Joliet, LLC,

d/b/a JDI Loans, Inc.; Jeffrey Aeder; Kevin Connor; and David Rattner (collectively, defendants),

for losses allegedly sustained from the improper sale of a portfolio of loans by Commercial Loan

Corporation (CLC) to JDI Loans, Inc. In the complaint, plaintiffs alleged causes of action against

defendants for conversion (count I), turnover of property (count II), imposition of trust (count III),

unjust enrichment (count IV), an accounting (count V), temporary, preliminary, and permanent
No. 2--06--0671

injunctive relief (count VI), and declaratory relief (count VII). The trial court granted defendants'

motion to dismiss pursuant to section 2--615 of the Code of Civil Procedure (735 ILCS 5/2--615

(West 2004)), with leave to amend. Plaintiffs subsequently filed an amended complaint alleging

causes of action for tortious interference with existing business relationships (count I), tortious

interference with contract (count II), recovery of the loan proceeds pursuant to section 3--306 of the

Uniform Commercial Code (UCC) (810 ILCS 5/3--306 (West 2004)) (count III), an accounting

(count IV), and declaratory relief (count V). The trial court also dismissed the amended complaint,

with leave to amend. Thereafter, plaintiffs Flower Bank, West Town Savings Bank, and Lincoln

State Bank voluntarily dismissed themselves from the action. Ottawa then filed a second-amended

complaint against defendants, asserting only a single cause of action, for inducement of breach of

fiduciary duty. The trial court again granted defendants' section 2--615 motion to dismiss, this time

with prejudice. Ottawa appeals, claiming that the trial court erred in dismissing its second-amended

complaint and in dismissing its original and first-amended complaints. For the reasons that follow,

we affirm.

                                          BACKGROUND

       On April 4, 2005, Ottawa brought its original complaint against defendants, alleging

conversion, turnover of property, imposition of trust, and unjust enrichment, and seeking an

accounting, temporary, preliminary, and permanent injunctive relief, and declaratory relief. The

claims were based on Ottawa's and the other plaintiffs' relationships with CLC. CLC was primarily

engaged in the business of extending, making, and servicing to third parties business loans that were

secured by real estate and personal property. CLC sold to various banks, including plaintiffs,

participation interests in most of these loans.

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No. 2--06--0671

         The original and amended complaints alleged essentially the same facts. In March 2004, JDI

Loans, Inc. (JDI) purchased a portfolio of seven loans from CLC pursuant to a mortgage loan sale

and servicing agreement (the JDI agreement). Under the agreement, JDI paid more than $3.2 million

to CLC for the loans. In return, CLC agreed to "sell, assign, transfer and convey unto [JDI] *** all

of [CLC's] right, title and interest in and to the Loans." The agreement further provided that the

"ownership of each Loan *** shall 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. In return, JDI

obtained the original notes from CLC.

         Prior to the sale, CLC had entered into participation agreements with various lenders,

including Ottawa and the other plaintiffs, whereby some portion of CLC's loan portfolio, including

the JDI loans, were funded. Those participation agreements required CLC to repay the participants

their investment if the loans were ever sold or repaid. CLC failed to satisfy its obligations to Ottawa

under the participation agreement when CLC diverted the $3.2 million paid to it by JDI. Included

in that amount was the balance due for Ottawa's portion of the loan portfolio, in the aggregate

amount of over $2 million.

         According to the terms and conditions of the participation agreements, CLC did not retain

any ownership interest in the participation loans. However, CLC held legal title to the participation

loans as trustee for the participants. CLC, as trustee, could not assign or transfer legal title to

participation loans. The participants were considered the beneficial owners of the participation

loans.          CLC filed bankruptcy in May 2004 and is now out of business. A Chapter 11

bankruptcy trustee was appointed immediately after the commencement of the CLC bankruptcy case,

primarily based upon CLC's pre-bankruptcy fraud and mismanagement of its entire loan portfolio.

                                                 -3-
No. 2--06--0671

JDI was an active participant in the CLC bankruptcy case and JDI Joliet filed a proof of claim in the

case in an unstated amount. In this proof of claim, JDI Joliet affirmatively stated that it did business

as JDI Loans, Inc.

       Ottawa alleged that, prior to the closing of the JDI agreement, JDI was informed that CLC

had previously sold participation interests in the loan portfolio. CLC also provided JDI with a copy

of the participation agreement form that was used in conjunction with the loan portfolio. In light of

this information, JDI requested that the participation interests in the loan portfolio be paid in full

from the proceeds being paid by JDI at the closing of the JDI agreement. Specifically, JDI requested

payoff letters from the participants, which included Ottawa, and confirmation that the participants

would be paid in full from the proceeds that JDI was tendering to CLC at closing. CLC refused to

comply with JDI's request.

       Ottawa further alleged that, upon such refusal by CLC, JDI then requested that CLC's counsel

act as an escrow agent of the proceeds that JDI was tendering to CLC pursuant to the JDI agreement.

JDI also requested that CLC's counsel assume the additional responsibility of forwarding payment

in full to the participants from the proceeds JDI was paying to CLC. CLC and its counsel refused

to comply with JDI's request.

       Ottawa alleged that JDI next requested that CLC and its counsel provide a side letter

agreement to JDI insuring that the proceeds JDI was tendering to CLC at closing pursuant to the JDI

agreement would be used to pay the participants in full for the balances due to them. CLC and its

counsel refused to enter into such an agreement.

       Ottawa alleged that, despite these refusals by CLC and its counsel and with knowledge and

notice that CLC had previously sold participation interests in the loan portfolio and thus had

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fiduciary duties to the participants, JDI proceeded to close the JDI agreement. CLC never paid from

the proceeds paid by JDI the balance due to Ottawa for its portion of the loan portfolio.

       As of the closing of the JDI agreement, Ottawa asserted that defendants had taken possession

of and asserted ownership rights in and to the loan portfolio, to the unlawful exclusion of Ottawa.

Ottawa asserted that, based on defendants' knowledge and notice of the preexisting ownership rights

in and to the loan portfolio and CLC's fiduciary duties to the participants, defendants purchased the

loan portfolio subject to any and all claims and defenses of Ottawa. As a result of defendant' actions,

Ottawa and the other plaintiffs filed suit on April 4, 2005, claiming that they were deprived of their

property; namely, their portions of the loan portfolio and interests paid thereon.

       At the time of the execution of the JDI agreement and at all other relevant times, JDI was a

dissolved corporation. Aeder and Connor were officers, directors, and shareholders of JDI, and

Rattner was an officer. Ottawa alleged that at all relevant times prior to the closing of the JDI

agreement, defendants knew of CLC's fiduciary obligations to the participants in the loan portfolio

being acquired by JDI from CLC. Ottawa further asserted that, as of the closing of the JDI

agreement, defendants took possession of and asserted ownership rights in and to Ottawa's portion

of the loan portfolio.

       Ottawa alleged that, as of October 5, 2005, and as announced by defendants' counsel in open

court, JDI was paid all amounts due from the underlying third-party borrowers under the

participation loans, inclusive of principal and interest. As a result, JDI received in excess of $3.5

million for the loans it acquired from CLC for merely $3.2 million. Ottawa claimed that, as a result

of defendants' actions, it has been deprived of its property; namely, Ottawa's portion of the loan

portfolio and the monies collected and derived therefrom.

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No. 2--06--0671

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

imprisonment for bank fraud he engaged in through CLC. A judgment was also entered against him

for $18.5 million, representing the amount he converted that was otherwise due a number of

participating banks, including Ottawa.

         Responding to plaintiffs' original complaint, defendants filed a motion to dismiss pursuant

to section 2--615. Defendants argued in general that they never owed Ottawa or the other plaintiffs

any duty under any agreement. Defendants argued that a participating bank can look only to its lead

bank, which in this case was CLC, for satisfaction of claims arising out of a transaction and that a

participating bank is not a creditor of a borrower and so cannot assert creditor claims against the

borrower. Alternatively, defendants argued that none of the claims alleged by plaintiffs were

properly pled. The trial court agreed and dismissed plaintiffs' complaint but granted them leave to

amend.

         Plaintiffs filed an amended complaint realleging the same facts and the counts for an

accounting and declaratory relief and alleging three new counts, for tortious interference with

existing business relationships, tortious interference with contract, and for proceeds pursuant to

section 3--306 of the UCC (810 ILCS 5/3--306 (West 2004)).

         Defendants moved to dismiss plaintiffs' amended complaint, again invoking the argument

that they never owed plaintiffs any duty under any agreement. Defendants additionally argued that

the new claims had not been properly pled. The trial court agreed and dismissed plaintiffs' amended

complaint, again granting plaintiffs leave to amend.

         After the other plaintiffs voluntarily dismissed themselves, Ottawa filed its second-amended

complaint, alleging the same facts as in the previous complaints but alleging only one count, for

inducement of breach of fiduciary duty. Defendants filed a section 2--615 motion to dismiss

                                                 -6-
No. 2--06--0671

Ottawa's second-amended complaint, raising the same arguments as before. This time the trial court

granted defendants' motion with prejudice.

                                             ANALYSIS

       Ottawa purports to appeal not only from the trial court's final order dismissing with prejudice

its second-amended complaint but also from the previous orders dismissing the original and first-

amended complaints. Defendants contend that Ottawa has waived all but its 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-amended complaints. We agree.

       "A plaintiff desiring to preserve for appeal the previous dismissal of claims either must stand

on the dismissed counts and challenge the ruling at the appellate level or reallege or incorporate the

dismissed counts in subsequent complaints." Abrams v. Watchtower Bible & Tract Society of New

York, Inc., 306 Ill. App. 3d 1006, 1014 (1999); see Boatmen's National Bank of Belleville v. Direct

Lines, Inc., 167 Ill. 2d 88, 99 (1995); Doe v. Roe, 289 Ill. App. 3d 116, 120 (1997). A party who

files an amended complaint waives any objection to the trial court's ruling on the former complaint.

Boatmen's National Bank, 167 Ill. 2d at 99. Where an amended pleading is complete and does not

refer to or adopt the prior complaint, the earlier complaint ceases to be a part of the record, being in

effect abandoned and withdrawn. Pfaff v. Chrysler Corp., 155 Ill. 2d 35, 61 (1992); Funes v. B&B

Equipment, Inc., 282 Ill. App. 3d 272, 274-75 (1996). Once an amended pleading has been filed,

allegations of error in dismissing a prior pleading are waived. Foxcroft Townhome Owners Ass'n

v. Hoffman Rosner Corp., 96 Ill. 2d 150, 153 (1983).

       In this case, Ottawa abandoned and withdrew the original complaint's claims of conversion,

turnover of property, imposition of trust, unjust enrichment, and temporary, preliminary, and

permanent injunctive relief when it failed to reallege or incorporate those claims in its first-amended

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No. 2--06--0671

complaint.    Likewise, Ottawa abandoned the first-amended complaint's claims for tortious

interference with existing business relationships, tortious interference with contract, proceeds

pursuant to section 3--306 of the UCC (810 ILCS 5/3--306 (West 2004)), an accounting, and

declaratory relief when it failed to reallege or incorporate those claims in its second-amended

complaint.

        Ottawa argues that the interpretation of the Foxcroft rule is "ill conceived, illogical and in

conflict with more compelling state law and should not be applied." While the Seventh Circuit Court

of Appeals has made it clear that a litigant in federal court need not replead dismissed claims to

preserve them for appeal, the Foxcroft rule is a creature of state law that has yet to be overturned.

See Bastian v. Petren Resources Corp., 892 F.2d 680, 682-83 (7th Cir. 1990); see also Smith v.

National Health Care Services of Peoria, 934 F.2d 95, 98 (7th Cir. 1991) ("This court in Bastian

stated that dismissed claims need not be included in an amended complaint, because the final

judgment brings up all previous rulings in the case"). The import of Foxcroft is that Ottawa had

alternatives to preserve the counts at issue for appellate review. First, it could have elected to stand

on the original or the first-amended complaint, without filing its second-amended complaint.

Alternatively, it could have preserved the claims in the original and first-amended complaints by

realleging them in the second-amended complaint.

        We note that, in response to defendants' motion to dismiss the first-amended complaint,

Ottawa admitted that it abandoned the original complaint's claims for conversion, turnover,

constructive trust, and unjust enrichment. Similarly, by failing to 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 claims save for the only

claim raised in the second-amended complaint: inducement of breach of fiduciary duty.

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No. 2--06--0671

Accordingly, we now address whether the trial court properly granted defendants' section 2--615

motion to dismiss Ottawa's claim for inducement of breach of fiduciary duty.

       A motion brought pursuant to section 2--615 (735 ILCS 5/2--615 (West 2004)) attacks the

legal sufficiency of the complaint. Abbasi v. Paraskevoulakos, 187 Ill. 2d 386, 391 (1999). It must

be determined whether the allegations of the complaint, when viewed in a light most favorable to

the plaintiff, are sufficient to state a cause of action upon which relief can be granted. 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 granting or denying 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

duty, a plaintiff must allege that a third party: (1) colluded with the fiduciary in committing a breach

of duty; (2) induced or participated in such breach; and (3) obtained the benefits resulting from the

breach of duty. See, e.g., Paul H. Schwendener, Inc. v. Jupiter Electric Co., 358 Ill. App. 3d 65, 74

(2005). Ottawa contends that it is attacking the sale to defendants of the underlying loans and that

its claim against defendants is for the improper transfer of the loans from CLC to defendants when

defendants knew that CLC had no ability or right to transfer the loans. However, Ottawa's claim for

inducement of breach of fiduciary duty must be based on its participation loans with CLC and its

assumption that JDI owed Ottawa some legal duty or obligation by virtue of its participation

agreement with CLC. Thus, we must determine whether Ottawa, as a participant bank, has a right

of action under the participation agreement against anyone other than CLC. An overview of

participation loans will lend an understanding to whether there is a foundation to Ottawa's claim for

inducement of breach of fiduciary duty.

                                                  -9-
No. 2--06--0671

        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

"participant" financial institutions. First National Bank of Belleville v. Clay-Hensley Comm'n Co.,

170 Ill. App. 3d 898, 901-02 (1988). Participants, like Ottawa, can look only to their lead bank,

which in this case was CLC, for satisfaction of claims arising out of the transaction; they are not

themselves creditors of the borrower and cannot assert claims against the borrower. Bank of

Chicago 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 agreement that a participation does not allow

the participant to assert claims against the borrower); First National Bank of Louisville v.

Continental Illinois National Bank & Trust Co. of Chicago, 933 F.2d 466, 467 (7th Cir. 1991) ("only

the lead bank has a direct contractual relationship with the borrower"); Federal Deposit Insurance

Corp. v. Adams, 187 Ariz. 585, 594, 931 P.2d 1095, 1104 (App. 1996) (holding that the participant

cannot sue the borrower to enforce the loan agreement, because it has no legal relationship to the

borrower).

        In First National Bank of Belleville, a case similar to the present case, a participating bank

brought suit against third parties for conversion of collateral that secured the loan issued by the lead

bank. First National Bank of Belleville, 170 Ill. App. 3d at 900. The court held that, because a

participating bank can maintain a cause of action against only the lead bank, the participating bank

did not have an interest in the collateral securing the loan sufficient to permit it to maintain a direct

action against the alleged converters. First National Bank of Belleville, 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 are not themselves creditors of the borrower and so cannot assert

creditor claims against the borrower.' " First National Bank of Belleville, 170 Ill. App. 3d at 904,

                                                  -10-
No. 2--06--0671

quoting A. Armstrong, The Developing Law of Participation Agreements, 23 Bus. Law. 689, 693

(1968).

          In this case, the participation agreement states that CLC sold to Ottawa "an undivided interest

in *** the right to receive its share *** of all collections with respect to the Note(s)." The master

participation agreements reflect that, in selling various participation interests to plaintiffs, CLC was

not transferring any legal ownership interests in the loans. Instead, plaintiffs were merely "deemed

to be holders of an equitable interest in the Loan *** [and CLC] may deal with the Loan *** as

though the absolute legal and equitable owner thereof." CLC thus retained legal title to the loans.

          Participation interests arise out of agreements between lead banks and participants. In this

case, Ottawa never alleged that JDI was a party to any of these agreements. As the trial court noted,

JDI was never provided with any contracts CLC entered into, and Ottawa did not maintain a recorded

security interest on the loans such that JDI would have been put on notice of a legal claim. Nor was

there a single allegation that JDI knew that Heuser did not intend to pay to Ottawa the balance it was

due from the $3.2 million CLC received from JDI. The fact remains, without a duty that runs from

defendants to Ottawa and a breach of that duty, we fail to see how Ottawa can sustain a legal cause

of action for inducement of breach of fiduciary duty.

          Moreover, even if there were a duty, Ottawa made no specific allegations of collusion or that

defendants did anything to induce CLC to breach its fiduciary duty to Ottawa. Nor were there any

specific allegations that any breach by CLC of a duty to Ottawa was caused by defendants' conduct.

Ottawa did not plead that defendants knew who Ottawa was, knew the contents, terms, or conditions

of Ottawa's contract or relationship with CLC, or caused or induced CLC to breach any obligation

to Ottawa.

                                                   -11-
No. 2--06--0671

       Ottawa cannot allege that defendants "induced or participated" in such a breach and obtained

the benefits from the breach. We fail to see how defendants could have induced or participated in

the breach of CLC's fiduciary duty to Ottawa when defendants neither knew of that duty nor saw the

contract that created the duty. Had CLC been an honest loan broker, 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 CLC's decision.

       As explained by defendants, JDI paid $3.2 million for the loan portfolio with an approximate

face value of $3.5 million. JDI bought a loan portfolio and "reaped" nothing at the time of closing.

It obtained the right to collect principal and interest 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

not collecting its money. The "benefit" obtained by JDI was paid for. It did not steal or convert the

money. 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 between Ottawa and CLC.

       Ottawa contends that, "by closing the transactions set forth in the JDI agreement with the

prior notice and knowledge described above, the Defendants intentionally and unjustifiably induced

a breach of the participation agreements existing between CLC and the Plaintiff." However, as

stated, Ottawa fails to allege how or in what manner the mere purchase of several loans induced CLC

not to pay Ottawa the amount Ottawa was due. As defendants aptly assert, "[o]ther than putting

money in the hands of a person no one knew was acting illegally (until the house of cards collapsed)

how exactly did JDI induce Mr. Heuser to steal?" In sum, because defendants were not privy to any

contracts entered into between Ottawa and CLC, Ottawa will never be able to allege that defendants

induced the breach of a fiduciary duty.

                                                 -12-
No. 2--06--0671

      For the foregoing reasons, the judgment of the circuit court of Du Page County is affirmed.

      Affirmed.

      GILLERAN JOHNSON and ZENOFF, JJ., concur.

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