7th Cir. Rejects Breach of Contract Allegations by Borrowers of Failed Bank Against Purchaser Bank

The U.S. Court of Appeals for the Seventh Circuit recently affirmed the dismissal of a breach of contract claim brought by a group of investors against a bank that purchased the assets of a failed bank in receivership, because there was no writing memorializing the alleged agreement, as required by the federal Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) and the Illinois Credit Agreement Act (ICAA).

A copy of the opinion in United Central Bank v. Davenport Estate LLC is available at:  Link to Opinion.

A bank extended loans to a group of real property investors in 2008 and also agreed to loan them $700,000 for repairs and renovations, which was placed in escrow. The parties did not, however, execute a separate written escrow agreement.  In 2009, the Federal Deposit Insurance Corporation (FDIC) closed the bank, and sold the loans to the plaintiff purchasing bank.

Despite repeated demands by the investors, the plaintiff purchasing bank never released the escrowed $700,000.

In 2010, the plaintiff purchasing bank filed a lawsuit to enforce the notes and guarantees, and to foreclose against the three subject properties. The investors counterclaimed, arguing that the bank’s refusal to release the escrow funds was a breach of contract.

The bank moved to dismiss, arguing that all the investors except one lacked standing to sue under Federal Rule of Civil Procedure 12(b)(1) and the counterclaim failed to state a claim upon which relief can be granted under Rule 12(b)(6) because there was no written escrow agreement.

The district court granted the motion to dismiss with prejudice, reasoning that:

  1. section 1823(e) of FIRREA, which provides that “[n]o agreement which tends to diminish or defeat the interest of the [FDIC] … shall be valid against the [FDIC] unless such agreement … is in writing …,” barred the claim because the escrow agreement was never reduced to writing and tended to diminish the interest of the FDIC and its assignee, the plaintiff purchasing bank; and
  2. the claim was barred by the ICAA because “Illinois courts have held that escrow agreements for loan proceeds are credit agreements within the meaning of the ICAA … [and in order to] maintain an action on a credit agreement, the ICAA requires the agreement to be in writing.”

On appeal, the investors first argued that “FIRREA does not apply in situations where the defunct bank is holding escrowed money for investors.”  However, the Seventh Circuit noted the investors did “not cite any applicable legal authority or provide support for this proposition.” Accordingly, the Seventh Circuit held that “this undeveloped argument is waived.” Also, because the investors did not address the district court’s construction of the ICAA, the Seventh Circuit held that any challenge to this part of the order was also waived.

The Seventh Circuit also rejected the investors’ second argument “that by failing to return the escrow money, [the bank] committed conversion,” finding that the investors waived this argument “because they only raised a breach of contract claim before the district court.”

Finally, the Court rejected the investors’ last argument, that the district court “could have permitted them to file a third amended complaint so that they could proceed under a theory of conversion” because the investors never moved to amend the counterclaim for a third time and “it was not the district court’s responsibility to ask the investors to do so or to make their legal arguments for them.”

Accordingly, the district court’s judgment was affirmed.

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Mickey Lee practices in Maurice Wutscher’s Commercial Litigation, Consumer Credit Litigation and Employment Litigation groups. He has substantial experience representing clients in class action litigation, Fair Credit Reporting Act litigation, labor and employment law, and various types of commercial litigation. He has co-chaired several bench and jury trials in state and federal court and has authored numerous appellate briefs and argued numerous cases before the Indiana Court of Appeals and the United States Court of Appeals for the Seventh Circuit. He is Vice President of the Indianapolis Chapter of the Federal Bar Association, and a Board member of the Johnson County Indiana University Alumni Association. Mickey and his wife, Melissa, are active members of the Riley Society with the Riley Children’s Foundation and the Mended Little Hearts of Indianapolis. Mickey received his Juris Doctor from the Indiana University Robert H. McKinney School of Law, and obtained his Bachelor of Science degree from Indiana University – Bloomington.