The opinion of the court was delivered by: Decker, District Judge.
On February 8, 1971, the jury returned a verdict in this cause
in favor of plaintiff, Federal Savings and Loan Insurance
Corporation ("FSLIC"), and against various defendants. Under
Count I, defendants Vernon V. Sherman, Jerome S. Morris and
Joseph W. Nowak were found liable in the sum of $150,000 for
fraud in the so-called Riverwoods transaction; defendant Quinn
Hogan was found liable in the sum of $20,000 for fraud in the
so-called Vernon Hills transaction. Under Count II, defendants
Joseph Racina and Edward Kowalko were found liable for
negligence, and an award of $5,000 was made. Now Nowak, Sherman
and Morris have filed post-trial motions. F.R.Civ.P. rule 50.
Hogan has moved for judgment notwithstanding the verdict, or in
the alternative, for a new trial. F.R.Civ.P. rule 50(b). He
argues that evidence of a deficient legal description in a
mortgage on the Vernon Hills property was improperly admitted
into evidence, because it was conclusively determined in a prior
proceeding that no fraud was perpetrated in drawing up the
Hogan was an officer of and majority shareholder in Vernon
Hills, Inc., when it entered into reorganization proceedings in
1962. As security for a loan made to the debtor, Service Savings
and Loan Association ("Service") held a mortgage on the Vernon
Hills Country Club golf course. The debtor's trustee petitioned
the district court for a determination of the value of Service's
security interest, which petition was referred to a special
master for a hearing.
During the pendency of the valuation hearing, Service
petitioned to reform its mortgage on the Vernon Hills Country
Club. It claimed that, due to a mistake of fact arising from a
scrivener's error, the legal description set out in the mortgage
failed to include the entire eighteen holes of the golf course.
Service petitioned the court to reform the description so as to
include the legal description of the entire golf course, as the
parties to the mortgage allegedly had agreed in the first place.
The FSLIC, in its capacity as assignee of Hillside Savings and
Loan Association ("Hillside"), opposed the reformation petition
on the ground that it held certain mortgages on that part of the
golf course which Service sought to have included in its
mortgage. The master heard proofs on the matter, and after the
parties rested, he granted Service leave to file an amended
petition for reformation based on the alleged fraud of the
debtor. His Report and Recommendations (submitted May 25, 1964),
upon which Hogan now relies, was affirmed and approved in its
entirety by the district court. In the Matter of Vernon Hills,
Inc., No. 62 B 9719 (N.D.Ill. 1964), and affirmed on appeal,
348 F.2d 4 (7th Cir. 1965).
Hogan relies in particular upon ¶ 9 of Part I of the special
"9. Service failed to prove by clear and convincing
evidence that Vernon Hills, Inc. or its agents
intended to or engaged in fraudulent or deceitful
conduct in connection with the preparation of the
$700,000 and $850,000 mortgages or that Vernon Hills,
Inc. or its agents by any statements,
misrepresentations, acts or conduct, misled or
perpetrated any fraud upon Service."
Hogan argues, in effect, that the above finding collaterally
estops any finding in this court that he committed fraud in
procuring the loan in the Vernon Hills transaction.
A preliminary difficulty with Hogan's argument in support of
his motion is that it asserts an affirmative defense which was
not pleaded in conformity with Rule 8(c) of the Federal Rules of
Civil Procedure. The defenses enumerated in Rule 8(c) must be set
out in responsive pleadings, otherwise they are waived. Factor v.
Carson, Pirie Scott & Company, 393 F.2d 141, 150 (7th Cir.),
cert. denied, 393 U.S. 834, 88 S.Ct. 107, 21 L.Ed.2d 105 (1968)
(estoppel); Wagner v. Fawcett Publications, 307 F.2d 409, 412
(7th Cir. 1962), cert. denied, 372 U.S. 909, 83 S.Ct. 723, 9
L.Ed.2d 718 (1963) (statute of limitations). Hogan did not plead
the defense of collateral estoppel. He raised it first at trial,
and then neglected to amend his pleading to include it.
F.R.Civ.P. § 15(b). Thus, he should be held to have waived the
However, even if the court should address itself to the merits
Hogan's argument, cf. Tornello v. Deligiannis Brothers, Inc.,
180 F.2d 553, 556 (7th Cir. 1950), there is little question that the
collateral estoppel argument is without merit. In order for a
finding of fact in a previous case to have a binding effect upon
a finding in a subsequent case, the fact must be material and
controlling in both cases, and it must also conclusively appear
that the fact in issue was necessarily determined by the first
court. Insull v. New York, World-Telegram Corp., 273 F.2d 166,
168 (7th Cir. 1959), cert. denied, 362 U.S. 942, 80 S.Ct. 807, 4
L.Ed.2d 770 (1960). Despite the sweeping language found in ¶ 9 of
the master's report, quoted above, it is apparent from a reading
of that entire report and from a reading of the Court of Appeals
opinion, 348 F.2d at 6-8, that the only issue necessarily
determined in the previous proceeding was that no fraud was
committed in the transcription of the legal description. Service
petitioned for reformation of the legal description only; it did
not wage a full-scale attack upon the procurement of the loans by
Vernon Hills, Inc. The main ground relied upon by Service was
mistake of fact. Only after all the evidence was in did Service
amend its petition to allege fraud. The Court of Appeals opinion
makes it clear that Service confined the scope of its petition
before the special master to the issue of whether the legal
description on its mortgage was incorrect, and in particular,
whether an oversight or a mistake caused it.
By contrast, the issue in the instant proceeding was whether
Hogan committed fraud in the procurement of the mortgage loans.
Evidence was offered, for example, that Hogan induced the
granting of the loans with a bribe. Thus, the issue in this court
was much broader than the one necessarily determined before the
special master. Cf. Yates v. United States, 354 U.S. 298, 337, 77
S.Ct. 1064, 1 L.Ed.2d 1356 (1957). Evidence of the defective
mortgage was not dispositive of the fraud issue; it was merely
one of many factors to be considered by the jury in deciding
whether the loans had been procured by fraud, and if so, how much
plaintiff was damaged thereby.
In concluding that plaintiff was not collaterally estopped from
introducing into evidence the mortgage with the defective legal
description, I do not feel it necessary to reach the further
objection that Hogan, who was not a party to the reformation
petition, cannot avail himself of the finding of no fraud.
However, there is some question whether Hogan, an officer and
shareholder of Vernon Hills, Inc., is in sufficient privity with
the corporate debtor to take advantage of the finding of the
special master. Compare Nichols v. Alker, 126 F. Supp. 679
(E.D.N.Y. 1954), aff'd, 231 F.2d 68 (2d Cir.), cert. denied,
352 U.S. 829, 77 S.Ct. 42, 1 L.Ed.2d 51 (1956), with Crown Kosher
Super Market of Mass., Inc. v. Gallagher, 176 F. Supp. 466, 470
(D.Mass. 1959), rev'd on other grounds, 366 U.S. 617, 81 S.Ct.
1122, 6 L.Ed.2d 536 (1961). See also, Grantham v. McGraw Edison
Co., 444 F.2d 210, 212-213 (7th Cir. 1971).
Hogan makes a second argument in support of his contention that
the deficient legal description in the mortgage should not have
been introduced into evidence. He asserts that since the FSLIC
already held title to the remaining portion of the golf course in
its capacity as assignee of Hillside, it could not possibly have
suffered damage by the failure to include that remaining portion
in the Vernon Hills, Inc. mortgage. However, the evidence
disclosed that the FSLIC was required to pay for the deed it
acquired from Vernon Hills' trustee in bankruptcy, and that deed
included property outside of that in the mortgage's legal
description. Thus, it is clear ...