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United States District Court, Northern District of Illinois, E.D

June 8, 1984


The opinion of the court was delivered by: Shadur, District Judge.


Teamsters Local 282 Pension Trust Fund ("Fund") sues ten defendants,*fn1 charging them with:

    1. violation of Securities Act of 1933 § 17(a),
  15 U.S.C. § 77q(a) ("Section 17(a)") (Count I);

    2. violation of Securities Exchange Act of 1934
  § 10(b), 15 U.S.C. § 78j(b) ("Section 10(b)") and
  related SEC Rule 10b-5 (Count II);

3. common law fraud (Count III); and

4. negligent misrepresentation (Count IV).

Several of the defendants now move for summary judgment under Fed.R.Civ.P. ("Rule") 56, contending the present action is barred by collateral estoppel.*fn2 For the reasons stated in this memorandum opinion and order, that motion is granted and the action is dismissed as to all defendants.


In 1981 certain Fund beneficiaries sued Fund's Trustees ("Trustees") under 29 U.S.C. § 1104(a) for breach of their fiduciary duty, challenging Trustees' actions in connection with a loan to Bancorporation and its wholly-owned subsidiary, Des Plaines Bank ("Bank"). In 1982 the Secretary of Labor commenced an action against Trustees alleging the same breach of duty.*fn4 In both actions Fund was joined as a defendant, and after the actions were consolidated for pretrial purposes both Fund and Trustees brought third-party actions in each case against Directors and their law firm, alleging the same claims set forth in this action.*fn5

In July 1983 District Judge Jacob Mishler issued his findings and conclusions based upon the evidence adduced during his bench trial, Katsaros v. Cody, 568 F. Supp. 360 (E.D.N.Y. 1983). Several findings were plainly relevant for current purposes (id. at 367):

    1. Trustees violated their fiduciary duty by
  failing to make an independent investigation of
  Bancorporation's and Bank's financial situation.

    2. Such duty to make an independent
  investigation included the duty not to rely on
  Directors' "representations, predictions and

    3. If Trustees had made an independent
  investigation, they would have discovered it was
  imprudent to make the loan to Bancorporation and
  Bank based upon the financial information
  presented by Directors.

If those determinations adverse to Trustees are similarly binding as to Fund here, this action must fail for obvious reasons. All Fund's claims rest on asserted misrepresentations on which Fund claims to have relied. If Fund had no right to rely on those representations (indeed had the duty not to do so), an essential linchpin to all its claims is missing. Hence this opinion turns to a consideration of whether collateral estoppel applies against Fund, as it clearly would against Trustees.

Collateral Estoppel

Three determinations must be made to apply collateral estoppel as to an issue in a later proceeding:

    1. Is the relevant issue in the second suit the
  same as an issue in the first?

    2. Was that issue actually and necessarily
  litigated and determined in the first suit?

    3. Did the party against whom estoppel is
  asserted have a "full and fair opportunity" to
  litigate the issue?

Kremer v. Chemical Construction Corp.,
456 U.S. 461, 480-81, 102 S.Ct. 1883, 1896-97, 72 L.Ed.2d 262 (1982); Whitley v. Seibel, 676 F.2d 245, 248, 250 (7th Cir.), cert. denied, 459 U.S. 942, 103 S.Ct. 254, 74 L.Ed.2d 198 (1982).

1. Two Actions with the Same Issue

Each of the four theories asserted by Fund here shares an essential element in common with the others — Fund must have relied on Directors' representations justifiably:

    1. As to Count I (on the perhaps questionable
  assumption Fund has any cause of action under
  Section 17(a), as to which see Caliber Partners,
  Ltd. v. Affeld, 583 F. Supp. 1308, at 1312-13 nn.
  9-12 (N.D.Ill. 1984)): Peoria Union Stock Yards Co.
  v. Penn Mutual Life Ins. Co., 698 F.2d 320, 323
  (7th Cir. 1983) ("Rule 10b-5 tracks section 17(a)
  closely"); Walck v. American Stock Exchange, Inc.,
  687 F.2d 778, 789 n. 16 (3d Cir. 1982), cert.
  denied, ___ U.S. ___, 103 S.Ct. 2118, 77 L.Ed.2d
  1300 (1983); Kramas v. Security Gas & Oil, Inc.,
  672 F.2d 766, 769-70 (9th Cir.), cert. denied,
  459 U.S. 1035, 103 S.Ct. 444, 74 L.Ed.2d 600 (1982) and
  cases cited therein.

    2. As to Count II: Zobrist v. Coal-X, Inc.,
  708 F.2d 1511, 1516 (10th Cir. 1983); Atchley v. Qonaar
  Corp., 704 F.2d 355, 359 (7th Cir. 1983).

    3. As to Count III: Central States Joint Board v.
  Continental Assurance Co., 117 Ill.App.3d 600, 607,
  73 Ill.Dec. 107, 453 N.E.2d 932, 937 (1st Dist.

    4. As to Count IV: Penrod v. Merrill Lynch,
  Pierce, Fenner & Smith, Inc., 68 Ill.App.3d 75, 81,
  24 Ill.Dec. 464, 469, 385 N.E.2d 376, 381 (3d Dist.

In the earlier cases Judge Mishler specifically held Trustees, acting on Fund's behalf, had and breached a duty to investigate the very wrongdoing of which Fund now complains. That duty "includes the negative obligation of not relying on the representations . . . of a borrower" (568 F. Supp. at 367). By definition then any such reliance could not have been justifiable. And because the collective obligation of Trustees was the obligation of Fund,*fn6 just as the representations of Directors were the representations of Bancorporation and Bank as borrowers, the justifiable-reliance issue as litigated in the New York actions is indeed the same issue that would need to be litigated in this action.*fn7

2.  "Actually and Necessarily Litigated and

It is beyond cavil that the issue of Trustees' duty to investigate was the foundation of Judge Mishler's holding Trustees guilty of a breach of their fiduciary duty. Even Fund does not really contend otherwise.

3. Full and Fair Opportunity To Litigate

At a May 9, 1984 status hearing this Court requested the parties to address what Fund (not Trustees) actually did in the New York lawsuit to litigate the issue. That inquiry was prompted by this Court's concerns:

    1. whether (as often occurs, for example, with
  a corporation named in a stockholder derivative
  action that charges an entire board of directors
  with wrongdoing) Fund may have been merely a
  passive onlooker in the earlier proceeding; or

    2. whether Fund's interest as the prospective
  beneficiary of any recovery against Trustees may
  have led it to try to establish the non existence
  of Trustees' right to rely on Directors'
  representations, rather than the opposite, in the
  New York litigation.

In response to this Court's question, Fund argues that even though it was named a defendant in the New York lawsuits, it was a nominal defendant only, joined for procedural purposes. In that capacity, Fund urges, collateral estoppel should not be applied against it. 1B Moore's Federal Practice ¶ 0.411[5], at 439-40 n. 5.

But even if Fund may have had a right to be treated as a nominal party in the New York lawsuits, that does not prevent the operation of collateral estoppel if Fund in fact actually litigated the critical issue. See United States v. Jensen, 608 F.2d 1349, 1355 (10th Cir. 1979). Defendants present conclusive evidence that Fund, though represented by its own separate counsel, not Trustee's counsel, vigorously argued before Judge Mishler against a finding that Trustees had breached their fiduciary duty. Some of Fund's activities at trial include:

1. making of an opening statement;

2. cross-examination of witnesses;

3. filing of a motion for directed verdict;

4. offering and introduction of evidence;

5. making of evidentiary objections; and

6. filing of a post-trial memorandum.

In all those activities Fund was not at all passive or neutral, but actively entered the lists by (and on) the side of Trustees.*fn9 Fund clearly had and exercised a full and fair opportunity to litigate the issue critical to this proceeding.

In sum, Fund deliberately sided with Trustees in the first round of litigation, maintaining Trustees were innocent of any wrongdoing because they relied on the borrowers' representations. That argument was unsuccessful because Judge Mishler held Trustees had no right to rely — indeed had a duty not to rely. Trustees were held culpable. Fund cannot now argue afresh Trustees' asserted justifiable reliance, a necessary prerequisite to recovery on each of Fund's current four theories against Directors.


There is no genuine issue of material fact, and moving defendants are entitled to a judgment as a matter of law. Their motion for summary judgment is granted. Because the collateral estoppel ground supporting their motion forecloses Fund's claims against all defendants, this action is dismissed in its entirety.

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