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Commercial National Bank v. Fdic





Appeal from the Circuit Court of Fulton County; the Hon. Charles H. Wilhelm, Judge, presiding. PRESIDING JUSTICE HEIPLE DELIVERED THE OPINION OF THE COURT:

Commercial National Bank of Peoria (Commercial) recovered a judgment of $105,652.57 plus costs against the Federal Deposit Insurance Corporation (FDIC) based on loans fraudulently induced by Farmers State Bank of Lewistown (Farmers), for whom the FDIC is acting as receiver. The FDIC appeals and we affirm.

At all times relevant to the instant case, Commercial and Farmers had a longstanding correspondent banking relationship. As one service to its "country bank," Commercial would provide participation and overline loans to customers of Farmers who sought credit in excess of Farmers' legal lending limits. Commercial's officer in charge of correspondent banking was Clifford Michael. Michael had been doing business for over a decade with Donald Thomas, who at the time of the events in 1981 was president of Farmers. Both Michael and Thomas testified to having an excellent business relationship. Whenever a customer of Farmers needed the services of Commercial, Thomas would call upon Michael. They would share the relevant financial data, and a decision would be made based upon that data.

On October 5, 1981, Thomas called Michael to inform him that Tingley Products (Tingley), a small manufacturing corporation owned by Vincent and Rebecca Augenstein, needed $90,000 to complete a contract. Thomas represented that the loan would be paid when the receivables generated by the contract were collected. Michael requested financial information. Thomas informed him that he had financial statements of both Tingley and the Augensteins dated September 30. The statements reflected a net worth of $15,000 for Tingley and $487,000 for the Augensteins personally. Michael had previously made a $60,000 loan to Tingley which had been repaid, albeit late. Michael agreed to make the loan on an unsecured basis, backed by the personal guarantees of the Augensteins. The maker of the note was listed as "Vincent Augenstein d/b/a Tingley Products." The note was signed "Vincent Augenstein, Pres."

What Thomas did not tell Michael was that Tingley had laid off all its employees in July. The contract that Thomas represented did not exist at all, but was merely a vague and uncertain prospect which never materialized. He also conveniently ignored an $88,000 overdraft from Tingley to Farmers. The financial statements submitted to Michael (prepared by Augenstein on a quarterly basis for Thomas) mentioned neither the overdraft nor a $56,000 loan from Augenstein to Tingley.

The evidence strongly suggests that Thomas was for a long time aware of Tingley's overdraft situation. It was the largest overdraft outstanding to Farmers. Augenstein testified that Thomas called him in to discuss the overdraft situation. Augenstein never suggested a loan to cover the overdraft. Thomas, however, had other ideas. Exhibits offered by Commercial show that the proceeds of the loan went directly into Tingley's account to offset the overdraft. Further exhibits show that Tingley had already been in debt up to or over Farmers' lending limits, not even considering the overdraft.

In the first week of November, Michael learned that Thomas had resigned from Farmers. In reviewing loans to customers of Farmers, Michael saw that the $90,000 had been applied to cover the overdraft. He promptly informed Farmers of Commercial's claim against it. He also extracted a substantial payment from Augenstein, leaving a principal balance of $74,472.47, although the note was not due until April 1982. On January 11, 1982, a new note was given to Commercial by Tingley, representing the corporation as the maker and granting Commercial security interests in most of Tingley's assets. Tingley and the Augensteins were both placed in involuntary bankruptcy by the FDIC. Judgment was taken on the January note and guarantees by Commercial. No portion of the judgment has been satisfied.

Commercial sued the FDIC on a single count of fraud. The jury returned a verdict of $77,860.96. Attached to the verdict form was a sheet indicating that the verdict was arrived at by taking the principal amount on January 11 and adding interest thereto up to April 12, the due date of the note. Commercial's post-trial motion seeking additional interest up until the date of the judgment was granted, resulting in the judgment referred to above.

• 1 Defendant argues that its motion for a directed verdict should have been granted or, in the alternative, that it should be granted a new trial. Its principal contention is that plaintiff did not prove the elements of a cause of action for fraud.

The elements of fraud can be found in Soules v. General Motors Corp. (1980), 79 Ill.2d 282, 402 N.E.2d 599. Plaintiff must prove that defendant:

(1) Made a false statement of a material fact.

(2) Knew or believed the statement to be false.

(3) Intended to induce action in reliance thereon.

(4) Actually induced the desired action.

(5) Caused damage to the party due to ...

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