Appeal from the United States District Court for the Northern District of Illinois, Eastern Division, No. 86 C 3936 -- Milton I. Shadur, Judge.
Coffey, Ripple, and Manion, Circuit Judges.
This case is another segment in extensive litigation between the parties. The appellant-trust fund (the Fund) is an employee benefit plan established under ERISA, 29 U.S.C. § 1002. In March 1979, the Fund made a loan of $2 million to the Des Plaines Bancorporation, Inc. (the Bancorporation), a bank holding company. The loan was secured by all the stock of the Des Plaines Bank (the Bank), a wholly-owned subsidiary of the Bancorporation. The Bank provided the Bancorporation with its sole source of income. The defendants-appellees are former officers and directors of the Bancorporation and of the Bank, as well as Jenner & Block, the law firm that represented the Bancorporation and the Bank. In this action, the Fund alleged that the defendants fraudulently induced the Fund to make the loan. The district court granted summary judgment in favor of the defendants on the ground that the Fund did not establish one element of common law fraud -- justifiable reliance. We agree with the district court that the defendants are entitled to summary judgment as a matter of law and therefore affirm its judgment.
The circumstances surrounding the 1979 loan have been set forth in detail in several other published opinions dealing with this matter.*fn1 We need not, therefore, engage in a long recitation here. It is sufficient to note that the Fund was unaware at the time it made the loan that the Bancorporation was in serious financial difficulty. Two years after the loan was made, the Bancorporation defaulted on its semi-annual loan payments to the Fund. On March 14, 1981, the Bank was closed by federal and state regulatory officials. The Fund was left with an uncollectible loan.
In 1981, several fund beneficiaries brought suit in the Eastern District of New York against the Fund and members of the Fund's board of trustees (the Trustees). These beneficiaries alleged that the Trustees had breached their fiduciary duties under ERISA. This suit was consolidated with a similar action brought by the Secretary of Labor against the Fund and the Trustees. The Fund and the Trustees filed third-party complaints against the defendants in the present suit. The district court in New York dismissed these third-party complaints. After a three-day bench trial on the remaining claims, the district court in New York ruled against the Fund and the Trustees. It found that the Fund and the Trustees had failed "to use that degree of care, skill, prudence and diligence that a prudent man would exercise under the circumstances then prevailing." Katsaros v. Cody, 568 F. Supp. 360, 369 (E.D.N.Y. 1983), aff'd, 744 F.2d 270 (2d Cir.), cert. denied, 469 U.S. 1072, 105 S. Ct. 565, 83 L. Ed. 2d 506 (1984).
In February 1984, the Fund brought suit in the Northern District of Illinois against the present defendants. In this action, the Fund raised the same claims that it had asserted in the third-party complaint that was dismissed in the New York litigation. The complaint alleged several violations of the federal securities laws, as well as state common law claims for fraud and negligent misrepresentation. The district court granted the defendants' motion for summary judgment. It held that the action was barred by the judgment of the New York district court under principles of collateral estoppel. Teamsters Local 282 Pension Trust Fund v. Angelos, 585 F. Supp. 1401 (N.D. Ill. 1984) (Teamsters I), aff'd in part and rev'd in part, 762 F.2d 522 (7th Cir. 1985) (Teamsters II). In Teamsters II, this court held that the New York litigation did not bar the Fund's securities fraud suit because the securities laws do not impose a duty to investigate on an ordinary investor. However, the court affirmed the district court's holding that collateral estoppel barred the Fund from asserting a claim for negligent misrepresentation under Illinois law. Although the court remanded the case for consideration of the Fund's federal securities claims and ruled against the Fund on its claim for negligent misrepresentation, it did not reach the merits of the Fund's claim for common law fraud. Teamsters II, 762 F.2d at 531.
On remand, the district court held that the Fund's federal securities action was barred by the statute of limitations. Teamsters Local 282 Pension Trust Fund v. Angelos, 624 F. Supp. 959 (N.D. Ill. 1985) (Teamsters III). The district court also declined to exercise pendent jurisdiction over the Fund's common law fraud claim and dismissed it for lack of subject matter jurisdiction. Id. at 965. This court affirmed. Teamsters Local 282 Pension Trust Fund v. Angelos, 815 F.2d 452 (7th Cir. 1987) (Teamsters IV). It held that the Fund's securities law allegations were subject to the three-year limitations period of Illinois securities law. That period of limitations could have been tolled if the Fund had exercised reasonable care and diligence to uncover the alleged fraud. However, held this court, principles of collateral estoppel prevented the Fund from asserting that it had exercised such reasonable care and diligence; it was bound by the contrary determination of the New York district court in Katsaros.
While Teamsters IV was still pending before this court, the Fund filed this new lawsuit. This suit raised the common law fraud claim that the district court had dismissed in Teamsters III for lack of pendent jurisdiction. The suit was filed in the Northern District of Illinois and jurisdiction was based on diversity of citizenship. The district court again granted the defendants' motion for summary judgment. Teamsters Local 282 Pension Trust Fund v. Angelos, 649 F. Supp. 1242 (N.D. Ill. 1986). The Fund now appeals from the judgment of the district court in this latest lawsuit.
B. Holding of the District Court
The district court determined that the Fund was collaterally estopped by the New York district court's findings of fact. These findings established that the Fund, for the most part, failed to investigate before approving the loan and that this failure resulted in its loss. The district court then examined Illinois law on the question of justifiable reliance. It held that, under Illinois law, a party alleging fraud has no right to rely on the representations of the defendant if a reasonable investigation would have uncovered the truth. Given the New York district court's findings of fact, the court held that, in this case, the Fund could not, as a matter of Illinois law, establish justifiable reliance. Because justifiable reliance is an essential element of an action for fraud under Illinois law, the court granted summary judgment in favor of the defendants.
As an alternate ground for granting summary judgment for the defendants, the district court also held that the legal conclusion of the district court in New York barred further litigation in this case. In New York, the court had held that the trustees of the Fund had not acted prudently, as required by the ERISA statute. Here, the district court held that the Fund, in order to establish justifiable reliance under the Illinois common law of fraud, had to establish that its trustees acted prudently. It had already been determined in the New York litigation that they had not acted prudently. Thus, the court ...