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UNITED STATES v. FIRST NATL. BANK OF CICERO

April 26, 1990

UNITED STATES OF AMERICA, Plaintiff,
v.
FIRST NATIONAL BANK OF CICERO, Defendant


George M. Marovich, United States District Judge.


The opinion of the court was delivered by: MAROVICH

GEORGE M. MAROVICH, UNITED STATES DISTRICT JUDGE

 In this action the United States seeks to recover approximately $ 411,000 it paid to the defendant bank pursuant to a loan guaranty, along with other damages. The government bases its claim for recovery on several grounds; it contends that the bank improperly applied the loan proceeds in violation of various agreements between the parties, that it made material misrepresentations which the government relied upon, and that it submitted a false claim for payment in violation of the False Claims Act, 31 U.S.C. §§ 3729-3731. Before the court are the parties' cross-motions for summary judgment. For the following reasons, the government's motion for summary judgment is denied, and the Bank's motion for summary judgment is granted.

 I. BACKGROUND

 This case centers on a loan made to the Holiday Oldsmobile car dealership ("Holiday") by defendant, the First National Bank of Cicero ("Bank"). The loan was guaranteed by the Small Business Administration ("SBA"), as part of the Automobile Dealers Loan Guarantee Plan ("Plan"), which was created by the Carter Administration on July 8, 1980. Appendix 11 to Defendant's Motion for Summary Judgment ("App. 11"). The purpose of the Plan was to provide financial assistance to the nation's auto dealers, who were at the time suffering the effects of the country's economic downturn. Id.

 Before the loan in question here, the Bank had previously dealt with Holiday and its owner, Leslie Cohodes. On February 29, 1980, the Bank made two loans to Holiday totaling $ 165,000. App. 13. The loans were secured by a bank certificate of deposit in the amount of $ 100,000 which Cohodes purchased with the loan proceeds, and by some stock and vehicle titles. App. 14, 15. In May of 1980, the Bank renewed and increased a $ 14,000 loan by $ 10,000, accepting a $ 10,000 certificate of deposit as collateral. App. 15A.

 In June or July of 1980, the Bank's President, Joseph Schuessler, informed Cohodes that the Bank would be willing to loan Holiday an additional $ 75,000 to $ 100,000 for working capital under the Loan Guarantee Plan. Deposition of Joseph Schuessler ("Schuessler Dep.") *fn1" at 40. Schuessler suggested that Cohodes contact a business consultant named Gregory Xylas for assistance in preparing the SBA loan application package. Schuessler Dep. at 37-38. On July 24, 1980, the Bank entered into a Deferred Participation Loan Guaranty Agreement ("Guaranty Agreement" or "Agreement") with the SBA in anticipation of the Bank's participation in the Plan. App. 30. The Guaranty Agreement was expressly made subject to SBA Rules and Regulations. Id., para. 1.

 On September 11, 1980, Xylas delivered a completed SBA loan application package to the Bank, where it was handled by a bank officer named William Giova. The package included not only the Borrower's (Holiday's) Application, but also a completed Lender's Application for the Bank to sign. App. 12A, B. The proposed loan was to be for $ 493,000. App. 12A. The Borrower's Application set out the proposed uses for the money: $ 60,000 for new equipment, $ 94,000 for working capital, $ 100,000 to pay existing accounts payable, $ 171,000 to pay off existing loans to the Bank, and $ 68,000 to purchase inventory. Id.; App. 12C at 287.

 The SBA materials were prepared by Xylas, and except for the Lender's Application were signed by Xylas and Cohodes. App. 16B, request No. 19; App. 12A, B, C. The materials contained several deliberate misstatements. The Lender's Application was incorrect in several respects; for example, it falsely stated that Cohodes had been in the auto dealership business for 40 years, and showed the business operating at a profit when it was actually incurring losses. App. 12B; Deposition of Leslie Cohodes at 38-39. The remainder of the application contained several other inaccuracies; it misstated Holiday's net assets and gross sales, contained an incorrect corporate tax return, and listed as a credit reference a bank with which Holiday had never done business. App. 12C at 270-73, 293-299, 289; Cohodes Dep. at 40-42, 54-55, 47-48. Finally, the SBA package contained an SBA Form 159 "Compensation Agreement," indicating that Cohodes paid Xylas $ 250 for completing the application. App. 12C at 316. In reality, Cohodes paid Xylas $ 3800 in cash and gave him a new Oldsmobile worth $ 12,200. Cohodes Dep. at 58; App. 6 at 12; App. 7.

 Cohodes blames Xylas for preparing the false application, and admits that he did not remember seeing, or did not see, many of the pages of the application, including some which bore his signature. Cohodes Dep. at 37-38, 44. Cohodes was, however, convicted in March of 1986 of misrepresenting the amount of compensation paid to Xylas, in violation of 18 U.S.C. § 1001, App. 6, 7, and sentenced to nine months in prison. App. 8. Xylas was investigated by the SBA in connection with the SBA application, but died before an indictment could be obtained. App. 16A, Request No. 4. No one from the bank was indicted with Cohodes or named in the indictment as a co-conspirator. App. 6; App. 16B, Request No. 7.

 When the SBA package was delivered to the Bank it was reviewed by Giova. Giova did not conduct an independent check of Holiday's application because the company was an existing customer and was not considered a problem customer. App. 12B; Deposition of William Giova at 86-87. In particular, neither Giova nor anyone else at the bank made a search of the public records to determine if there were any liens or encumbrances against Holiday or its assets. Exhibit 38 to Plaintiff's Motion for Summary Judgment ("Ex. 38"), Request No. 14. Giova reviewed and signed the Lender's Application that had been prepared by Xylas. App. 12B.

 Holiday's application arrived at the SBA offices on September 12, 1980. App. 12A. The application initially went to the Chief of the SBA's Financing Division, William Brown, who assigned applications to individual loan specialists. Deposition of Irma Cerda at 14. In this case, the application went to a loan specialist named Joseph Feldman, who was to review the application and recommend approval if he found it satisfactory. Deposition of Joseph Feldman at 4, 15-18. As part of its normal procedures, the SBA ordered a Dun & Bradstreet credit report on Holiday when the application first came into the SBA offices. Cerda Dep. at 18, 20, 21; App. 16A, Request No. 9; App. 18.

 The SBA does not admit that it ever received the D & B report. *fn2" It is undisputed, however, that the report contains extremely negative information about Holiday, including the existence of IRS liens, Illinois Department of Revenue liens, and court judgments. App. 20; App. 16A, Request No. 12. Both Feldman and Brown stated that the loan would not have been approved if they had seen the D & B report. App. 21; Deposition of William Brown at 42. Feldman recommended approval of the Holiday application on October 2, 1980. Feldman Dep. at 38-40, App. 23. Brown then reviewed the application and Feldman's report and approved the loan on October 10, 1980. App. 23-24; Brown Dep. at 32-33.

 After Brown's approval, the SBA sent an "Authorization and Loan Agreement" ("Authorization") to the Bank to advise the Bank of its decision. App. 24. Subject to certain conditions, the SBA was agreeing to guarantee 90% of a $ 493,000 loan made by the Bank to Holiday. Id. The Authorization was expressly made subject to the Guaranty Agreement signed by the Bank on July 24, 1980. App. 24, para. 2(a). Paragraph 3 of the Authorization set out the "Terms of Loan," and stated that the loan was authorized for the same "use of proceeds" which was listed in the Borrower's Application"; only $ 171,000 was to be used to pay off debts owed to the Bank. Id., para. 3(b)(4).

 The loan was closed on October 27, 1980, at the Bank. The Bank immediately debited $ 171,000 from the $ 493,000 proceeds to pay off the February 1980 loans listed in the application and Authorization. App. 25. The remaining $ 322,000 was deposited in Holiday's checking account. Id. On October 28, 1980, Patricia Putney, Holiday's secretary, wrote two checks to the Bank in the amounts of $ 46,475 and $ 40,025. App. 26. These checks were written to pay off interim financing and a used car floor plan loan. Id. The interim financing totalled $ 32,500: an August 28, 1980 $ 7500 loan, and a $ 25,000 loan which was made on October 6, 1980, after approval of the SBA loan but before its disbursal. App. 33.

 Schuessler stopped by the closing and was shocked to learn that the Holiday loan was for $ 493,000 rather than $ 75,000 to $ 100,000. Cohodes Dep. at 68. On learning the actual amount of the loan, Schuessler refused to release a $ 100,000 certificate of deposit which Cohodes had previously pledged to the Bank, though the CD had originally been pledged as collateral for the February 1980 loan of $ 165,000, and not for the $ 493,000 loan. Cohodes Dep. at 70; Schuessler Dep. at 43. Schuessler did release the other collateral from the February, 1980 loan, including the stock and car titles. App. 27. The Bank did not assign the CD to the SBA. Also on the closing date, the Bank signed a "Settlement Sheet" documenting the loan disbursement. Ex. 42. By signing the Settlement Sheet, the Bank certified that the loan proceeds were used in accordance with the Authorization. Id.

 On April 14, 1987, the SBA filed this action seeking, inter alia, recovery of the $ 411,000 paid under the guaranty. While the SBA makes somewhat different prayers for relief in each of the three counts, essentially each count sets forth a different theory justifying recovery of the $ 411,000. In Count I, the SBA alleges that the Bank materially breached the terms of the Agreement and Authorization. Count II charges the Bank with misrepresenting several facts on its Lender's Application and in its written demand for payment under the guaranty, despite the fact that it knew or should have known of the inaccuracy of the statements. In Count III the SBA alleges that the Bank violated the False Claims Act, 31 U.S.C. § 3729-31, by making misrepresentations in its Lender's Application and in the Settlement sheet, and by making the demand on the SBA to honor its guaranty. Count IV states a claim against Cohodes under the False Claims Act, but Cohodes has chosen not to defend this action.

 Both sides have moved for summary judgment. In its motion, the Bank contends that it did not breach any terms of the agreement between itself and the SBA, and, more vigorously, that any breach of the parties' agreement was not material, and thus does not justify rescission of the guaranty. The Bank also asserts that Count II is barred by the three-year statute of limitations, contained in 28 U.S.C. § 2415(b), for tort claims asserted by the United States. As to Count III, the Bank contends that the SBA has failed to demonstrate that the SBA's loss is causally related to the alleged false claim, and that Count III is barred by the six-year statute of limitations contained in the False Claims Act, 31 U.S.C. § 3731(b).

 In its motion for summary judgment, the SBA argues that the Bank did breach the agreement between itself and the SBA, and that this breach was material and directly caused the SBA's loss. The SBA also argues that Count II is not subject to the three-year statute of limitations for tort claims, but rather is subject to the six-year statute of limitations for contract claims. With respect to Count III, the SBA contends that there should not be a causation requirement under the False Claims Act, that in any event its losses were caused by the SBA's misrepresentations, and that Count III is not barred by the False Claims Act's six-year statute of limitations. We find that the Bank did breach the agreement between itself and the SBA, but that this breach was not material and does not justify rescission of the guaranty. We also find that Count II is barred by the three-year statute of limitations for tort claims asserted by the United States, and that the SBA has no claim under the False Claims Act because its loss was not sufficiently related to the Bank's false claim. We do not reach the question of whether Count III would be barred by the statute of limitations.

 Besides the motions for summary judgment, also before the court is the SBA's motion to strike an exhibit to the Bank's motion for summary judgment, namely the Affidavit of Pasquale E. Moccio, which is attached as Appendix 22 to the Bank's motion for summary judgment. We deny this motion, though we note that this denial has no practical effect on the main issues in this case. As the following discussion ...


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