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November 30, 1993

MARC DEVELOPMENT, INC., an Illinois corporation, KEITH-MARC PROPERTIES, LTD., an Illinois limited partnership, and BROWN LEASING, INC., f/k/a CAPITOL LEASING COMPANY, Plaintiffs,


The opinion of the court was delivered by: JAMES B. MORAN

Plaintiffs Marc Development, Inc. (MDI), Keith-Marc Properties Ltd. (KMPL), and Brown Leasing, Inc. (Brown), bring this action against defendants Brian McLaughlin (McLaughlin), Philip Wolin (Wolin), Gerald DeNicholas (DeNicholas), and Alex Vercillo (Vercillo) under section 503 of the Federal Reserve Act, 12 U.S.C. § 221 et seq., based on an alleged violation of 18 U.S.C. § 1005. Before this court are defendants Wolin and DeNicholas' motions to dismiss plaintiffs' complaint. Federal subject matter jurisdiction is based on 28 U.S.C. § 1331. Supplemental jurisdiction is based on 28 U.S.C. § 1367. For the reasons stated below defendants' motions are granted in part, denied in part, and deferred in part.


 The Federal Deposit Insurance Corporation (FDIC) was appointed receiver for The Cosmopolitan National Bank (Cosmopolitan) on May 17, 1991. At issue in this case is a loan participation agreement entered into by MDI, KMPL, Brown and Cosmopolitan in June 1989 -- before Cosmopolitan went into receivership. Defendant Vercillo was president, chief operating officer and director of Cosmopolitan. Defendant DeNicholas was executive vice-president, chief financial officer and director of Cosmopolitan. Defendant McLaughlin was a senior officer of Cosmopolitan and was responsible for the administration of its commercial and real estate loan portfolio. Defendant Wolin was retained by Cosmopolitan to represent the bank in a lawsuit involving four disputed loan participations between Brown and Cosmopolitan. These loan participation agreements are unrelated to the MDI, KMPL, Brown and Cosmopolitan loan participation at issue in this case.

 In June 1989, Cosmopolitan agreed with Brown to participate up to the amount of $ 2,000,000 of a total $ 5,000,000 loan to MDI and KMPL for the development of property near the Deer Valley ski resort in Utah. As a condition of its participation in the loan, Cosmopolitan required that it be repaid first on its outstanding share of the loan. As of September 1990, MDI and KMPL had been advanced $ 1,781,542.68 from Cosmopolitan under the loan. No further funds were dispersed from Cosmopolitan to MDI and KMPL; however, Brown Leasing advanced $ 1,504,590.88 in October 1990, and Terry Brown personally advanced an additional $ 735,655.56 in November 1990.

 In March 1991, MDI began making loan payments to Cosmopolitan. Payments were made by MDI on March 4, March 13 and March 28, 1991, with the March 28 payment of $ 858,159.22 reimbursing Cosmopolitan in full for monies advanced to MDI under the loan participation agreement. Cosmopolitan accepted all of MDI's payments, including the March 28 payment, and did not advise MDI/KMPL prior to or at the time of acceptance of that payment that Cosmopolitan intended to apply the payment in a manner other than that designated by MDI and KMPL.

 However, plaintiffs allege that on April 5, 1991, defendants reversed Cosmopolitan's bookkeeping entry for MDI's March 28, 1991 principal payment and applied $ 718,518.58 of the payment as a "setoff" to the four unrelated and disputed loan participations between Brown and Cosmopolitan. MDI and KMPL were not parties to these other loan participations.

 Plaintiffs contend that defendants effected this bookkeeping reversal and purported setoff to misstate to federal regulators the financial condition of Cosmopolitan and to misstate the status and outstanding balances of the MDI/KMPL loan and the disputed Brown Leasing participations. By applying the MDI/KMPL payment to the Brown-Cosmopolitan loan participations, plaintiffs allege, defendants were able to report to federal regulators that there was an outstanding amount due on the MDI/KMPL loan and that the Brown-Cosmopolitan loan participations which had formerly been labeled troubled assets, in litigation and on non-accrual status, were now performing assets. Plaintiffs allege that these misrepresentations were made in an attempt to injure Brown and MDI and KMPL, and to inflate the assets of Cosmopolitan to stave off closure by federal regulators long enough for Phoenix Financial, a group organized by defendants, to acquire control of the bank.

 Phoenix Financial was organized in 1991 by DeNicholas and Wolin. Plaintiffs claim that defendants organized Phoenix Financial with the express purpose of acquiring Cosmopolitan before the failing financial institution could be taken into receivership by the FDIC. Plaintiffs allege that DeNicholas and Wolin were to be principal investors in Phoenix Financial, DeNicholas and Vercillo were to run Phoenix, and McLaughlin was to be an integral part of the new bank management after Phoenix Financial acquired Cosmopolitan. However, defendants' attempt to avoid seizure of Cosmopolitan by federal regulators was ultimately unsuccessful and the FDIC seized control of the bank in May 1991.


 Defendants Wolin and DeNicholas move this court for dismissal of plaintiffs' complaint in its entirety. Defendant Wolin maintains that because he was neither officer nor director of Cosmopolitan he cannot be sued under 12 U.S.C. § 503, which imposes individual liability on "directors or officers of any member bank." Therefore, Wolin contends that there is no basis for federal jurisdiction over him and, that being the case, the state law claims should be dismissed as well.

 Defendant DeNicholas contends that plaintiffs' entire complaint should be dismissed because it fails to state a claim for a violation of § 503. DeNicholas maintains that federal jurisdiction cannot be invoked under § 503 for a violation of 18 U.S.C. § 1005 unless a truly false entry has been made. DeNicholas contends that because Cosmopolitan recorded the payment as a setoff on the unrelated Brown-Cosmopolitan participation agreements, and actually did use the payment as a setoff on those agreements, there was no false entry because the bank's records accurately reflect the disposition of MDI's payment. Therefore, DeNicholas maintains that plaintiffs cannot state a claim under § 503. Additionally, DeNicholas maintains that plaintiffs have failed to adequately allege causation under § 503. Thus, DeNicholas argues that count VI should be dismissed.

 Defendants further contend that plaintiffs cannot state a claim for intentional interference with contract relations or intentional interference with prospective business advantage (counts I and V) because plaintiffs did not plead the necessary elements of either cause of action. Both torts require a knowing, intentional and affirmative interference by defendant with a third party, and defendants maintain there is no third party interference charged by plaintiffs. Moreover, defendants contend that plaintiffs have failed to plead that defendants acted with actual malice, another element of the tort of intentional interference with prospective business advantage. Therefore, DeNicholas and Wolin argue, counts I and V should be dismissed. Next, defendants contend that counts III and VII should be dismissed because plaintiffs have failed to plead their fraud claim with particularity, as required by Rule 9(b) of the Federal Rules of Civil Procedure. Defendants maintain that plaintiffs have similarly failed to allege which of their statements induced MDI/KMPL to act to its detriment. Finally, defendants contend that plaintiffs' claim for conversion (counts IV and VIII) should be dismissed because a bank account is not an appropriate subject for an action for conversion.

 I. Plaintiffs MDI, KMPL and Brown's Federal Claims Against Wolin, Count II: Violation of 12 U.S.C. § 503 and 18 U.S.C. § 1005

 Federal Reserve Bank officers, directors, agents and employees are prohibited from making

any false entry in any book, report, or statement of such bank with intent to injure or defraud such bank, or any other company . . . or any individual person, or to deceive any officer of such bank, or the Comptroller of the ...

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