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COURTNEY v. HALLERAN

September 14, 2004.

JOHN W. COURTNEY, FRANCES T. LAX, LAWRENCE M. GREEN, and IRENE L. KORTAS, on behalf of themselves and others similarly situated, Plaintiffs,
v.
NEAL T. HALLERAN, et al., Defendants.



The opinion of the court was delivered by: JOAN GOTTSCHALL, District Judge

MEMORANDUM OPINION AND ORDER

Plaintiffs John Courtney, Frances T. Lax, Lawrence Green and Irene Kortas were depositors of Superior Bank FSB ("Superior") who lost the uninsured portions of their accounts when Superior failed and was placed in receivership with the FDIC in the summer of 2001. Plaintiffs have sued Superior's holding company, Coast-to-Coast Financial Corp. ("CCFC"), along with several of CCFC's principals (with CCFC, collectively the "CCFC Defendants"), several of Superior's individual officers and administrators (the "Bank Defendants") and Superior's auditors, Ernst & Young LLP ("E&Y"), alleging that CCFC essentially plundered Superior's assets for its own profit and, using "cooked" financial statements supplied by E&Y, misrepresented the financial condition of the bank to depositors to encourage their business. Plaintiffs also claim that Superior's employees fraudulently induced plaintiffs to deposit funds with Superior by falsely informing plaintiffs that their deposits would be insured by the Federal Deposit Insurance Corporation ("FDIC").

Plaintiffs have filed a five-count fourth amended complaint, claiming that (1) defendants violated the Illinois Consumer Fraud Act, 815 ILCS § 505/2 by "providing false financial statements regarding the financial condition of the bank and erroneous legal advice regarding FDIC insurance coverage" (Count I); (2) CCFC and E&Y violated the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962(c) by withdrawing funds from the bank under cover of false financial statements approved by E&Y (Count II); (3) E&Y violated Section 30.1 of the Illinois Public Accounting Act by knowingly or negligently approving financial statements that drastically overstated the value of Superior's assets (Count III); and (4) E&Y knowingly aided and abetted CCFC's RICO violation (Count IV). Plaintiffs have also sued the FDIC and CCFC's principals for a declaration that the FDIC's settlement of claims against CCFC should be declared null and void because the settlement attempts to divert Superior's assets to CCFC in violation of the statutory priority scheme for distribution of Superior's assets (Count V).

  Before the court are separate motions to dismiss filed by the CCFC Defendants, the Bank Defendants, E&Y and the FDIC. For the reasons stated below, defendants' respective motions to dismiss are each granted.

  BACKGROUND

  In resolving defendants' motions to dismiss, the court assumes that the following allegations of plaintiffs' complaint are true.

  In December of 1988, Superior, which had already been taken over by federal regulators, was sold to CCFC, a holding company which, in turn, is owned and controlled by Thomas J. Pritzker, Penny S. Pritzker and Alvin Dworman. Following its takeover by CCFC, Superior began accumulating high-risk assets associated with retained interests in mortgage securitizations. The securitization process was very complex but basically worked as follows: Superior made high-risk loans to auto and home buyers with poor credit histories, pooled the loans and then sold interests in the loan pools to investors. Superior collected the income streams due on the underlying mortgages and paid a fixed rate of return to investors. Superior made money on the transaction based on the difference between the mortgage payments it took in from borrowers and the lower fixed rate of return Superior paid to the investors. This was a high-risk venture because the value of Superior's retained interests fluctuated depending on the rate of default or prepayment on the underlying loans. For example, a high rate of prepayment by borrowers — as happens when borrowers refinance their loans due to declining interest rates — would depress the value of Superior's retained interest because Superior would no longer receive the high contractual interest rate from those mortgage debtors but would still be obligated to pay the fixed rate of return to investors.

  Plaintiffs allege that, during their ownership of Superior, the CCFC Defendants essentially plundered Superior's assets by withdrawing funds from Superior far in excess of what was warranted by Superior's financial performance and engaging in myriad self-interested transactions with Superior. For example, plaintiffs allege that CCFC's principals took out vast loans from Superior that they had no intention of repaying and "helped themselves" to Superior's assets by directing Superior to pay CCFC $188 million in dividends from 1989-1999. Plaintiffs allege that defendants' fraud and mismanagement severely depleted Superior's assets and eventually drove Superior into insolvency.

  To maintain the influx of cash into Superior's coffers, the CCFC Defendants and Bank Defendants hid Superior's deteriorating financial condition from depositors and prospective depositors with the help of Superior's auditors, E&Y. Plaintiffs claim that E&Y "cooked" Superior's books by vastly overstating the value of Superior's assets. Then, based on E&Y's faulty conclusions, the CCFC and Bank Defendants made statements to depositors assuring them that Superior was financially sound.

  Plaintiffs also claim that, to encourage large deposits, Superior misrepresented the availability of FDIC insurance. Plaintiffs allege that Superior's employees advised them that, if plaintiffs took steps to open up multiple accounts under different names, their entire deposit would be insured by the FDIC. Plaintiffs claim that Superior's advice was false and that, consequently, plaintiffs unwittingly left large portions of their deposits uninsured just when Superior was about to implode. Eventually, defendants' mismanagement of Superior caught up to them. Plaintiffs allege that, starting in 1998, the Office of Thrift Supervision ("OTS") and the FDIC began having serious concerns about Superior's financial condition. After further investigation, the OTS and FDIC determined that several of Superior's financial statements, that had been audited by E&Y, significantly overstated the value of Superior's assets. In January of 2001, E&Y conceded that its accounting treatment of Superior's retained interests was incorrect and agreed to reevaluate its conclusions. E&Y subsequently determined that Superior's accounts must be restated to reduce the value of Superior's retained interests by $270 million. An additional $150 million write-down followed shortly thereafter.

  That drastic reduction of Superior's assets left Superior insolvent and on July 27, 2001 the OTS appointed the FDIC receiver for Superior. The FDIC transferred all insured deposits, i.e. deposits up to $100,000, and Superior's remaining assets to a newly chartered entity, Superior Federal. About $49 million of uninsured deposits were not transferred to the new entity but rather remained with the defunct Superior Bank. As yet, Superior does not have sufficient assets to refund those uninsured deposits.

  After Superior was placed in receivership, the FDIC settled Superior's claims against CCFC's principals for $460 million — $100 million paid up front and the remaining $360 million to be paid over the following 15 years. That settlement is to be distributed, in part, to Superior's depositors according to the federal statutory priority scheme for distribution of Superior's assets. However, plaintiffs allege that the $460 million settlement will still fall short of the amount necessary to compensate uninsured depositors.

  Moreover, plaintiffs allege that the settlement violates the federal statutory scheme for allocating Superior's assets. As part of the settlement, the FDIC agreed with the CCFC defendants to jointly sue E&Y for misrepresenting Superior's financial condition. The FDIC also agreed to assign the Pritzkers a percentage of any proceeds recovered by the FDIC in the E&Y suit. Plaintiffs allege that this arrangement was designed to circumvent the statutory priority scheme by allowing Superior's owners, the CCFC Defendants, to jump ahead of Superior's depositors in claiming a share of Superior's remaining assets.

  On November 2, 2002, the FDIC, acting in its corporate capacity, filed a complaint against E&Y, based on E&Y's alleged misstatements of Superior's financial condition.*fn1 Ostensibly, the FDIC sued in its corporate capacity to avoid an arbitration agreement between Superior and E&Y. However, the District Court dismissed the FDIC's complaint for lack of standing. Although the Seventh Circuit disagreed with the District Court's standing rationale, it affirmed the dismissal of the case, holding that, pursuant to 12 U.S.C. § 1821, "FDIC-Receiver [is] the right entity to pursue any claim against Superior Bank's accountants." ...


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