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United Central Bank v. Dany Investment, LLC

United States District Court, N.D. Illinois, Eastern Division

April 1, 2014

DANY INVESTMENT, LLC et al., Defendants.


JOHN A. NORDBERG, Sr., District Judge.

This is a mortgage foreclosure case brought by plaintiff United Central Bank ("UCB"), successor to Mutual Bank. In May 2008, Mutual Bank made three loans totaling approximately $6 million to defendants (Umar F. Paracha and companies he owns). The loan proceeds were used to buy investment properties - a hotel in the Wisconsin Dells, a hotel in Davenport, Iowa, and a truck stop gas station in Hampshire, Illinois. The FDIC took over Mutual Bank and, in July 2009, sold the assets (including these three loans) to UCB who then filed this action to foreclose on these properties and to enforce promissory notes and related guaranties.

The Paracha defendants answered and also filed a counterclaim alleging that they entered into the loan agreements based on false promises about the income, value, and other attributes of the properties. Before discovery was taken, UCB filed three case-dispositive motions. First, it moved for summary judgment on most of the counts in the complaint. The motion was based in part on the fact that the Paracha defendants admitted in their answers that they signed the loan documents and had not made any loan payments. Second, UCB moved to dismiss the counterclaims because they were barred by (among other things) the Illinois Credit Agreements Act. Third, UCB moved to dismiss the affirmative defenses on the same basic grounds as the first two motions. UCB portrayed this case as a straightforward mortgage foreclosure case, albeit one brought by a successor bank.

In response, the Paracha defendants raised several arguments. They noted generally that Mutual Bank had been taken over by the FDIC which had accused Mutual Bank and those working for it of making high-risk loans to a small group of high-volume borrowers based on inflated appraisals and other false promises and without giving attention to whether the borrowers could repay the loans. Aside from this general point, they raised only two specific arguments. First, for one of the loans, they asserted that a title closing sheet referred to a $700, 000 construction escrow, and they claimed they never received this money. Second, for one of the three loans, they asserted that they made monthly payments of $28, 000 for the first year, which was not accounted for in the tally submitted by UCB.

On March 9, 2012, this Court denied all three motions. See Dkt. # 71.[1] The primary reason for the ruling was that the Paracha defendants had not yet had the opportunity to take any discovery. However, we told them that we were giving them the benefit of the doubt because their briefs had been vague, lacking in authority, and even contradictory in places. ( Id. at 3.) We further advised them that going forward they would eventually have to provide specific evidence and better arguments to avoid summary judgment. ( Id. )

The Paracha defendants then filed an amended counterclaim in which they re-asserted the same fraud-based claims against UCB but also added as cross-defendants several individuals and a law firm working for Mutual Bank in May 2008 when these loans were made - specifically, Amrish Mahajan, John Benik, Pethinaidu Veluchamy, James A. Regas, and Regas, Frezados & Dallas ("FRD"). (Dkt. # 106.)

Meanwhile, UCB and the Paracha defendants proceeded with discovery under the supervision of the Magistrate Judge.

Now before the court are seven motions UCB has filed essentially the same three motions we denied - namely, a second motion for summary judgment seeking judgment on the loans and guaranties (Dkt. # 131); a motion to dismiss the amended counterclaims (Dkt. # 134), and a second motion to strike the affirmative defenses (Dkt. # 129).[2] In short, after giving defendants the benefit of discovery, UCB is re-asserting its same arguments. Cross-claimants have filed two similar motions to dismiss the amended cross-claims (Dkt. # 127 and # 129).


We begin with the motions to dismiss the Paracha defendants' counter and cross-claims, which allege that Mutual Bank and those working for it (a law firm and others) made false promises about these loans in May 2008 in order to induce the Paracha defendants to enter into the transactions. UCB and cross-claimants (who we'll refer to jointly for convenience as UCB) argue that these claims must be dismissed for lack of jurisdiction because the Paracha defendants failed to exhaust their administrative remedies by presenting these claims to the FDIC, as required by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), Pub.L. 101-73, 103 Stat. 183 (1989). We agree.

Under FIRREA, the FDIC is authorized to administer claims against a bank for which the FDIC acts as receiver. Farnik v. FDIC, 707 F.3d 717, 721 (7th Cir. 2013). In Farnik, the Seventh Circuit confirmed that FIRREA requires dismissal for lack of jurisdiction of any claims that relate to the alleged bad acts of the bank in FDIC receivership if those claims have not been previously submitted to FIRREA's administrative claims process. Id. at 723 (claims alleging that bank unilaterally prepared loan documents concealing the true nature of interest rates were barred for failure exhaust as required by FIRREA).

Here, there is no dispute that the Paracha defendants failed to present these claims to the FDIC. It is also clear that the counterclaims and cross-claims all relate to the making of the three loans by Mutual Bank in 2008. Therefore, these claims are "claims relating to any act or omission' of a failed bank" and therefore cannot be considered here unless first presented to the administrative claims procedure. Id. at 722. UCB relies heavily on Farnik. However, in a supplemental brief, it has cited to additional recent cases bolstering its argument. See Dkt. # 160 ( citing Dane v. IndyMac Mortgage Servs., 2013 WL 5595406 (D. Or. Oct. 11, 2013); Demolo v. U.S. Bank Nat'l Assoc., 727 F.3d 117 (1st Cir. 2013); Tavake v. JPMorgan Chase Bank, 2013 WL 3332148 (E.D. Cal. July 1, 2013)).

Faced with this authority, the Paracha defendants have not even attempted to make a credible argument that their claims as currently plead are not barred.[3] Instead, they have filed a motion for leave to amend their counterclaims and cross-claims in which they propose to change their theory of the case. See Dkt. # 172; see also #171 and #180. Specifically, they state that their counterclaims (more precisely, it would have to be the counterclaims they hope to file) are now "not based on any action taken by the failed Mutual Bank." (#180 at 3.) They assert that the $700, 000 construction escrow was transferred to UCB when it took over Mutual Bank in July 2009. ( Id. ) In other words, they now take the position that Mutual Bank never took or distributed the construction escrow but held it and passed it along to UCB who now supposedly still has it and refuses to distribute it. ( Id. ) Thus, the proposed new counterclaims would be asserted only against UCB and would all be based on alleged acts taken after July 2009. (Dkt. #172.)

This is a significant and belated change in their theory of the case. UCB complains that it is too late to switch theories and also points out that the Paracha defendants have not even attached a proposed second amended counterclaim to their motion. While these are valid objections, we will again give the Paracha defendants the benefit of the doubt and will allow them one last chance to make an argument regarding the $700, 000 escrow funds. However, we note that the Paracha defendants must come forward with more specific allegations (which they have promised to do) if they hope to survive a motion to dismiss. They have had the benefit of some discovery. They presumably have some documents in their own possession. They suggest that there is an escrow agreement, but have not supplied a document nor even attempted to describe what its terms are, such as when or how these funds could be released. In fact, it is not even clear that Mutual Bank, as opposed to a third party, held the escrow funds. The burden will be on the Paracha defendants to come forward with plausible allegations ...

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