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Saleh v. Merchant

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

April 25, 2017

NABIL SALEH, as Trustee of the Nabil Saleh MD Ltd. Pension Plan Plaintiff,
v.
HASAN MERCHANT, et al., Defendants. MUSKEGAN HOTELS LLC, M.D. 1 LLC, MD GLOBAL LLC, GLOBAL DEVELOPMENT, INC., and HASAN MERCHANT, Cross-Plaintiffs,
v.
FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver for the NATIONAL REPUBLIC BANK OF CHICAGO, HIREN PATEL, EDWARD FITZGERALD, WOLIN & ROSEN LTD., SMITHAMUNDSEN LLC, THE STATE BANK OF TEXAS, CHANDRAKANT PATEL, ADVANCED APPRAISAL CONSULTANTS, INCORPORATION, ADVANCED APPRAISAL CONSULTANTS, LLC, and WILIAM DADDONO Cross-Defendants.

          MEMORANDUM OPINION AND ORDER ON CROSS-PLAINTIFFS' MOTION FOR LEAVE TO FILE SECOND AMENDED COMPLAINT AND RELATED MOTIONS

          John J. Tharp, Jr. United States District Judge.

         Cross-Plaintiffs Muskegan Hotels LLC, M.D. 1 LLC, Global Development, Inc., MD Global LLC, and Hasan Merchant have moved for leave to file a second amended cross-complaint instanter under Federal Rule of Civil Procedure 15. No parties have answered the previously filed cross-complaints, although two cross-defendants (the FDIC and Edward Fitzgerald) have filed motions to dismiss under Fed.R.Civ.P. 12(b)(6). The second amended cross-complaint will not cause undue prejudice to the defendants and may cure some of the deficiencies suggested in the motions to dismiss. Counts 1-5 and 13, however, are futile in light of the Financial Institutions Reform, Recovery, and Enforcement Act (“FIRREA”). Thus, the motion for leave to amend is granted except as to Counts 1-5 and 13.

         The Court also addresses the cross-plaintiffs' pending motion to replace deceased cross-plaintiff Hasan Merchant with his estate's administrator, Michael I. Merchant. Because the motion is timely under Federal Rule of Civil Procedure 25 and the claims challenged by Wolin & Rosen survive Merchant's death, the motion to substitute is granted.

         BACKGROUND

         This cross-complaint is a part of a long-running dispute that has spanned state and federal courts regarding bad investments in motel properties. The cross-plaintiffs allege that a number of defendants, including the National Republic Bank of Chicago (now under receivership by the FDIC), several of the bank's employees, The State Bank of Texas, several of that bank's employees, and several appraisal services and one of their employees, all conspired to use inflated appraisals to sell foreclosed hotels and motels at above-market prices. Mot. for Leave to Am. Cross-Compl. Ex. 1 (“Cross-Compl.”) ¶ 76. They bring claims against the FDIC relating to its denial of their administrative claims to National Republic Bank of Chicago assets, Racketeer- Influence Corrupt Organizations (“RICO”) charges against the entire group, [1] as well as state claims for fraud, breach of fiduciary duty, negligence, tortious interference with contract, unjust enrichment, quantum meruit, and equitable subordination. Only the FDIC objected to the motion for leave to amend the cross-complaint.

         In a later motion, the cross-plaintiffs also moved to substitute the administrator for Hasan Merchant's estate for Mr. Merchant, who passed away on July 31, 2015. Mot. to Substitute Ex. 2, ECF No. 81-2. Cross-Defendant Wolin & Rosen, Ltd. objected that Merchant's RICO and state law claims did not survive his death. Both of these motions are addressed below.

         DISCUSSION

         On January 5, 2016, the cross-plaintiffs requested leave to file a second amended cross-complaint (“SACC”) instanter. This filing may have been intended as a response to the FDIC's motion to dismiss this first amended cross-complaint, since the cross-plaintiffs did not otherwise respond to that motion to dismiss. The cross-plaintiffs cannot file this new cross-complaint without leave of court, since it is their second time amending and beyond the time frame for amendment by right. See Fed. Rule Civ. Proc. 15(a)(2). Leave to amend should be given “freely. . . when justice so requires.” Id. Leave to amend should be denied when there is “undue delay, bad faith, dilatory motive, repeated failure to cure deficiencies, undue prejudice to the defendants, or where the amendment would be futile.” Stanard v. Nygren, 658 F.3d 792, 797 (7th Cir. 2011).

         The SACC would in fact be the sixth cross-complaint filed in this case (three in the state court proceeding prior to removal plus three in federal court). During its time in federal court, the cross-complaint has doubled in number of counts and ballooned from two cross-defendants to eleven. However, as the cross-plaintiffs note in their motion, there has been no discovery and no defendant has filed an answer to the current operative cross-complaint. Furthermore, delay on its own is generally not a sufficient reason to deny leave to amend. Airborne Beepers & Video, Inc. v. AT&T Mobility LLC, 499 F.3d 663, 667 (7th Cir. 2007).

         The FDIC argues that the claims against it are also futile because they are barred by a variety of statutory provisions. An amendment is futile “[w]here it is clear that the defect cannot be corrected.” Runnion v. Girl Scouts of Greater Chi. & Nw. Ind., 786 F.3d 510, 520 (7th Cir. 2015). If the claims are indeed unquestionably barred, the motion for leave to amend should be denied.

         As the SACC addresses concerns raised by other cross-defendants (such as Edward Fitzgerald) and no cross-defendant other than the FDIC has objected, there is no prejudice in granting the motion as to the other defendants. Mr. Fitzgerald's motion to dismiss the first amended cross complaint for failure to state a claim is therefore denied as moot, although he may offer it again if the second amended cross-complaint fails to address his concerns to his satisfaction.

         I. Claims against the FDIC

         There are 8 counts in the proposed SACC that name the FDIC as a cross-defendant. The first five are styled as claims for determination of the cross-plaintiffs' proofs of claim. According to the SACC, the cross-plaintiffs all filed claims with the FDIC between November 29 and December 1, 2014. Mot. for Leave to Am. Cross-Compl. Ex. 1 (“Cross-Compl.”) ¶ 18. These were all disallowed by the FDIC on August 17, 2015. Id. at ¶ 19-23. The exhibits attached to the cross-plaintiffs' motion state that their claims were disallowed under 12 U.S.C. § 1821(d)(5)(D)(i). The FDIC claims this action is barred by 12 U.S.C. § 1821(d)(5)(E), which states that “[n]o court may review the Corporation's determination pursuant to subparagraph (D) to disallow a claim.” The cross-plaintiffs claim, however, that they are simply “continu[ing] an action commenced before the appointment of the receiver, ” which they are permitted to do under 12 U.S.C. § 1821(d)(6)(A). See, e.g., Cross-Pl.'s Ex. 1-A at 2, ECF No. 56-2 (“if you do not agree with this disallowance, you have the right to file a lawsuit on your claim (or continue any lawsuit commenced before the appointment of the Receiver)”).

         Resolution of this issue turns on the nature of the cross-plaintiffs' claims. The FDIC is correct that federal courts have no jurisdiction to review the FDIC's determination to disallow a claim. 12 U.S.C. § 1821(d)(5)(E). But a disappointed claimant may nevertheless pursue its claim in federal court. “He may return to square one, and, under 12 U.S.C. § 1821(d)(6)(A), file suit against the RTC in federal district court, not for review of the RTC's disallowance, but for relief on the underlying claim. Such a suit ignores the RTC's disallowance and allows de novo examination of the claim by the federal courts. FIRREA explicitly gives the federal courts jurisdiction over such a suit. 12 U.S.C. § 1821(d)(6)(A).” Helm v. Resolution Trust Corp., 43 F.3d 1163, 1165 (7th ...


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