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FDIC as Receiver for Seaway Bank and Trust CO. v. Urban Partnership Bank

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

January 22, 2018

FDIC AS RECEIVER FOR SEAWAY BANK AND TRUST COMPANY, Plaintiff,
v.
URBAN PARTNERSHIP BANK, Defendant. URBAN PARTNERSHIP BANK, Third-Party Plaintiff,
v.
FIRST FINANCIAL NETWORK, INC., Third-Party Defendant.

          MEMORANDUM OPINION AND ORDER

          John Robert Blakey United States District Judge

         Third-Party Plaintiff Urban Partnership Bank (Urban) sued Third-Party Defendant First Financial Network, Inc. (FFN) for breach of contract and failure to indemnify. [36]. Urban alleges that FFN breached its contract to manage the online auction of distressed loans, resulting in the underlying suit by the Federal Deposit Insurance Corporation (FDIC) when the sale of those loans fell through. Id. FFN moves to dismiss Urban's third-party complaint on the grounds that Urban cannot show damages and is not entitled to indemnification. [41]. For the reasons explained below, this Court partially grants and partially denies FFN's motion.

         I.Background

         A. Materials

         This Court draws facts from the amended complaint, [36], and the exhibits attached to it, see Thompson v. Ill. Dep't of Prof'l Reg., 300 F.3d 750, 753 (7th Cir. 2002). Here, this Court may also consider the exhibit attached to FFN's motion to dismiss, [65], without converting the motion to one for summary judgment, as discussed below. See Levenstein v. Salafsky, 164 F.3d 345, 347 (7th Cir. 1998).

         B. Factual Allegations

         Urban formed in August 2010 to purchase certain assets of a failed bank from the FDIC. [36] ¶ 5. These assets included a number of “non-performing or otherwise distressed” loans that Urban bought while entering a “loss share” agreement with the FDIC, which would shoulder certain losses arising from these loans. Id. ¶¶ 5, 6. When a number of the loans continued experiencing losses, Urban decided to sell off a portfolio of some of the loans. Id. ¶ 7. Urban hired FFN as a financial advisor to manage the sale of the portfolio because of FFN's “history and experience” selling loans and assets and its familiarity with FDIC policies, since the FDIC had to approve the sale. Id. ¶¶ 7-9.

         In the summer of 2015, Urban and FFN developed a proposal for the FDIC on the planned sale of the loan portfolio. Id. ¶ 10. FFN drafted the proposal, which detailed FFN's relevant experience and the proposed sale process. Id. ¶¶ 11-14. The FDIC approved the sale in September 2015. Id. ¶ 15-16. In October, Urban and FFN entered a Loan Sale Engagement Agreement (LSEA), which made FFN Urban's exclusive advisor in the sale, granted FFN the exclusive right to market and sell the portfolio for a specified period, and committed FFN to various tasks relating to the sale, including managing the online auction for the portfolio. Id. ¶¶ 17-19. FFN's alleged breach of the LSEA forms the basis of Urban's third-party complaint.

         The LSEA required FFN to prepare various legal documents for the auction, including the loan sale agreement (LSA), and additional terms and conditions of sale. Id. ¶ 19. FFN also had to analyze all the bids received for the portfolio using its proprietary Bid Optimization Model and provide “bid day reports” to UPB. Id. The bid analysis was to include a detailed assessment of “all phases of the sale.” Id. ¶¶ 13, 26.

         Beginning October 14, 2015, interested buyers previously vetted and approved by FFN could visit FFN's website and access information about the portfolio, including the terms and conditions of sale. Id. ¶¶ 20-22. On October 15, FFN told Urban that it wanted to amend the terms and conditions of sale by adding a requirement that bidders submit a servicing plan explaining “how loan payments will be collected and administered after the servicing transfer date” if the bidder won. Id. ¶ 23. Urban accepted the recommendation; on October 22, FFN posted the updated terms and conditions online and notified eligible bidders of the change. Id. ¶¶ 27-29. Under the terms and conditions, bidders had to submit both the servicing plans and the actual bids to FFN. Id. ¶¶ 23, 30. The terms and conditions also provided that the terms of sale-set out in the loan sale agreement (LSA)- were non-negotiable. Id. ¶ 32.

         FFN drafted the LSA and posted it online on October 30. Id. ¶¶ 33-34. The LSA contained several provisions relating to the “servicing transfer date, ” meaning the date when the responsibilities for servicing the loans would transfer from Urban to the purchaser. Id. ¶¶ 31, 36-37. The LSA distinguished between loans governed by the Real Estate Settlement Procedures Act (RESPA), and those not subject to RESPA. Id. ¶¶ 37-39. The servicing transfer date for non-RESPA loans was the date of the sale's closing, December 11, 2015. Id. ¶ 38. Urban's servicing of RESPA loans was also to cease on the closing date, except as required by law. Id. ¶ 39. Reading the LSA and RESPA together, this meant that Urban would transfer all servicing to the buyer on December 26 (i.e., 15 days after the closing). Id. ¶¶ 39-40. At one point Urban asked FFN if the LSA was clear enough for bidders to ascertain the servicing transfer date; FFN's counsel recommended leaving the provisions as they stood, and Urban acquiesced. Id. ¶¶ 42-44.

         The deadline for bids was November 17, 2015. Id. ¶ 45. Seaway Bank and Trust Company (Seaway), an Illinois bank, registered as a bidder on October 16, and at some point before the deadline asked FFN to waive the requirement that Seaway submit a servicing plan with its bid. Id. ¶¶ 47-50. FFN declined, but said that Seaway could submit the servicing plan the day after the bid deadline. Id. ¶ 51. On November 17, Seaway submitted its bid and an initial deposit of $100, 000 to FFN. Id. ¶¶ 52-58. It submitted a servicing plan the next day, as agreed with FFN. Id. ¶ 59.

         When the bidding closed, FFN gave Urban its bid analysis of all the offers for the portfolio, based upon which Urban decided to accept Seaway's bid. Id. ¶¶ 63- 65. The bid analysis did not raise any issue relating to Seaway's servicing plan. Id. ¶ 64. FFN notified Seaway of its successful bid and released all other bids. Id. ¶¶ 66-67. On November 24, 2015, Seaway wired FFN its final deposit. Id. ¶ 68.

         On December 4, Seaway told FFN that it could not service the loans until at least 120 days after the December 11 closing date-contrary to the provisions of the LSA. Id. ¶¶ 40, 69, 78. Urban alleges that up to this point, FFN had not reviewed or vetted Seaway's servicing plan. Id. ¶¶ 70-71. Urban also claims that if it had known about Seaway's purported change to the servicing transfer date, it would not have accepted Seaway's bid. Id. ¶ 76.

         On the closing date, December 11, Seaway did not pay the balance of the purchase price, as required by the initial terms and conditions and the LSA. Id. ΒΆ 81. FFN and Urban determined that Seaway had defaulted on the sale agreements, which, under the LSA, entitled Urban to keep Seaway's deposits as a remedy. ...


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