Justia U.S. 7th Circuit Court of Appeals Opinion Summaries

WR sought to develop a medical office building by executing a long-term ground lease to a developer, who would design, finance, construct, and own the facility, leasing space to WR. WR requested proposals, describing a 30-year ground lease for a 30,000 square foot medical facility. Citadel submitted a proposal. Negotiations followed. WR signed an “Authorization to Proceed” stating that WR “will only be responsible for architectural and engineering fees in the event [W R] does not execute its space leases and ground lease.” Citadel hired attorneys, architects, engineers; refined plans: conducted zoning review, and began securing financing. Negotiations failed. WR terminated the relationship, just as Citadel was preparing to commence construction. WR refused to pay expenses unless it received the plans; entered into contracts with Citadel’s architect and engineer; used their plans and built the facility. The district court rejected Citadel’s claims. The parties settled with respect to pre-construction costs and fees. The Seventh Circuit affirmed. Citadel failed to show that WR agreed to complete the arrangement. When the relationship ended, they had not agreed on essential lease terms. No language in the agreement required the parties to negotiate in good faith, nor did it establish a framework for the negotiation process. View "Citidal Grp. Ltd. v. Washington Reg'l Med. Ctr." on Justia Law

After being rejected for a mortgage because Hall had a bankruptcy and their joint income was too low, Phillips and Hall applied with Bowling, a mortgage broker, under the “stated income loan program.” Bowling prepared an application that omitted Hall’s name, attributed their combined income to Phillips, doubled that income, and falsely claimed that Phillips was a manager. Phillips signed the application and employment verification form. Fremont extended credit. They could not make the payments; the lender foreclosed. Bowling repeated this process often. He pleaded guilty to bank fraud and, to lower his sentence, assisted in prosecution of his clients. Phillips and Hall were convicted under 18 U.S.C. 1014. The district court prohibited them from eliciting testimony that Bowling assured them that the loan program was lawful and from arguing mistake of fact when in signing the application and employment verification. They argued that they were hindered in showing the lack of intent for a specific-intent crime. The district judge concluded that they sought to argue mistake of law. Jury instructions required acquittal absent a finding, beyond a reasonable doubt, that defendants knew that the statements were false; genuine mistake of fact would have led to acquittal.. The Seventh Circuit affirmed.View "United States v. Phillips" on Justia Law

In 2005, Banks, a construction worker, wanted to flip houses, but did not have capital. John, a mortgage broker, suggested that they purchase homes from distressed owners at inflated prices, with the sellers promising to return money above what they owed their own lenders. Owners cooperated rather than face foreclosure. Banks renovated the houses using funds received from sellers and resold them. Johns collected a broker’s fee. When they purchased a house from owners in bankruptcy, they wanted a mortgage to secure payment from the sellers and informed the trustee of the bankruptcy estate. Despite protestations by the trustee, the sale went through, and Banks used the rinsed equity to pay off sellers’ creditors through the trustee. The sellers’ lawyer discovered the scheme, which led to indictments. Johns was convicted of making false representations to the trustee regarding the second mortgage and for receiving property from a debtor with intent to defeat provisions of the Bankruptcy Code. With enhancements for financial loss and for targeting vulnerable victims, Johns was sentenced to 30 months. The Seventh Circuit affirmed the conviction, rejecting challenges to sufficiency of the evidence and jury instructions, but remanded for clarification of sentencing enhancements. View "United States v. Johns" on Justia Law

Safeco issued plaintiffs a homeowner’s policy that went into effect when they closed on the property and covered all accidental direct physical loss to property, unless limited or excluded, “occurring during the policy period.” Before receiving the policy and first seeing its terms, but after beginning renovations, plaintiffs discovered severe inner wall water leaks and significant water infiltration on three exterior walls. A mold specialist found that the home had numerous construction deficiencies that existed long before they purchased the home, resulting in chronic water intrusion that damaged interior finished walls, insulation, external plywood sheathing, and other aspects of the structure. Safeco denied coverage, stating that the prepurchase inspection confirmed multiple areas of water damage that were in need of attention and that the loss qualified as a preexisting condition that occurred outside of the policy period. The district court held that Safeco was precluded from raising the exclusions because it did not notify plaintiffs the exclusions until after they discovered the damage, awarded $485,100.64, and held that Safeco lacked a reasonable basis for denial and demonstrated reckless disregard, entitling plaintiffs to damages resulting from bad faith. The Seventh Circuit affirmed.

Investors joined together to buy property. To finance the purchase, they formed a distinct limited liability company, IPA, to negotiate and execute a loan on their behalf with Morgan Stanley. Okun was manager of IPA, which was not allowed to hold an ownership interest in any of the investors. Morgan Stanley sold the loan to an Okun-controlled entity, Lender, LLC, and agreed to offset the purchase price by the amount of funds available in escrow, reserve, and impound accounts, in which it held a security interest and which were, under the terms of the loan, required to reimburse investors for maintenance, taxes, and other property-related expenses. Lender LLC never reestablished the accounts, depriving the Investors of $1,361,184.63. Abandoning their suit against Lender, LLC, the investors claimed that Morgan Stanley breached their loan agreement and committed conversion. The district court granted summary judgment for Morgan Stanley. The Seventh Circuit affirmed. Morgan Stanley was not barred by the Note, the Mortgage, or the RSA from assigning its interest in the escrow accounts to Okun or structuring a sale of the loan as it wished; it committed neither breach of contract nor conversion.

While vacationing in Arizona, plaintiffs contracted to purchase a condominium in a planned development in Mexico. The project was managed by defendant, an Arizona resident. After making the first of three installment payments, plaintiffs became concerned and sought reassurance. Defendant sent several communications to plaintiffs (in Wisconsin) assuring them the project was properly financed and would be completed on time. They made additional payments. The unit was not completed on time and investigation revealed that the project did not have financing; advance sales were funding the development. Plaintiffs sued in Wisconsin state court, alleging intentional misrepresentation and seeking rescission and damages. Following removal to federal district court, the case was dismissed for lack of personal jurisdiction. The Seventh Circuit reversed. The complaint alleges that repeated communications to plaintiffs’ Wisconsin home were part of a deliberate attempt to create a false sense of security and to induce plaintiffs to make payments. The communications are critical to the claim of intentional misrepresentation. Defendant was aware that the harm would be felt in Wisconsin. The allegations are sufficient to establish minimum contacts necessary to satisfy due-process requirements for jurisdiction in Wisconsin. The communications satisfy the “local act or omission” provision of the Wisconsin long-arm statute.

Plaintiff owned a rental center and retained defendants, who provide investment banking services to the equipment rental industry, to help him obtain an investor or buyer. Defendants’ advice culminated in sale of a majority of plaintiff’s stock for about $30 million. Defendants billed plaintiff $758,675. Plaintiff paid without complaint but later sued for return of the entire fee on the ground that defendants lacked a brokerage license required by Wis. Stats. 452.01(2)(a), 452.03. The district court dismissed, finding the parties equally at fault. The Seventh Circuit affirmed, declining to definitively answer whether a license was required under the circumstances that a negotiated sale of assets fell through in favor of a sale of stock. Plaintiff is not entitled to relief even if there was a violation. Referring to the classic Highwayman’s Case, the court rejected claims of in pari delicto and unclean hands; plaintiff was not equally at fault. To bar relief, however, is not punishing a victim. Plaintiff did not incur damages and is not entitled to restitution. Plaintiff sought compensation for spotting a violation and incurring expenses to punish the violator, a bounty-hunter or private attorney general theory, not recognized under Wisconsin law. The voluntary-payment doctrine is inapplicable.

Sheneman and his son purchased distressed properties, then flipped the properties by operating an elaborate mortgage fraud scheme that convinced unwitting buyers to purchase properties they could neither afford nor rent out after purchasing. Mortgage lenders were duped into financing the purchases through misrepresentations about the buyers and their financial stability. Four buyers with few assets and no experience in the real estate market purchased 60 homes. Most of the homes were eventually foreclosed upon. The buyers and lenders each suffered significant losses. Sheneman was convicted of four counts of wire fraud, 18 U.S.C. 1343, and sentenced to 97 months' imprisonment. The Seventh Circuit affirmed, rejecting challenges to the sufficiency of the evidence and to application of sentencing enhancements for use of sophisticated means and for losses of more than one million dollars.

Between 2004 and 2008, Brown ran an elaborate scheme that tricked lenders into issuing fraudulent mortgage loans in Chicago and Las Vegas. Brown recruited or directed dozens of individuals: lawyers, accountants, loan officers, bank employees, realtors, home builders, and nominee buyers. Of his accomplices, 32 people were criminally charged. The Chicago scheme resulted in about 150 fraudulent loans, totaling more than $95 million in proceeds from victim lenders. The Las Vegas scheme resulted in approximately 33 fraudulent loans totaling about $16 million. Brown entered guilty pleas and was sentenced to 216 months’ imprisonment for the Las Vegas scheme and 240 months’ imprisonment for the Chicago scheme, to run concurrently. The district court also imposed a restitution amount of more than $32.2 million. The Seventh Circuit affirmed Brown’s sentence, rejecting a challenge to the loss calculation. The court remanded the 66-month sentence and $7.1 restitution order against another participant in the Chicago scheme because the court incorrectly determined the number of victims.

MGIC provides private insurance on mortgage loans and incurred large losses in the financial crunch that began with the decline of prices of securities based on packages of mortgage loans. Class-action suits filed under the Securities Exchange Act of 1934 were consolidated and were dismissed when the judge concluded that the complaint did not meet the standard set by the Private Securities Litigation Reform Act, 15 U.S.C. 78u–4(b). A single plaintiff appealed, based on fraud that allegedly occurred during MGIC's quarterly earnings call on July 19, 2007. The Seventh Circuit affirmed, holding that the complained-of statement was true and that the complaint failed PSLRA's requirement for pleading scienter. At most plaintiff could allege that MGIC’s managers should have seen the looming problem, and establish negligence rather than the state of mind required for fraud. MGIC's managers did not have any private information that they could have revealed.