Lead Opinion
This appeal from a judgment for the plaintiff in a diversity suit governed by Illinois law presents difficult questions concerning appellate jurisdiction, the common law of restitution, and statutes of limitations. Lawyers Title, the plaintiff, is a title insurer. Dear-born Title, now defunct and, it appears, assetless, was an escrow and closing agent and also served as Lawyers’ agent for the issuance of title insurance policies in Illinois. Lawyers Title sued Dearborn to recover money that Lawyers had paid to its insureds who had incurred losses as a result of Dear-born’s mishandling of real estate transactions involving those insureds. After getting a default judgment for $5.9 million against Dearborn, Lawyers Title filed supplemental proceedings under Fed.R.Civ.P. 69(a) against United Financial Mortgage Corporation, claiming that Dearborn had paid United—a mortgage lender that was Dearborn’s biggest customer—some $654,000 by mistake, and alternatively that the payment of this money was a fraudulent conveyance. As Dearborn’s judgment creditor, Lawyers Title is entitled to recover this money from United if Dear-born would have been entitled to do so. 735 ILCS 5/2-1402(c)(3); Bentley v. Glenn Shipley Enterprises, Inc.,
The district judge granted summary judgment for Lawyers Title (without, however, addressing Lawyers’ alternative ground— fraudulent conveyance) for all but $70,000 of the money it sought, reserving that claim for trial and entering judgment under Fed. R.Civ.P. 54(b) for the balance so that United could appeal immediately.
United Financial is a middleman in the mortgage loan market. It makes the loan to the mortgagor and then sells the loan to a bank or other financial institution. It used Dearborn as follows: United would deposit the money for the loan with Dearborn, which would place the money in an escrow account, handle the closing, and upon its completion disburse the money in the account to the mortgagor, refinancing bank, or seller, depending on the nature of the loan. Lawyers Title had insured the borrower’s title in some of these transactions, and so in effect had insured some of the funds deposited in Dear-born’s escrow accounts. That is why it incurred losses when Dearborn lost, or more likely stole, the funds. So far as appears, United Financial did not lose any of its own money that had been deposited in Dearborn’s escrow accounts.
The judgment that United Financial is appealing from is based on two checks that Dearborn gave United. One, for $87,800, was to reimburse United for advancing funds to Dearborn for transfer to a couple named Larios who were refinancing a mortgage loan they had gotten from United. United had never advanced those funds, so there was nothing for Dearborn to reimburse. Therefore, under the most elementary principles of restitution, Dearborn'—and so Lawyers Title standing in its shoes—was entitled, at least prima facie, to the return of the $87,800, the money having been paid to United on the mistaken assumption that it was to reimburse United for the advance of a like sum to Dearborn. Allstate Life Ins. Co. v. Yurgil,
The cheek was not drawn in response to a bill or series of bills or any other written demand by United for payment. Extensive discovery turned up no bookkeeping entry or other documentation of debts owed United by Dearborn. Although the check was deposited in United’s corporate account and cleared, the receipt of the money was nowhere recorded in United’s books of account. Despite its rather grand name, United Financial Mortgage Corporation was a small company when these payments were made; and its principal, Khoshabe, claims to be a lousy bookkeeper. Dearborn’s principal, Rasulis, is under criminal investigation and took the Fifth Amendment when asked to explain the basis for this large payment to United.
The irregular way in which United accounted for the check, coupled with the fact that Dearborn went belly-up several months after the check was issued, and with the halo of fraud that surrounds Rasulis and the lack of any documentation of a debt, creates an almost irresistible inference that Rasulis and Khoshabe conspired to defraud Dearborn’s other creditors and the Internal Revenue Service, and that the two checks were a fraudulent conveyance by Dearborn to United. An issue critical to both of Lawyers Title’s theories of liability, however (payment by mistake and fraudulent conveyance), is whether, despite appearances, the check for $566,000 discharged a liability of Dearborn to United and thus was neither mistaken nor unsupported by consideration. (The other check, the one for $87,800, was clearly paid by mistake if it was not a fraudulent conveyance.) United argues that the check was, in fact, in discharge of three distinct types of liability:
First, Khoshabe testified in his deposition that Dearborn had made an oral contract with United to pay a penalty, for every check that it gave United that bounced, equal to the face amount of the check, and that the total amount due United under this oral contract might have reached $300,000. Second, Dearborn had, again according to Khoshabe, agreed to pay United a rental fee for every closing that took place at United’s offices. The fee was $100 if the mortgage lender was not United, $300 if it was. The maximum due United under this “contract” was $210,-000. We are still short of $566,000, but Khoshabe testified, in the third place, that Dearborn was also liable to United in tort for costs imposed upon United by Dearborn’s delays in closing United’s loans, delays that sometimes thwarted advantageous sales of the loans. Khoshabe thinks that the total costs of these delays may have been as much as $140,000, in which event Dearborn owed United far more than the $566,000 that it had paid United with the second check.
Lawyers Title argues that neither the bounced-check penalty nor the extra rental fees when United was the lender were lawful, and therefore neither item represented a real debt. Illinois like all other states does not enforce penalty clauses in contracts. (For a global perspective, see Ugo Mattei, “The Comparative Law and Economics of Penalty Clauses in Contracts,” 43 Am. J. Comp. L. 427 (1995).) Parties to a contract can agree on the amount of damages if there is a breach, but for such a “liquidated damages” clause to be enforceable it must be a reasonable estimate of what the promisee’s losses are likely to be in the event of a breach. Bauer v. Sawyer,
Against all this it can be argued that penalty clauses, precisely by encouraging the formation of contracts likely to be broken— which presumably is why a promisee would demand such a clause—would, if enforceable, throw more contract cases into the courts. Such a clause might also make the promisee, who may profit greatly from the promisor’s breach since it will activate the promisee’s entitlement to a penalty, stubborn about agreeing to contract modifications when the promisor gets into trouble. A related point is that penalty clauses turn minor breaches of contract into litigation casus belli by increasing the expected judgment in a breach of contract suit. The parties to lawsuits do not pay the full costs that litigation imposes on the judicial system, and so courts are justly concerned with proposed changes in law that would foster additional litigation.
But the academic debate over penalty clauses, interesting as it is, is irrelevant in the here and now. The law is clear that penalty clauses are unenforceable, and so we must consider whether the 100 percent penalty for bounced checks can be viewed as liquidated damages, that is, as a bona fide estimate of the likely damages to United if Dearborn bounced a check.
Clearly not. A simple example will show why. If Dearborn bounced a check to United for $150,000 and one day later replaced it with a check that cleared, United would be entitled to claim “damages” of $150,000. Yet its only loss would be one day’s interest on $150,000, which at an interest rate of 10 percent a year would be less than $50. United is right to point out that depositing bounced checks could imperil its relations with its bankers, who might wonder what quality of people or firms United was dealing with. Such a harm—a loss of “good will,” more concretely a diminution of future contractual opportunities—would be difficult to quantify, making a provision for liquidated damages highly appropriate. Bauer v. Sawyer, supra,
Even though the sanction is clearly excessive ex ante, that is, in reference to the full range of likely breaches, it might be redeemed if the particular breach for which the penalty was sought was so calamitous that the penalty was a happily reasonable estimate of compensatory damages for that breach, though not in general. 3 Farnsworth, supra, § 12.18, p. 293. But there is no indication of that here. So unlikely is it that the sanction could be justified as a form of liquidated damages that United had to
The Real Estate Settlement Procedures Act of 1974, 12 U.S.C. §§ 2601 et seq., forbids the payment of a kickback for referring to the payor an opportunity to provide a real estate settlement service for a federally related mortgage loan. 12 U.S.C. § 2607(a). The district court found that the $200 premium that United received from Dearborn for letting Dearborn use United’s premises to close mortgage loans originated by United was such a kickback, the loans being “federally related.” (Or so at least the parties assume, without discussion. The criteria are set forth in 12 U.S.C. § 2602(1). We need not decide whether they were satisfied or not; we treat the parties’ silence as a stipulation that they were satisfied.) The cost of renting office space to Dearborn for conducting mortgage closings was no greater when United was the lender than when some other financial institution was. The only plausible explanation for the $200 premium is that it was compensation to United for steering its borrowers to Dearborn to handle the closing. There may conceivably be a legitimate explanation; maybe Dearborn had to charge less for its closing services to other customers because they did not trust it as much as United’s customers did. But as with the penalty issue, the condition for the transaction to have been lawful (that the lower price was not due to the fact that there was no kickback when United was not the originator of the loan) is so unlikely to have been met that a burden of explanation lay on United, which in its submissions to the district court offered no explanation whatsoever. The only possible inference on this record is that the $200 was indeed a kickback.
But part of the claimed debt was for the $100, a part of the total rental fee that Lawyers Title does not claim was a kickback; and it is this part, multiplied by the number of closings for which United claims it was not paid, that generated the $70,000 that the district judge carved out as a separate claim for trial. We must consider whether it is indeed a separate claim, for if not we lack jurisdiction over this appeal, since the judgment appealed from is final only by virtue of Rule 54(b) of the Federal Rules of Civil Procedure. The test for separate claims under the rule is whether the claim that is contended to be separate so overlaps the claim or claims that have been retained for trial that if the latter were to give rise to a separate appeal at the end of the case the court would have to go over the same ground that it had covered in the first appeal. Curtiss-Wright Corp. v. General Electric Co.,
The question whether the retained and appealed claims are separate is a close one in this case, since Lawyers Title’s claim for the return of the $70,000 involves the same check as the claim on which the district judge entered the Rule 54(b) judgment. But the actual overlap is slight. The only issue with respect to the $100 component of the rental fee is whether there was a contract to pay such a fee (or at least an expectation of payment and some value to the service, supporting a claim for restitution) or whether it is a fabrication of Khoshabe’s. That is not an issue in the present appeal, because while Lawyers does not concede that there was any such contract it acknowledges that whether there was or not is a triable issue, not one that can be resolved on summary judgment;
This is not a case in which the facts underlying the retained and the appealed claims are the same, and the only difference is the legal theory underlying the claims. NAACP v. American Family Mutual Ins. Co., supra,
Lawyers Title is naturally eager to recover what it considers its money from United; to allow the resolution of the proceeding to be delayed indefinitely because a small separate claim remains to be resolved would be to allow the tail to wag the dog. If the tail, even if very short, is firmly enough attached to the dog then Rule 54(b) may not be used to accelerate the appeal. But it is not here, given how limited the overlap is between the facts underlying the claims.
So we have appellate jurisdiction and return to the merits, where the most important question is whether, given that Dear-born had no legally recognized debt to United arising out of either the penalty contract or the kickback contract, Lawyers Title, as Dearborn’s surrogate, can get back the money that Dearborn paid to discharge these “debts.” One obstacle to this claim is the distinction that some old cases, which United would like us to resurrect, make between payment under mistake of fact (as with the Larios transaction—the $87,800 check— where as we said Lawyers’ prima facie claim for restitution is secure) and payment under mistake of law. See 2 Dan B. Dobbs, Law of Remedies: Damages-Equity-Restitution § 11.2, pp. 715-16 (2d ed.1993); 2 Farnsworth, supra, § 9.2, p. 503. If the facts are construed as favorably to United as the record permits, Dearborn was under no misapprehension concerning the facts when it paid $566,000 to United. It just failed to realize that it did not owe anywhere near as much because the bounced-check penalty was unenforceable under contract law and the kickback agreement illegal and so also unenforceable. Granted, it is unlikely that Dearborn actually made any mistake. It is more likely that Rasulis “parked” this money with Khoshabe’s firm and that the money—which, remember, never showed up on the books of United—was later split between the two of them. But of course Khoshabe does not admit this, and so it is proper for Lawyers Title to base its argument on the premise that so much of the money as Dearborn paid United in respect of the penalty clause and excess rental fees was paid by mistake.
The cases that refuse to order the restitution of money paid under a mistake of law say that everyone is assumed to know the law, so the plaintiff has only himself to blame for the mistake. Yates v. Royal Ins. Co.,
These may seem fuzzy grounds for allowing recovery in mistake of law situations; and there are cases in which the mistake of law really is culpable and restitution should be barred because the defendant relied on the plaintiff’s payment of the money. See, e.g., 3 George E. Palmer, The Law of Restitution § 14.27, p. 338 (1978). But to reach that result, and to prevent parties to settlements from trying to rescind by crying mistake, does not require a rule that mistakes of law can never be grounds for restitution. Reliance isn’t argued here—nor had United even a colorable claim to bounced-check “penalties”—making this a case in which the defendant claims a right to keep money to which he has neither legal nor equitable entitlement. A number of Illinois cases allow restitution in such a case, notwithstanding the plaintiffs mistake of law. Harrison Sheet Steel Co. v. Lyons,
Other Illinois cases also not cited by United hold that a voluntary payment made under a claim of right cannot be recovered by showing that the payment was not required by law. E.g., Kanter & Eisenberg v. Madison Associates,
Given the virtual disappearance of the distinction in the law of restitution between mistake of fact and mistake of law and the square precedent of the Harrison decision, we have little doubt that Illinois’ highest court would allow restitution in a case such as the present—but only insofar as the bounced-check penalty is concerned. The picture is much more blurry with respect to the kickbacks, though not because there was any colorable basis for their payment in the first place; there was not, so the defense of voluntary payment under a claim of right is not available to United. But other defenses to Lawyers’ claim for the recovery of the kickbacks as having been paid under a mistake of law may be available. It is one thing to say that even a business firm shouldn’t necessarily be charged with knowledge of every law that might impinge upon its business; it is another to say that a firm in the real estate settlement services business, such as Dearborn, can be excused for not knowing about the Real Estate Settlement Procedures Act. Such a firm would be totally irresponsible, and so would not have an appealing claim to recoup the kickbacks—unless compliance with the Act would be more likely if anyone who paid kickbacks could get them back, since this would make the extraction of kickbacks, in violation of the Act, a less profitable undertaking. As between Dearborn and United, United was the more culpable in soliciting and accepting what amounted to bribes to throw business Dearborn’s way. So there is an argument for punishing United more severely by making it give the money back. The fact that the money will be received not by a merely less guilty party, Dearborn, but by a totally innocent party, Lawyers Title, strengthens the argument for restitution. Dearborn may have been in pari delicto with United, though we think not, for the reason just stated; Lawyers Title certainly was not. Scholes v. Lehmann,
Even so, United argues that Lawyers Title is barred from recovering the kickbacks by the one-year statute of limitations in the Real Estate Settlement Procedures Act. 12 U.S.C. § 2614. True, this is not a suit under that Act, but instead a common law suit for restitution, based on the argument that the kickbacks were made pursuant to a contract that, being illegal, created no true debt. The suit was brought within the limitations period for suits of that kind, which is five years. 735 ILCS 5/13-205 (catch-all provision for civil actions not otherwise provided for); cf. Armstrong v. Guigler,
Granted, there is a question whether the Real Estate Settlement Procedures Act confers any rights on the payor of the kickback, as opposed to the customers for the real estate settlement service. See 12 U.S.C. § 2607(b). We do not understand either party to be contesting the point, so we let it pass. If the Act does not apply, Lawyers Title is nowhere, for, as we have just said, there is no other basis for holding the kickbacks illegal.
We conclude that the Act’s one-year statute of limitations does apply to this suit, at least insofar as the suit seeks restitution of the kickbacks. Cf. Meghrig v. KFC Western, Inc., — U.S. -, -, -,
Lawyers Title argues that even if the one-year statute of limitations is applicable, it was tolled by United’s fraudulently concealing the fact that it had received money from Dearborn to which it was not entitled. The facts bearing on this issue are undeveloped, because the district judge did not think the one-year statute of limitations applicable; but there is a threshold legal question whether tolling is possible. It is not if the one-year period is jurisdictional, Cada v. Baxter Healthcare Corp.,
Of particular relevance are the decisions which hold that the statute of limitations in the Truth in Lending Act is not jurisdictional even though the limitations period is found in the same section as the provision conferring jurisdiction on the federal courts to enforce the Act, King v. California,
We have said nothing about United’s third theory of Dearborn’s obligation to it: that part of the money Dearborn paid was in settlement of tort claims that United had against Dearborn arising out of its repeated botching of the transactions that United had hired it to handle. If this was a bona fide settlement, the voluntary-payment doctrine clicks in and Lawyers Title as Dearborn’s surrogate cannot undo the settlement on the basis of a mistake of law. (In contrast, as we stressed earlier, United had no colorable claim either to the bounced-check penalties or to the payment of illegal kickbacks.) Lawyers Title argues with considerable force that the evidence of these tort claims, and especially the evidence of their size, is unsatisfactory. But these are contestable, and unquestionably material, factual issues and so not properly resolved on summary judgment.
In summary, the judgment of the district court is affirmed insofar as it orders United to pay Lawyers Title so much of Dearborn’s two checks to United as purports to discharge Dearborn’s debt to United for the bounced-check penalty, but is otherwise vacated and the case remanded to determine whether the statute of limitations bars Lawyers Title from recovering the kickbacks and how much of the money that Dearborn paid United pursuant to the so-called tort settlements may be offset against Lawyers Title’s claim. The district court may also have to consider Lawyers’ alternative ground for recovery—that the two checks which Dearborn issued to United Financial were fraudulent conveyances either because Dearborn intended to defraud its creditors (other than United), 740 ILCS 160/5(a)(l), or because they were not supported by commensurate consideration and impaired the solvency of Dear-born, thus satisfying the twin requirements for fraudulent conveyance on a theory of constructive fraud. 740 ILCS 160/6(a); Scholes v. Lehmann, supra,
Affirmed in Part, Vacated in Part, and Remanded with Directions.
Dissenting Opinion
dissenting.
Rule 54(b) of the Federal Rules of Civil Procedure “is limited expressly to multiple claims actions in which ‘one or more but [fewer] than all’ of the multiple claims have been finally decided and are found otherwise to be ready for appeal.” Sears, Roebuck & Co. v. Mackey,
The majority and the parties focus on Lawyers Title’s demand for the return of the $566,000 paid by a Dearborn check to United. This demand is supported by two theories of liability: payment by mistake and fraudulent conveyance. The district court did not completely adjudicate this matter; it retained $70,000 of the claim for trial.
In an effort to justify the Rule 54(b) judgment, the majority parses even further the $566,000 check in an effort to find underlying “claims” that are analytically separate. Neither the manifest legislative policy of requiring a final decision as a predicate to appellate jurisdiction nor the ease law of the circuit supports such an extension of Rule 54(b). The $70,000 “claim” retained by the district court arises out of an alleged contract whereby Dearborn agreed to pay a rental fee to United for using United’s offices for closings. The fee for such use, as alleged, was $300 per closing if United was the mortgage lender and $100 if it was not. The district court determined that the $200 premium was a kickback and entered judgment with respect to the $200 premiums, but retained for trial the remaining “claim” for $70,000 ($100 multiplied by the relevant number of closings). The $300 payments, according to the majority, can be broken into separable claims: one claim includes the $100 portion of the payments and another the $200 portion.
I cannot concur with my colleagues that the rental contract can be dissected so that the fees paid under it reside in separate claims. Cf. Buckley v. Fitzsimmons,
True, the issues surrounding the $100 portions of the rental payments (e.g., whether a contract existed) are in some ways different from the issues surrounding the $200 portions (e.g., whether the premium was an illegal kickback). But, unlike 28 U.S.C. § 1292(b) (under which our review is discretionary and the district court’s required findings are different), Rule 54(b) does not
It is also unsettling the degree to which the litigation yet to occur in the district court may moot the issues decided in this appeal.If later litigation were to determine that there was never a contract for rental fees, for example, the question whether $200 of each $300 payment was an illegal kickback would be academic and today’s opinion on that issue advisory. Other defenses to the $100 claim retained likewise could apply to the $200 claim decided. “The possibility that developments in the litigation may moot a claim suggests that appellate resolution be deferred” and “makes improvident the parties’ and the judges’ investment of resources to produce a speedy appellate ruling.” Horn v. Transcon Lines, Inc.,
The majority’s approach, applied in such a liberal fashion, is totally undisciplined. It would, for instance, allow a district court to enter a Rule 54(b) judgment in a simple torts ease upon deciding that the defendant is hable and that the plaintiff is entitled to a sum certain for an injured arm, although the court saves for trial the damages to be awarded on account of the plaintiffs injured leg. The second appeal in this hypothetical case would not require the appeals court to “cover the same ground” again; the factual overlap would be limited to the mere “background” facts of the accident and the second appeal would not likely concern the same legal issues. Nevertheless, it is manifest that a Rule 54(b) certification is improper if the district court has merely granted a partial summary judgment on the issue of liability when assessment of damages remains. See, e.g., Seatrain Shipbuilding Corp. v. Shell Oil Co.,
The majority’s new approach to Rule 54(b) is simply too permissive to square with the congressional decision to require a “final decision” or with our case law. See Horn,
Although our circuit has acknowledged, as a general proposition, the wisdom of the “pragmatic approach” to appellate jurisdiction announced by the Supreme Court in Brown Shoe Co. v. United States,
Notes
. Although counsel’s view is not controlling, it is interesting to note that counsel for Lawyers Title conceptualized his client's claim in the same manner as I. Indeed, although counsel requested Rule 54(b) certification and contended on appeal that the certification was proper, counsel nevertheless held the belief that the district court did not fully adjudicate Lawyers Title’s claim. When asked at oral argument, “[The district court] did not adjudicate your entire claim?” counsel responded flatly, "That is right.”
. Because it is sometimes difficult to determine whether the degree of factual overlap between two claims is so extensive that the claims are not separable, we have said that we shall not disturb a district court’s discretion in this regard if "thoughtfully exercised.” Buckley,