Lead Opinion
Mid-State Fertilizer Co. sold fertilizer in mid-state Illinois. It needed money to buy supplies, pay its workers, and run the business until it could collect from customers. Mid-State arranged for revolving credit from the Exchange National Bank of Chicago, which promised to lend Mid-State 70% of its inventory and receivables to a maximum of $2 million; Mid-State promised to direct its customers to make all payments to a postal box that Exchange would control (the “lock box”). Exchange
In December 1985 Mid-State gave Exchange a financial statement showing that it had lost between $200,000 and $300,000 in the preceding year. Concerned about the soundness of its borrower, Exchange limited the amount of fertilizer in transit that would count as “inventory” for the purpose of new advances. By May 1986 Mid-State was in default. Exchange spoke with some of Mid-State’s customers and discovered that a receivable Mid-State had represented to be worth $135,000 did not exist. Exchange soon stopped making new advances to Mid-State and contacted all of Mid-State’s customers, demanding that they send payments to the lock box. It discovered in the process that customers had paid $1 million direct to Mid-State, bypassing the lock box and increasing the bank's risk. Unable to find new financing, Mid-State crumpled. It is now in liquidation under Chapter 7 of the Bankruptcy Code.
Mid-State commenced this suit, joined as plaintiff by the Kimmels. Their principal grievances arise under state law. Mid-State contends that Exchange broke its contract by refusing to make additional advances and by collecting all of the receivables even after declining to loan more money. But there is no basis of federal jurisdiction over these claims, as all parties are citizens of Illinois. To get into federal court the plaintiffs needed a federal claim.
The district court granted Exchange’s motion for summary judgment on the federal claims, dismissing the pendent claims without prejudice.
I
Exchange reiterates an argument that did not persuade the district court: that the Kimmels are not entitled to recover under RICO and the BHCA. Both statutes authorize litigation by “[a]ny person who is injured in his business or property
Lasley and Maxine Kimmel were the managers and shareholders of Mid-State. They guaranteed its obligations to Exchange. Their wealth obviously was tied to Mid-State’s success: to injure Mid-State was to wound the Kimmels. Equally obviously, the Kimmels’ injury was derivative. Investors gain or lose with the firm; stockholders receive what’s left after the corporation pays its debts. Lenders (guarantees are a form of contingent loan) also gain or lose with the firm, although lenders have more protection than equity investors. Employees, too, invest in the firm: they invest their human capital. If that capital is specialized — that is, if it is worth more when used in connection with the employer than doing something else — the employee is an “investor” to the extent of that specialization. If the employee’s skills are not tied to the firm, so that the employee can go elsewhere and make as much, then there is no “investment”, no loss in the event the firm collapses. Unspecialized employees, like the suppliers of gasoline and typewriters, can turn elsewhere and still earn a market return. In all of these roles — as equity investors, as debt investors (guarantors), and as human capital investors (managers) — the Kimmels gained and lost with Mid-State. A blow costing Mid-State $1 could not cost the Kimmels more than $1. An award putting the $1 back in Mid-State’s treasury would restore the Kimmels to their former position.
The derivative nature of such injuries leads courts in antitrust cases to hold that neither investors nor employees may recover. E.g., In re Industrial Gas Antitrust Litigation (Bichan),
Good reasons account for the enduring distinction between direct and derivative injury. When the injury is derivative, recovery by the indirectly-injured person is a form of double counting. “Corporation” is but a collective noun for real people — investors, employees, suppliers with contract
The district court recognized that shareholders, creditors, managers, lessors, suppliers, and the like cannot recover on account of injury done the corporation. It believed that guarantors are different, and that because the Kimmels are guarantors they also may recover as stockholders.
One could say that guarantors are different because they may deal directly with the wrongdoer. The Kimmels’ guarantees were contracts between them and Exchange. But direct dealing is not the same as direct injury. The Kimmels do not contend that Exchange broke the contracts by which the Kimmels guaranteed Mid-State’s borrowings. They say, rather, that Exchange violated statutory and contractual duties owed to Mid-State, which caused them derivative injury as guarantors. Recovery by Mid-State would put the Kim-mels in the position they would have occupied had Exchange lived up to its promises. There is therefore no reason other than a semantic one to treat guarantors differently from debt investors in the firm, and semantics (even if glorified as semiotics or hermeneutics) is not good enough.
Swerdloff v. Miami National Bank,
II
Mid-State, the remaining plaintiff, contends that Exchange violated § 1962(a) of RICO by perpetrating a pattern of fraud and investing the proceeds in itself. The fraud Mid-State perceives lies in the bank’s lassitude in crediting monies to the loan. Exchange committed itself to check the blocked account every morning in order to determine which checks deposited to it had been paid; as soon as funds were available, Exchange promised to use the proceeds to reduce the balance of the loan — saving Mid-State interest charges and releasing some funds to the operations account. The bank did not apply the funds in the blocked account in a timely fashion. Exchange sometimes waited a day to move the money after the checks had cleared, enjoying the value of the float. Therein lies the fraud, Mid-State says. By surreptitiously delaying the transfer, Exchange enriched itself by the time value of the money.
Two inconvenient facts, revealed by the record on summary judgment, cut this claim short. First, the bank did not act surreptitiously. It rendered timely statements to Mid-State showing when it applied funds from the blocked account. Nothing was concealed. Second, deceit (if we take this to be deceit) is not “fraud” unless material. Mid-State knew about the tarrying when it negotiated an extension of the loan. If Mid-State did not think delay material then — it deemed the delay “not that big a problem” — it cannot change its view now. Commercial transactions commonly allow for problems of this sort. The interest Exchange earned on the deferred credits comes to less than $5,000 over the life of the loan; Mid-State, knowing of the occasional delays, could have bargained for a fractionally lower interest rate or quicker extension of credit against inventory — maybe it did these things and has been “compensated” in advance for the delay. The income Exchange earned on the float was worth about one-quarter of one percent in interest on the loan, a simple adjustment to make. Anyway, to break a promise is not to commit fraud. Mid-State equates the two without support. We therefore agree with the district court’s conclusion,
Ill
The several bank anti-tying statutes forbid linking credit to other services. Section 1972(1), in which Mid-State seeks refuge, says that a bank “shall not in any manner extend credit ... on the condition or requirement—
(A) that the customer shall obtain some additional credit, property, or service from such bank other than a loan, discount, deposit, or trust service; ...
(C) that the customer provide some additional credit, property, or service to such bank, other than those related to and usually provided in connection with a loan, discount, deposit, or trust service;
(E) that the customer shall not obtain some other credit, property, or service from a competitor of such bank ... other than a condition or requirement that such bank shall reasonably impose in a credit transaction to assure the soundness of the credit.”
Mid-State believes that the lock box and blocked account are banking services im-permissibly tied to the loan. Section 1972(1)(A) falls out immediately because the lock box and blocked account are “deposit ... service[s]”, but it is not so easy to grant summary judgment on claims under § 1972(1)(C) and (E). These allow banks to require customers to use services “usually provided in connection with a loan”, § (1)(C), and those “reasonably imposefd] ... to assure the soundness of the credit”, § (1)(E), both of which sound like factual questions. Mid-State tendered an affidavit (on which more below) putting these things in issue, and it says it is entitled to a trial. To this Exchange responds that lock boxes are common in asset-based financing and that after the lock box had served its pur
The practices at hand — tying and reciprocity — are familiar in antitrust law. Section 3 of the Clayton Act, 15 U.S.C. § 14, which explicitly addresses tying, contains a limitation missing in the banking statutes: under the Clayton Act a tie-in sale is unlawful only if the effect “may be to substantially lessen competition or tend to create a monopoly in any line of commerce.” The omission in the banking laws has not prevented courts from seeing, however, that it is all but impossible to define a “tie” apart from inquiry into competitive conditions. Almost anything could be called a tie-in. Maybe the loan is “tied” to the demand that it be repaid; maybe the refusal to lend less than $1 million could be called a tie-in of one $500,000 loan to a second. There must be a benchmark. As the Supreme Court observed in Jefferson Parish Hospital District No. 2 v. Hyde,
Unfortunately, however, the record in this case was assembled before Davis clarified the congruence of bank-tying law with its antitrust cousin. The district judge did not inquire whether Exchange’s practices were “anticompetitive” in the sense antitrust law uses that term; instead the court held that Mid-State had not demonstrated a genuine issue of material fact about whether the lock box and blocked account were customary services, reasonably employed to “assure the soundness of the credit.” Exchange filed affidavits avowing that such requirements are both common and necessary when dealing with small businesses in volatile agricultural markets. Mid-State furnished a contrary affidavit. Judge Hart concluded that Mid-State’s affidavit does not establish a genuine issue of material fact,
Mid-State’s affidavit came from William R. Bryan, Chairperson of the Department of Finance at the University of Illinois in Urbana and author of more than a dozen articles on banking (together with many on other subjects) since he received his Ph.D. from the University of Wisconsin in 1961. Professor Bryan served five years as an economist at the Federal Reserve Bank of St. Louis before entering the academy, and while at the University of Illinois he has moonlighted on the boards of directors of three banks — including, from 1974 to 1977, the Exchange National Bank of Chicago. Editor of the Illinois Business Review since 1977, Professor Bryan signed an affidavit which reads in full (omitting formal matters):
3. I have reviewed various pleadings, depositions and documents, which include documents and records provided by the Exchange National Bank during discovery.
4. In my opinion the loan arrangement, which included a locked box or blocked account, in this case was not necessary to assure repayment of the loan by Mid-State.
5. It is my opinion that the loan arrangement, which included a locked box or blocked account, in this case was not*1339 necessary to assure the soundness of the credit extended to Mid-State.
6. In my opinion the handling of the loan arrangement and use of the locked box or blocked account by the Exchange National Bank was not an appropriate traditional banking practice.
7. In my opinion the handling of the loan arrangement and use of the locked box or blocked account by Exchange National Bank personnel was contrary to good faith and fair dealing.
8. Further, it is my opinion that the handling of the loan arrangement and use of the locked box or blocked account by Exchange National Bank personnel was such that the likely and predictable result was the demise of Mid-State as a going concern.
9. That my opinions set forth herein are based on my education, training, experience, as well as my review of the documents, pleadings and other information provided to me to date.
The district court thought this affidavit insufficient because Professor Bryan “does not recite any of the specific facts or steps in his reasoning”.
Rule 705 of the Federal Rules of Evidence allows experts to present naked opinions. Admissibility does not imply utility. Professor Bryan presented nothing but conclusions — no facts, no hint of an inferential process, no discussion of hypotheses considered and rejected. Rule 56(e) of the Rules of Civil Procedure provides that affidavits supporting and opposing motions for summary judgment must do more than present something that will be admissible in evidence. They shall “set forth facts” and by implication in the case of experts (who are not “fact witnesses”) a process of reasoning beginning from a firm foundation. American Key Corp. v. Cole National Corp.,
Why, especially, when the declaration makes no sense. Professor Bryan asserts that a lock box system for realizing on the collateral of a loan is “not an appropriate traditional banking practice” and “that the likely and predictable result [of the practice] was the demise of Mid-State as a going concern.” This accuses the bank of irrational conduct — not a common assumption for an economist. Why would Exchange National Bank assassinate one of its customers? Banks can’t make money by digging their customers’ graves. Why would a customer queue up for the slaughter? Anyway, how can payments from customers direct to the bank not be “traditional” when that is the cornerstone of factoring and asset-based lending? Matsushita Electric Industrial Co. v. Zenith Radio Corp.,
Indeed, nothing in the affidavit draws on the skills of an economist. Insights into “good faith and fair dealing” are no part of the economist’s armamentarium — certainly not when expressed without regard to risk and the rate of interest on the loan (compared with, say, the rate for other similarly risky loans that are less-well secured). Economics is the study of rational, self-interested accommodation to scarcity. Bryan as economist might have discussed whether banking markets available to Mid-State are competitive, whether security devices such as lock boxes reduce defaults and so allow banks to lend at lower rates (and, if so, whether Mid-State received an adjustment implied by the change in risk, in light of the competitive rate of interest then prevailing). An economist could have developed a model of the relation between risk-reduction devices and the rate of interest and analyzed where Mid-State fell in comparison to other borrowers, or where Exchange fell in comparison to other lenders. Bryan did none of these things. Instead he examined materials produced in discovery and drew inferences from the record, speaking in legal rather than economic terms. He gave a legal rather than an economic opinion. George J. Stigler, What Does an Economist Know?, 33 J. Legal Ed. 311 (1983).
Bryan offered the court his CV rather than his economic skills. Judges should not be buffaloed by unreasoned expert opinions. Paul Meier, Damned Liars and Expert Witnesses, 81 J.Am.Statistical Ass’n 269 (1986). Judge Hart was not. We have gone into detail not because essential to sustain his decision but because ukase in the guise of expertise is a plague in contemporary litigation. “The importance of safeguarding the integrity of the [judicial] process requires the trial [or appellate] judge, when he believes that an expert’s testimony has fallen below professional standards, to say so, as many judges have done.” Deltak, Inc. v. Advanced Systems, Inc.,
Affirmed.
Notes
Claims under state law might be appropriate "adversary proceedings" in Mid-State’s bankruptcy, but none of the parties mentions this possibility, so we let the matter drop. Likewise we bypass the fact that Mid-State’s trustee in bankruptcy has not been named as the plaintiff. Counsel assured us at oral argument that the trustee has approved this litigation.
Concurrence Opinion
concurring.
I join the judgment of the court and in the essential reasoning of the majority opinion. I write separately only with respect to three points. First, I believe that the majority is quite right in concluding that, under the circumstances presented here, the Kimmels have alleged only derivative injury as guarantors and therefore do not have standing to bring either a RICO or a Bank Holding Company Action. On the other hand, as the Fifth Circuit pointed out in Swerdloff v. Miami National Bank,
In Part II of its opinion, the majority disposes of Mid-State’s claim on the ground that there is no valid allegation of fraud in the complaint that could sustain a cause of action under section 1962(a) of RICO. I agree completely with this conclusion; I only point out that this disposition ought not be read as our deciding sub silentio the important question of whether Mid-State has standing to bring an action under subsection (a) of section 1962.
To support its claim that Mid-State suffered a loss due to the tying arrangement, plaintiffs point only to one paragraph in the affidavit of its financial expert, William Bryan. The paragraph states, “Further, it is my opinion that the handling of the loan arrangement and use of the locked box or blocked account by Exchange National Bank personnel was such that the likely and predictable result was the demise of Mid-State as a going concern.” Bryan states he examined the pleadings, depositions, and documents in this case, but he does not recite any of the specific facts or steps in his reasoning that led him to the conclusion stated in paragraph 8 of his affidavit. Plaintiffs therefore have failed to satisfy their burden of showing specific facts in support of an essential element of their cause of action.
Mid-State Fertilizer Co. v. Exchange Nat’l Bank of Chicago,
. There is a controversy in the reported cases as to what injury will satisfy the standing requirement for a violation under 28 U.S.C. § 1962(a). The defendant in this case argues, and a num