CHICAGO — A federal appeals panel determined a group of investors in a failed Lake Michigan shore development can’t continue part of a lawsuit against their former lawyers.
According to a U.S. Seventh Circuit Court of Appeals opinion filed Jan. 20, the dispute dates to 2005, when Hasan Merchant agreed to buy three hotels in Michigan from the National Republic Bank of Chicago. Merchant used two limited liability corporations as buyers: Muskegan Hotels LLC for two properties in Muskegon, and MD 1 LLC for another in Benton Harbor.
“Over time the investment values of the properties declined, and it became clear that the hotels had been appraised at inflated amounts and sold for about twice their fair values,” Scudder wrote.
After Muskegan and MD 1 defaulted, National Republic foreclosed in 2009. Merchant then accused bank executives of colluding with an appraiser to overvalue the properties.
In 2010, Muskegan investor Nabil Saleh filed a lawsuit in Cook County Circuit Court alleging investor fraud against Merchant, the bank and 12 others. By 2014, the case was in federal court, when the Federal Deposit Insurance Corporation substituted for National Republic after taking the bank into receivership.
In March 2015, Merchant and four of his property companies brought a cross-complaint against the FDIC, alleging it violated the Racketeer Influence and Corrupt Organizations (RICO) Act, among other claims. That action grew to five amended complaints with several additional claims and plaintiffs.
The final related complaint, Scudder wrote, “raises 14 counts against 10 defendants, including two law firms that provided legal work to NRB at different times.” While parts of both the initial lawsuit and cross-complaint remain pending, the panel considered only the dismissal of claims against law firms Wolin & Rosin, Ltd., and SmithAmundsen LLC.
Those claims had been dismissed by U.S. District Judge John Tharp.
Tharp ruled state law claims against Wolin & Rosen were untimely, while the claims against SmithAdmundsen had a “fatal pleading deficiency” in that they lacked sufficient allegations linking the firm’s work to either the purchase of the hotels or the purportedly fraudulent appraisal. Tharp also dismissed the RICO claims for failing to show how either law firm was involved in any alleged racketeering or collection of unlawful debt.
“The last of Wolin & Rosen’s legal work on the property transactions featured in the Fifth Amended Cross-Complaint took place in June 2007,” Scudder wrote, noting the first claims against the firm were filed in November 2015.
The panel also said Merchant couldn’t hold off the clock because he failed to allege concealment of the conduct underlying the complaint. Neither does the Bankruptcy Code offer a path for defeating statutory time limits.
After also agreeing with Tharp’s decision to dismiss state law claims against SmithAmundsen, the panel explained why it affirmed his dismissal of the RICO action.
“The Fifth Amended Cross-Complaint alleges that NRB itself was a racketeering enterprise and spends over 170 paragraphs detailing alleged RICO violations,” Scudder wrote. “But none comes close to adequately pleading that Wolin & Rosen played a part in operating or managing NRB, conspired to commit a RICO violation, or invested income from a pattern of racketeering.”
The panel said attorneys performed routine real estate legal work and can’t be held liable without “particular allegations” of participating in operating or managing the bank, or that it had an agreement to help with “a fraudulent appraisal and loan scheme.” Those conclusions, Scudder, continued “are doubly true for SmithAmundsen,” as there are not allegations linking any work it performed for National Republic “all of which occurred in or after 2012 — to any alleged racketeering, conspiracy, or investment of proceeds from racketeering from 2005 to 2007.”
Merchant and his corporate entities have been represented by attorney Paul Caghan, of Chicago.
SmithAmundsen has been represented by the firm of Karbal, Cohen, Economou, Silk & Dunne LLC, of Chicago.
Wolin & Rosen was represented by the firm of Donohue, Brown, Mathewson & Smyth LLC, of Chicago.