219 F.3d 519 (6th Cir. 2000), 98-4545, Aetna Casualty and Surety Co. v Leahey Constr.

Docket Nº:Leahey Construction Company, Inc., et al., Defendants, KeyBank National Association (Ohio) and Edward Donnelly, Defendants-Appellants (98-4545)/Cross-Appellees, Mark J. Elmore and Mark J. Elmore, C.P.A., Inc., Defendants-Appellees/ Cross-Appellants (99-3006).
Citation:219 F.3d 519
Party Name:Aetna Casualty and Surety Company, n/k/a Travelers Casualty and Surety Company of America, Plaintiff-Appellee/ Cross-Appellant (99-3005), v.
Case Date:July 13, 2000
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit
 
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219 F.3d 519 (6th Cir. 2000)

Aetna Casualty and Surety Company, n/k/a Travelers Casualty and Surety Company of America, Plaintiff-Appellee/ Cross-Appellant (99-3005),

v.

Leahey Construction Company, Inc., et al., Defendants, KeyBank National Association (Ohio) and Edward Donnelly, Defendants-Appellants (98-4545)/Cross-Appellees, Mark J. Elmore and Mark J. Elmore, C.P.A., Inc., Defendants-Appellees/ Cross-Appellants (99-3006).

Nos. 98-4545; 99-3005 and 99-3006

United States Court of Appeals, Sixth Circuit

July 13, 2000

Argued: April 27, 2000

Appeal from the United States District Court for the Northern District of Ohio at Akron; No. 97-01691--James S. Gwin, District Judge.

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James F. Koehler, Timothy J. Fitzgerald, GALLAGHER, SHARP, FULTON & NORMAN, Cleveland, Ohio, for Plaintiff-Appellee/Cross-Appellant.

Patrick F. Haggerty, Daniel R. Warren, Toni J. Querry, THOMPSON, HINE & FLORY, Cleveland, Ohio, for Appellant.

Mark H. Ludwig, COLE COMPANY, Akron, Ohio, William T. Rini, Carlisle, McNellie & Rini, Cleveland, OH, for Defendants-Appellees/Cross-Appellants.

Before: NORRIS and GILMAN, Circuit Judges; HOOD, District Judge.[*]

OPINION

RONALD LEE GILMAN, Circuit Judge.

Aetna Casualty and Surety Company, now known as Travelers Casualty and Surety Company of America (Travelers), alleges that the defendants engaged in a scheme to defraud Travelers in connection with its issuance of certain surety bonds. Specifically, Travelers contends that Patrick Leahey, a principal owner of both Leahey Construction Company, Inc. (LCC) and Leahey General Contracting and Management Corporation (LGC&M), fraudulently manipulated the financial position of LGC&M for the purpose of inducing Travelers to agree to bond LGC&M's public construction projects. Travelers further claims that Leahey's personal banker, Edward Donnelly of KeyBank National Association (KeyBank), and Leahey's accountant, Mark J. Elmore of Mark J. Elmore, C.P.A., Inc., participated in the scheme. LGC&M subsequently defaulted on three bonded projects, causing Travelers to incur over $2.5 million in losses.

The jury returned a verdict against Donnelly and KeyBank for conspiracy to commit fraud and aiding and abetting fraud, and returned a verdict against Elmore and his firm for fraud, aiding and abetting fraud, and negligent misrepresentation. Travelers thereafter requested that the district court impose joint and several liability upon the defendants. The defendants, on the other hand, requested judgment in their favor as a matter of law or, alternatively, a new trial. All of these motions were denied by the district court. The parties now challenge those rulings.

For the reasons set forth below, we REVERSE the district court's decision that (1) denied Donnelly's and KeyBank's motion for judgment as a matter of law with respect to the claim of conspiracy to commit fraud, and (2) denied Elmore's motion for judgment as a matter of law with

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respect to the claims of fraud and of aiding and abetting fraud. We also REMAND the case for a new trial on (1) the question of whether, in light of the information disclosed by Elmore to David Black as Travelers's agent, Travelers established the element of justifiable reliance on Leahey's fraud regarding the surety bonds issued after the date of disclosure, and (2) the amount and allocation of damages to which Travelers is entitled in light of the rulings made throughout this opinion. In all other respects, we AFFIRM the judgment of the district court.

I. BACKGROUND

A. Factual background

1.Leahey's efforts to obtain bonding, and his representations regarding increased capitalization

At all relevant times, Leahey and his wife Susan were the principal owners of LCC and LGC&M, two Ohio corporations. Leahey operated LCC primarily as a contractor of residential homes. In the spring of 1996, however, Leahey shifted his attention toward public construction projects, and formed LGC&M in April of 1996 for that purpose.

A public entity generally requires that its construction projects be bonded by a surety company to guarantee the performance of the contractor. Leahey therefore contacted Black, who for several years had provided Leahey with insurance coverage. Black was employed by the James B. Oswald Company, an insurance agency that, among other things, serves as an intermediary between contractors and surety companies. One of Black's contacts was Stanley Halliday, a Cleveland-based account manager with Travelers. Halliday's immediate superior at Travelers was Douglas Bender. After Black informed Halliday that Leahey "would be a good opportunity for us," Halliday, through Black, requested that Leahey provide various financial information to Travelers for a preliminary review.

On June 27, 1996, Halliday met with Black and Leahey. During the meeting, Halliday expressed concern with the level of LGC&M's capitalization. Halliday explained at trial as follows:

My first review of Mr. Leahey's financial statement was, we didn't feel he had the financial resources to support a bonding program. . . .

As a bonding company, we feel there is a commitment to an amount of both cash and what we call working capital, which is current assets less current liabilities, and also net worth or invested capital in a company.

You need to run a construction business and there are a lot of reasons why we believe that - and I'm not going to bore you to death with that - but it's something pretty important. And we talked about that, and it's something that Dave Black knew and understood, and also [Leahey] knew and understood that he was going to have to change a little bit of his operating philosophy financially.

As a result of his concerns, Halliday inquired as to whether Leahey would be able to increase LGC&M's assets. Halliday testified that Leahey assured him that funds could be obtained from his father-in-law, Albert Bersticker:

[Leahey] made it very clear that his wife Susan Leahey was the daughter[] of a gentleman who's the CEO for Ferro Corporation, a Fortune 500 firm based in Cleveland. And that that gentleman had set up essentially a trust, a family type of trust that had quite a bit of liquid assets available to them to inject into [LGC&M], as needed.

And if you looked historically at their financial statements in the past, [Leahey] had loaned 200[-]300,000 dollars to the company when it needed it to get - you know, to provide it with some cash when there were shortfalls from time to time. So essentially he felt that that

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would be a good mechanism to fund the company.

At all relevant times, Bersticker also served as a director of KeyBank.

Because Halliday did not want the additional funds to be added to LGC&M in the form of a simple bank loan, he suggested a more secure arrangement:

[T]here is [an] option called subordinated debts. And that's kind of tricky, but what it is is [Leahey] would take this, personally their money that he owned and controlled personally through his trust, and would loan it to [LGC&M] and sign an agreement with [Travelers] that stated that that money was not to leave [LGC&M] ever, unless [Travelers] approved it to leave [LGC&M]. And that that money would be used in the day-to-day operations of business.

. .

And at our meeting we all agreed after discussion that that was a route that was acceptable to [Leahey] and to Dave Black, and then to [Travelers], that we could conceivably establish a business relationship.

The parties agreed after further discussion that Leahey would, among other things, execute a subordination agreement with respect to a previously made loan of $162,100, and that he would personally loan an additional $275,000 to LGC&M that would also be subordinated to Travelers.

2.Leahey's $275,000 loan from KeyBank

Despite Leahey's representations to Halliday that the source of the needed funds would be his family trust, Leahey, in early July of 1996, inquired of his personal banker, Donnelly, about the possibility of obtaining a traditional bank loan from KeyBank. Since 1991, Donnelly had processed several loans for Leahey, the majority of which were related to bonding requirements. Donnelly claimed at trial, however, that he did not understand the bonding business. The purpose of this particular loan, as a KeyBank document indicates, was "to obtain approval from a new Bonding Company." After KeyBank denied Leahey's request, Leahey proposed as an alternative that Bersticker personally guarantee the loan and that payment be due in thirty days.

On July 24, 1996, Donnelly wrote a memorandum to Leahey containing the details of the loan that KeyBank was prepared to make. In its original form, the document indicated that the amount would be a $175,000 loan to LCC, payment would be due in thirty days, there would be a $250 fee, and Bersticker would be the guarantor. The memorandum also stated as follows:

The funds are being used to increase the bonding capacity of [LCC]. You have been advised by the bonding agent to deposit these funds into [LCC]'s checking account. You need these funds to be there at month-end.

Functionally, we can deposit the funds for you into the account on July 29 and at your instructions, withdraw the funds from the account on August 2 and repay the loan. Once the loan has been repaid, the loan and guarantee will be canceled.

After Leahey received the memorandum, he returned it to Donnelly with several changes. Among other things, he noted that the loan amount should be listed as...

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