265 F.3d 630 (7th Cir. 2001), 00-3848, A.I. Credit Corp. v Legion Insurance Co.

Docket Nº:00-3848
Citation:265 F.3d 630
Party Name:A.I. Credit Corporation, Plaintiff-Appellant, v. Legion Insurance Co., et al., Defendants-Appellees.
Case Date:September 12, 2001
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit

Page 630

265 F.3d 630 (7th Cir. 2001)

A.I. Credit Corporation, Plaintiff-Appellant,


Legion Insurance Co., et al., Defendants-Appellees.

No. 00-3848

United States Court of Appeals, Seventh Circuit

September 12, 2001

Argued April 17, 2001

Appeal from the United States District Court for the Northern District of Indiana, Hammond Division. No. 99 C 10--Allen Sharp, Judge.

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[Copyrighted Material Omitted]

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Before Fairchild, Cudahy, and Coffey, Circuit Judges.

Fairchild, Circuit Judge.

A.I. Credit Corporation is a premium finance company that lends its clients money to pay commercial insurance premiums. When one of its clients, Monon Corporation, was placed into involuntary bankruptcy without repaying more than $2 million in insurance financing debts, A.I. Credit brought this fraud suit alleging primarily that the individuals who negotiated two Monon loans in 1996 conspired to defraud A.I. Credit by misrepresenting the status of the collateral and the intended use of the loan proceeds.1 The district court entered summary judgment against two of the defendants (Monon's insurance broker, Peterson, and his wholly-owned corporation) after they failed to respond to A.I. Credit's motion, but granted summary judgment in favor of Monon's chief financial officer, Franklin, as well as its insurers' representative, Mc Pherson, and two insurance companies and a marketing company with which McPherson is affiliated. A.I. Credit appeals from the judgment for these defendants. Because we conclude that genuine issues of material fact exist, we vacate and remand.


We recount the evidence before the court in the light most favorable to A.I. Credit, the non-moving party. A.I. Credit had financed Monon's workers' compensation insurance premiums in 1994 and 1995. Although the financed policies were underwritten by Legion Insurance Company and Mutual Indemnity, Ltd., the policy information necessary to make the loans was obtained by A.I. Credit from William McPherson, a producer at Commonwealth Risk Services, Inc. (Commonwealth is the marketing branch of the parent company of Legion and Mutual; we'll refer to all three companies as "the insurers.") McPherson was responsible for generating business for Legion and Mutual and was compensated accordingly; Monon was among his five most profitable accounts.

In 1996, unknown to A.I. Credit, Monon financed its workers' compensation insurance through a different company-- Anthem Premium Finance. Monon's chief financial officer, John Franklin, entered a loan agreement with Anthem in March 1996. The agreement granted Anthem a security interest in any "return premiums" arising out of the policy-- refunds payable

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to Monon from the claims reserve fund in which its premium payments were deposited in the event its actual losses were lower than projected. April 1 letters from Monon's Franklin and the insurers' McPherson confirmed Anthem's security interest in the "available cash" in this fund.

According to Monon's controller, Miles Holsworth, Monon was in serious financial trouble around this time: a "huge order" from a single customer, Consolidated Freightways, Inc. (CFI), was "keeping th[e] company alive." Monon owed money to CFI, and CFI threatened to cancel its order if Monon failed to pay promptly. (Holsworth Dep. at 146-47.) According to A.I. Credit's theory, Monon, desperate for cash, arranged a conference call to negotiate another loan from A.I. Credit under the pretense of financing the workers' compensation premiums that Anthem already had financed. Holsworth testified in his deposition that he, along with Monon's Franklin, the insurers' McPherson, and Monon's insurance broker, Michael Peterson, participated in one or more conference calls with an A.I. Credit representative sometime in April 1996. Id. at 46-49, 133-36, 150, 225-29, 244-45, 292-93. According to Holsworth, when the A.I. Credit representative expressed concern regarding collateral, Franklin "offered up the Mutual Indemnity workers' comp. balance"--the same funds already pledged to Anthem. Holsworth further testified that, during the call, Peterson, the broker, confirmed to the A.I. Credit representative that "those monies could be used to secure" the loan, and the insurers' McPherson "supported" the proposal. Id. at 48, 228-29. Holsworth could not recall with certainty the name of the A.I. Credit representative involved in the conference call, id. at 46, 225, but John Rago, A.I. Credit's vice president of credit, averred that he participated in an April 1996 conference call involving at least two of the participants Monon's Holsworth identified: Franklin and Peterson. When asked if Rago was the A.I. Credit representative on the call, Holsworth testified that he recognized Rago's name and confirmed that Rago "could" have been the A.I. Credit representative. Id. at 226, 46.

Shortly after the conference call, on April 22, 1996, A.I. Credit entered a written agreement to finance the premiums on Monon's Legion and Mutual policies, secured by the return premiums and the right to cancel the policies if Monon defaulted on its payments. Had the loan in fact been secured by the policies, this provision would have provided A.I. Credit with an effective collection mechanism: Indiana law requires companies like Monon to carry workers' compensation insurance, see Ind. Code sec. 22-3-2- 5(a); cancellation of the necessary policy could force Monon to cease operations. A.I. Credit wired the money-- $2,695,262.62--to the broker, Peterson, on April 23. Peterson then faxed Monon's Holsworth a letter informing him that he had used the bulk of the proceeds-- $2,675,000--to pay CFI. None of the money was sent to Legion or Mutual.

A.I. Credit entered a second written loan agreement with Monon in May 1996, purportedly to finance an "audit" premium--an additional premium due based on an audit that revealed Monon's actual payroll for the 1995-96 policy period exceeded the estimates on which the original premium was based. This agreement, too, purportedly permitted A.I. Credit to cancel the policy for nonpayment. A.I. Credit again wired the proceeds--$954,098--to Monon's broker, Peterson, and Peterson again wrote Monon's controller, Holsworth, this time explaining that, although A.I. Credit was "treat[ing]" the loan as financing for "an additional premium to the Workers Compensation policy," he had

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used the loan proceeds to pay a debt Monon owed Anthem. There was evidence that no audit premium was ever due: the insurers' McPherson testified that no such premium was assessed, and Holsworth described the purported audit as "the workers' comp[ensation] audit that didn't exist." (Holsworth Dep. at 178.)

Two A.I. Credit employees who participated in the loan approval process offered evidence that they relied on Franklin's and McPherson's representations. A.I. Credit vice president Rago attested that A.I. Credit would not have made either loan without his recommendation, that he recommended the April loan based on representations made to him during the conference call to the effect that the money was needed to pay Monon's 1996-97 premiums, and that he would not have approved the loan had he known Monon had obtained other financing. Cindy Carroll, the manager of A.I. Credit's Boston branch, testified by deposition that McPherson "[c]onfirm[ed]" the amount of the fictitious audit premium on which the May loan was based (Carroll Dep. at 164), and later attested in a supplemental affidavit that she would have withheld her approval had she known no such premium was due (Carroll Aff. para. 9). Carroll also attested that, had she discovered the Anthem financing after A.I. Credit entered the May loan agreement, she would immediately have taken steps to collect the debt and realize the collateral. Id.

Anthem and A.I. Credit both notified Legion that they had entered premium finance contracts with Monon for the same policy, and a Legion employee eventually brought the matter to the attention of the insurers' McPherson in early June. McPherson never consulted A.I. Credit, however, and Monon was placed into involuntary bankruptcy on September 25, 1996--still owing $2,657,144.42 to A.I. Credit. Monon's internal accounting records show it had over $3 million in available cash as late as the end of June.

A.I. Credit's second amended complaint alleges...

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