Thornton v. Evans

• Citation: 692 F.2d 1064
• Decision Date: 27 January 1983
• Docket Number: No. 81-1007,81-1007
• Parties: , 3 Employee Benefits Ca 2241 Leonard THORNTON and William Carothers, etc., et al., Plaintiffs-Appellants, v. James E. EVANS, et. al., Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 1064

692 F.2d 1064

67 A.L.R.Fed. 155, 3 Employee Benefits Ca 2241

Leonard THORNTON and William Carothers, etc., et al., Plaintiffs-Appellants, v. James E. EVANS, et. al., Defendants-Appellees.

No. 81-1007.

United States Court of Appeals, Seventh Circuit.

Argued Jan. 15, 1982.

Decided Nov. 1, 1982.

As Modified on Denial of Rehearing

Jan. 27, 1983.

Edmund W. Kitch, Charlottesville, Va., for plaintiffs-appellants.

Steven P. Handler, Hannafan & Handler, Gregory J. Shinglman, Frank & Shinglman, John W. Rotunno, Bell, Boyd & Lloyd, Chicago, Ill., for defendants-appellees.

Before CUDAHY, Circuit Judge, FAIRCHILD, Senior Circuit Judge, and PECK, ^* Senior Circuit Judge.

CUDAHY, Circuit Judge.

Plaintiffs, who are members of the Teamsters Union and beneficiaries of the Central States, Southeast and Southwest Areas Health and Welfare Fund (the "Fund"), brought suit to recover damages allegedly resulting from a conspiracy to defraud the Fund of millions of dollars through an insurance scam. Defendants involved in the present appeal include Richard G. Kleindienst, former Attorney General of the United States, the law firm of Welch, Morgan and Kleindienst, James E. Evans, Donald P. Klekamp, and American Financial Corporation. Evidence presented in this case and in other proceedings arising out of the same alleged fraud ¹ traces a pattern which seems distressingly prevalent today: the savings of working men and women are pilfered, embezzled, parlayed, mismanaged and outright stolen by unscrupulous persons occupying positions of trust and confidence. Plaintiffs here have obtained a default judgment against the defendant (Joseph Hauser) who was the primary actor in the fraudulent scheme. We must decide on this appeal whether the remaining defendants, who plaintiffs claim were part of a conspiracy to facilitate the fraud, were properly either dismissed or accorded summary judgments by the district court. We conclude that summary judgment was improperly granted to two defendants and that the case was improperly dismissed on the pleadings as to the other defendants. ²

I. FACTS

A. Alleged Fraudulent Transactions

The facts in this case, as gleaned from plaintiffs' succession of complaints, the depositions and affidavits of the defendants, and other record evidence, reveal a complex web of dubious financial arrangements among individuals and corporations. ³ Plaintiffs allege, and Kleindienst admits in his affidavit filed in Baker v. Old Security Life Insurance Co., No. 76 C 2904 (N.D.Ill.) (the "Baker affidavit"), ⁴ that in April, 1976 Kleindienst asked his friend, the late Frank E. Fitzsimmons, then president of the Teamsters Union, to intervene on behalf of Old Security Life Insurance Company ("Old Security") to encourage the Fund to favorably consider Old Security's bid to furnish insurance for members of the Fund. Kleindienst's overtures to Fitzsimmons were made at the request of an old acquaintance of Kleindienst, Thomas Webb, who had in turn been requested by defendant Joseph Hauser to seek avenues of influence in the union to secure the Fund's acceptance of Old Security's bid. Old Security subsequently received a contract award from the Fund to provide the insurance coverage, and Kleindienst and Webb received a $250,000 fee, which they split, for their role in securing the contract. In addition, Kleindienst was asked to represent a Hauser-controlled corporation in other matters.

Although the Fund began paying substantial insurance premiums to Old Security in May, 1976, the premiums were not retained or invested by Old Security. Rather, through an undisclosed co-insurance agreement with Family Provider Life Insurance Company ("Family Provider"), Old Security transferred 80% of the premiums to Family Provider and Family Provider assumed 80% of Old Security's risk. ⁵ The parent corporation of Family Provider, Great Pacific Corporation ("Great Pacific"), was controlled by Joseph Hauser and his associates, including John Boden and Brian Kavanaugh. ⁶

On May 3, 1976, Great Pacific, acting through Hauser and its new counsel, Kleindienst, reached an agreement with defendant American Financial Corporation ("American") to acquire an American subsidiary (an insurance firm licensed in New Jersey) and Arizona real estate owned by another American subsidiary, Continental Homes, Inc. ("Continental Homes"). American was represented in this transaction by attorneys James Evans and Donald Klekamp, who are also defendants here. Great Pacific's check to American for $1 million as a partial down payment was returned to American on May 6 as dishonored for lack of sufficient funds.

The transaction did not fall through on this account, however, because, according to plaintiffs' complaint, Hauser and his associates illegally diverted premiums paid by the Fund to Old Security to cover the Great Pacific check. On May 10, the Fund paid premiums of $1.7 million to Old Security under the insurance agreement. On or about May 11, Hauser caused Old Security to transfer $1.5 million to Family Provider's Arizona bank accounts, presumably pursuant to the co-insurance agreement between those two corporations. At about the same time, Hauser caused Family Provider to declare a $1.8 million dividend to its parent, Great Pacific. ⁷ Great Pacific allegedly used these funds, most of which were originally deposited with Old Security as premiums, to complete the down payment to American with respect to the acquisition of the insurance company and the real estate, by placing approximately $1 million in an account at the Provident Bank in Cincinnati, Ohio. ⁸ The complaint does not allege that any of the defendants, other than Hauser, were aware at the time of these transactions that premiums paid to Old Security had been surreptitiously transferred to Great Pacific as a "dividend" from Family Provider, and then transferred to American. Further, the plaintiffs have cited to specific evidence linking the other defendants to Hauser's alleged diversion of premiums paid by the Fund to Old Security and his manipulation of Family Provider to declare a dividend to Great Pacific. The allegation connecting defendants, other than Hauser, to these actions is to the effect that, at a later time, the defendants, including Hauser, conspired together to conceal the diversion of these premiums.

Hauser's scheme began to unravel several days later when J.W. Trimble, Director of the Arizona Insurance Department, discovered the unlawful dividend paid by Family Provider to Great Pacific. ⁹ Trimble notified Family Provider that he would suspend its license to operate in Arizona unless the $1.8 million dividend was immediately returned to Family Provider. On May 19, Hauser and Boden met with Kleindienst in his Washington, D.C. office and informed him of Trimble's demand; Kleindienst states in his affidavit filed in support of his motion for summary judgment in this case that this was the first time he learned of the Family Provider dividend to Great Pacific. The apparent effect of Trimble's demand was to imperil the deal between Great Pacific and American (if the $1.8 million were to be returned). Further, Trimble's action affected the contract between the Fund and Old Security (since Family Provider's problems necessarily implicated the primary insurer).

The role of the defendants in the events of the next few days is crucial to determining whether these defendants "conspired" with others to defraud the Fund of millions of dollars of insurance premiums in breach of fiduciary duties. Kleindienst states in his affidavit filed in the instant case that immediately after Hauser's revelation to him about the Family Provider dividend, he researched Arizona law, concluded that the dividend was illegal and advised Hauser and Boden to return, on behalf of Great Pacific, an unencumbered $1.8 million to Family Provider. Kleindienst further asserts that Hauser and Boden informed him later on May 19 that $1.8 million in unencumbered funds had been placed in Family Provider's bank accounts in the Provident Bank and in the Diplomat Bank in Washington, D.C. Kleindienst then informed Trimble in a telephone conversation (confirmed with a telegram sent by Kleindienst to Trimble on the same day) that Great Pacific had deposited $1.8 million in Family Provider's unencumbered bank accounts. Although not specifying in his affidavit the date or time, Kleindienst also claims that he "subsequently" requested both the Provident Bank and the Diplomat Bank to confirm to Trimble the deposits of unencumbered funds in the Family Provider accounts.

A meeting was held the next day, May 20, at Kleindienst's office allegedly attended by, among others, Hauser, Kavanaugh, Boden, Kleindienst, Evans and Klekamp. Plaintiffs claim that at this meeting, the defendants agreed to fraudulently represent to Trimble that the $1.1 million held in Family Provider's Provident Bank account was unencumbered even though that money was actually "controlled" by American. Defendants Evans and Klekamp explained in their depositions that the May 20 meeting resulted in an agreement that American's $1.1 million interest in the proceeds of the real estate transaction between its subsidiary, Continental Homes, and Great Pacific would be deposited in Family Provider's account at the Provident Bank. With this money, Family Provider was permitted to "invest" in the real estate transaction between Continental Homes and Great Pacific. During the meeting several letters were drafted by Evans, Klekamp and Kavanaugh for the purpose of effectuating the transfers of funds resulting from these decisions. One of these letters provided, in furtherance of the new investment by Family Provider in the Great Pacific--Continental Homes transaction, that the deposit in Family Provider's account at the Provident Bank was to be pledged to Continental Homes, the American subsidiary. See Ex. II (Plaintiffs' App. at 10). Evans and Klekamp explained...