United States Fidelity & Guar. Corp. v. Putzy

• Decision Date: 07 June 1985
• Docket Number: No. 83 C 6083.,83 C 6083.
• Citation: 613 F. Supp. 594
• Court: U.S. District Court — Northern District of Illinois
• Parties: UNITED STATES FIDELITY & GUARANTY CORP., a Maryland Corporation, Plaintiff, v. PUTZY, Leonard E. and McManus, Brian, individually and as co-partners d/b/a Professional Insurance Planners, Inc.; Professional Insurance Planners, Inc., a de facto Illinois corporation, and Putzy, Jean M., Defendants.

613 F. Supp. 594

UNITED STATES FIDELITY & GUARANTY CORP., a Maryland Corporation, Plaintiff, v. PUTZY, Leonard E. and McManus, Brian, individually and as co-partners d/b/a Professional Insurance Planners, Inc.; Professional Insurance Planners, Inc., a de facto Illinois corporation, and Putzy, Jean M., Defendants.

No. 83 C 6083.

United States District Court, N.D. Illinois, E.D.

June 7, 1985.

Leo Feldman, Arthur Raphael, Edward S. Margolis, Teller, Levit & Silvertrust, Chicago, Ill., for plaintiff.

Lawrence Kurbin, Tatel & Howlett, Chicago, Ill., for defendants.

MEMORANDUM OPINION AND ORDER

GETZENDANNER, District Judge:

This diversity action involves a four count complaint seeking damages for insurance premiums due and unpaid. In Count I, plaintiff United States Fidelity & Guaranty Corp., a Maryland corporation, requests a judgment against Leonard E. Putzy, Jean M. Putzy, and Professional Insurance Planners, Inc., (hereafter PIPI) a de facto Illinois corporation, in the sum of $447,883.85. In Count II, plaintiff seeks a judgment in the same amount, plus punitive damages, against Leonard Putzy and Brian McManus as co-partners doing business as PIPI. Count III contains a prayer for judgment against Putzy and McManus as nondisclosed principals of PIPI. Finally, Count IV contains a prayer for judgment against Leonard Putzy and PIPI in the sum of $169,701.11, plus attorney's fees, pursuant to an agreement and note dated June 10, 1981. Judgment by default has been entered on Counts I and IV against defendants Leonard Putzy, Jean Putzy, and PIPI, and default has been entered as to the other counts. The matter is currently before the court on the cross-motions for summary judgment of plaintiff and defendant Brian McManus (hereafter defendant) on Counts II and III. For the reasons set forth herein, the court enters judgment for McManus on both counts.

FACTUAL BACKGROUND

The following facts are undisputed. U.S. Fidelity & Guaranty Company is a Maryland Corporation licensed to do business in Illinois, with its principal place of business in Baltimore, Maryland. All defendants are Illinois citizens. On April 1, 1975, defendant Leonard Putzy (hereafter Putzy), then doing business as the L.E. Putzy Insurance Agency, entered into an Agency Agreement with plaintiff whereby he was granted authority to solicit and submit applications for U.S. Fidelity's insurance and bonds. Around that same time, Putzy retained an attorney for the purpose of incorporating an insurance agency to be known as Professional Insurance Planners, Inc. (PIPI). On April 24, 1975, a certificate of incorporation was issued to the company and recorded with the Secretary of State. On December 1, 1976, PIPI was involuntarily dissolved by the Secretary of State for failure to pay its franchise tax or file an annual report.

As of April 30, 1980, Putzy had a past due balance owing to plaintiff of $104,185 for premiums collected but not transmitted. This balance due grew to $171,430 by the end of May, and the parties met several times to work out payment. On June 10, 1980, Putzy entered into a new Agency Agreement with U.S. Fidelity on behalf of PIPI, a successor corporate agency. On June 12, 1980, Putzy, his wife Jean, Michael Wray, and Jim Peterson (potential purchasers of an interest in PIPI) signed a personal indemnity agreement to reimburse plaintiff against certain claims, and assigned all of PIPI's stock to plaintiff to secure the delinquent balances owed.

During this period, Putzy used letterhead reflecting both the names Professional Insurance Planners, Inc., and L.E. Putzy Insurance Agency. In 1980, Michael Wray purchased 10% of the agency. In order to maximize tax benefits stemming from PIPI's losses, Putzy directed his accountant, Richard Gallichio, to prepare multiple tax returns for the business. PIPI's corporate return reflected "no transactions." Gallichio also prepared a partnership tax return, however, for "Professional Insurance Planners" which reported the business's gross receipts and declared a loss.

On March 26, 1981, plaintiff's agent, Paul Jacob, suspended Putzy and PIPI's agency effective April 15, 1981. On April 16, 1981, Jacob wrote a memorandum to plaintiff's Vice-President indicating that the suspension had been lifted, and recommending that the suspension continue to be lifted on the condition that PIPI obtain $75,000 in new capital to be paid directly to plaintiff on or before May 21, 1981. In that letter, Jacob recognized that PIPI's unstable financial condition presented a risk of unpaid premiums, but recommended the continuation because of the steady business.

The $75,000 capital was originally to be contributed $25,000 each by Putzy, Michael Wray, and Jim Peterson. The three parties also agreed to execute secured notes for the balance of the amounts owed. For reasons unexplained in the record before this court, the above deal fell through and Putzy appealed to Robert McManus, now deceased, and his son Brian for the money. The McManuses agreed to provide the capital as part of a stock purchase transaction. On May 7, 1981, McManus drew a check in the amount of $75,000, payable to Leonard Putzy and PIPI. The proceeds were accordingly turned over to plaintiff. On July 7, 1981, Putzy transferred 51% ownership of PIPI to the McManuses through a stock purchase agreement, a copy of which can no longer be found. Brian and Robert McManus thereby each became a 25.5% owner. Subsequent to the payment of the money, but before the stock purchase agreements were signed, McManus discussed the deal with his accountant, Paul Hoffman. Putzy had apparently advised both parties that PIPI was a Subchapter S corporation, with real estate holdings, and that its losses could therefore be deducted from personal income while the McManuses would have the security of owning land. At no time, however, has PIPI ever filed a tax return claiming Subchapter S status.

The only writing evidencing the above agreement is a stock certificate given to McManus and prepared by Paul Sheils, an attorney whom Putzy contacted to represent the McManuses in connection with the purchase. Sheils testified that he prepared the stock certificates as a new issue, based on Putzy's representations as to the number of outstanding shares. (Sheils Dep. at 47-48). Nothing was ever filed with the Secretary of State to record the issuance of these shares, and Sheils made no attempt to secure plaintiff's consent to the transfer or to ascertain that PIPI was a corporation in good standing. Sheils knew that Putzy had pledged 100% of PIPI's stock to U.S. Fidelity, but did not inform McManus of that fact.

From July 1981 to September 1983, plaintiff continued to do business with PIPI. The amount of unpaid premiums grew from $102,920.77 to $232,444.50. During that same period, neither Brian McManus nor Robert McManus took an active role in the day to day operations of PIPI. Also during that period, Richard Gallichio continued to prepare multiple tax returns for PIPI which attributed all PIPI's business transactions to the partnership Professional Insurance Planners and not to the corporation. Gallichio's 1981 financial statements for PIPI, the corporation, fully reflect all transactions and list $76,000 in shareholder equity. Gallichio testified that he "amended" the books of the business from a corporation to a partnership in December of 1981, but never discussed this decision with the McManuses. (Gallichio Dep. at 40-43).

Paul Hoffman prepared the 1981 personal income tax return of Brian McManus. Hoffman received PIPI's Schedule K-1 (the one prepared by Gallichio) directly from Leonard Putzy. That K-1 form listed PIPI as a partnership. Since the partnership and Subchapter S corporation forms are otherwise identical, however, Hoffman considered the use of a partnership form irrelevant and simply crossed out the numbers at the top of the form. Hoffman did not discuss Putzy's use of the partnership forms with McManus. McManus listed the PIPI losses on his 1981 tax returns as arising from operation of a Subchapter S corporation, not a partnership.

In April of 1983, Putzy asked McManus to sit in on a meeting with U.S. Fidelity representatives. McManus sat in on several meetings and learned for the first time of PIPI's liability to pay its extensive indebtedness to plaintiff. McManus also learned at this time that PIPI's corporate charter had been dissolved back in 1976, that Putzy had pledged all the stock and holdings of PIPI to plaintiff, and that plaintiff intended to hold McManus personally liable for any unsatisfied portion of the debt.

Sometime during the summer of 1983, McManus also learned that Putzy had been diverting funds from PIPI. In September 1983, McManus met with the representatives of his father's estate, and together they authorized Michael Wray, PIPI's account manager, to run the business. McManus informed Wray that PIPI was probably going to go bankrupt; Wray's job was therefore to wind up the business and ensure that no further funds were diverted.

LEGAL DISCUSSION

Because jurisdiction in this case rests solely on diversity of citizenship, state law supplies the rule of decision. Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). The parties agree that Illinois law governs. Plaintiff argues that the undisputed facts show McManus liable at common law as a stockholder in a defective corporation, or, alternatively, as an undisclosed principal of PIPI. Defendant argues that the undisputed facts establish non-liability. The court will begin its discussion with plaintiff's claim against McManus as an undisclosed principal.

It is Illinois law that a third-party who seeks recovery from both an agent and a previously undisclosed principal must elect from whom to take judgment. General Refrigeration & Plumbing Co. v. Goodwill Industries, 30 Ill.App.3d 1081, 333 N.E.2d 607, 613 (5th Dist.1975); Vander Wagen Bros. v. Barnes, 15...