Hartmann v. Prudential Ins. Co. of America

Decision Date09 December 1993
Docket NumberNo. 92-3664,92-3664
PartiesStephanie HARTMANN and Eva Hartmann, Plaintiffs-Appellants, v. PRUDENTIAL INSURANCE COMPANY OF AMERICA, Debra Hartmann, and Harvey Loochtan, Defendants-Appellees.
CourtU.S. Court of Appeals — Seventh Circuit

Jonathan B. Gilbert (argued), David P. Schippers, Schippers & Gilbert, Chicago, IL, for Stephanie Hartmann and Eva H. Vinson.

Joseph J. Hasman, Steven P. Mandell (argued), Sherri L. Giffin, Peterson & Ross, Chicago, IL, for Prudential Ins. Co. of America.

Jeffrey B. Steinbeck, Genson, Steinback, Gillespie & Martin, Michael J. Kralovec, James B. Ford (argued), Nash, Lalich & Krolovec, Chicago, IL, for Harvey Loochton.

Richard P. Steinken, Dean N. Panos (argued), Jenner & Block, Chicago, IL, for Debra Hartmann.

Before POSNER, Chief Judge, and CUMMINGS and CUDAHY, Circuit Judges.

POSNER, Chief Judge.

This diversity suit for fraud and for equitable reformation of an insurance contract grows out of a notorious murder. In 1978, Werner Hartmann, a German immigrant who had made a fortune in the car stereo business, married a striptease artist whom he had met at a local nightclub where she was performing. She was much younger than he. The marriage was soon on the rocks. In 1981 Debra Hartmann moved out of the marital abode and in with her lover, a tennis pro--and gun-store clerk--named Korabik. They decided to murder Werner before he could divorce her. He held at the time two life insurance policies, for $100,000 and $150,000 respectively, both of which named Debra as the sole beneficiary. The $150,000 policy had been issued by Prudential, one of the defendants in this case (Debra is another). Werner told a number of his friends that he wanted to change the beneficiary designation to make his two daughters by a previous marriage, who are the plaintiffs in this case, the beneficiaries in place of Debra.

The Prudential policy had been sold to Werner by Harvey Loochtan, a Prudential agent, the third defendant. In March 1982, Werner called Loochtan and told him he wanted a third insurance policy, for $250,000. Werner told friends that the policy would be for his daughters. Loochtan gave Werner an application form and arranged for him to take a physical examination, which he did and passed. Shortly afterward, Debra showed up at Loochtan's office with the application form, purportedly signed by Werner (almost certainly his signature had been forged). The form had not been filled in and Debra asked Loochtan to do so and to write her name in the space for the beneficiary. She placed $3,000 in cash on his desk, asking that he prevent Werner from changing the beneficiary. Loochtan pocketed the money but pointed out that the way to achieve her end was to make her the owner of the policy, since then Werner couldn't change the beneficiary and this was done. Prudential issued the policy in May.

Meanwhile Werner, consistent with his expressed wish, was trying to change the beneficiaries of his life insurance policies. He called the agent who had sold him the $100,000 policy and told him he wanted to change the beneficiary from Debra to his daughters. The agent sent him the form, Werner completed it, and the insurance company duly changed the beneficiary designation. Werner called Loochtan with the same request. But Loochtan, instead of sending Werner the change of beneficiary form or informing him that Debra would be the owner of the policy rather than Werner, called Debra and told her what Werner was up to. This call signed Werner's death warrant. Within a few days, on June 8, 1982, he was machine gunned to death--probably by Korabik, although no one has yet been tried for the murder--as he stepped out of the shower.

The two Prudential policies were double-indemnity policies. Debra claimed $800,000 because her husband had died violently. Prudential, suspecting fraud, refused to pay, and Debra sued. In 1984, before any criminal proceedings had been instituted, Prudential settled with her for $450,000.

Debra, Korabik, and Loochtan were finally brought to justice in 1989, when federal mail fraud charges were lodged against them. Loochtan pleaded guilty, and not being deemed complicit in Werner's murder, despite his call tipping off Debra, was sentenced to only two years in prison. The others were convicted after a trial. Debra was sentenced to 22 years in prison and Korabik to 16. These long sentences reflected the jury's finding that Werner's murder was a step in the defendants' scheme to defraud Prudential. We upheld the convictions and sentences in United States v. Hartmann, 958 F.2d 774 (7th Cir.1992).

The facts we have recited come from the transcript of the criminal trial. On the basis of these facts, the district judge in this civil suit granted summary judgment for all the defendants.

The main part of the suit seeks to recover $800,000, the face amount of the policies, from Prudential. The plaintiffs argue that the policies should be equitably reformed to carry out Werner's wishes by changing the beneficiary designation in the policies from Debra to Werner's two daughters, the plaintiffs. The secondary part of the suit--secondary not only because of doubt as to the ability of the two individual defendants to satisfy a substantial judgment but also because of the way in which the plaintiffs have framed their claim against them--charges Debra and Loochtan with having defrauded the plaintiffs of their beneficial interest in the two policies.

There is little doubt, despite Prudential's arguments, that Werner wanted his daughters to be the beneficiaries of both policies. He had the absolute right to change the beneficiary of the $150,000 policy, which had already been issued to him, and he undoubtedly would have succeeded in making the change had it not been for the nefarious conduct of Loochtan, Prudential's agent. As for the other policy, we know that Prudential was willing to issue it--Prudential did issue it; and but for Loochtan's misconduct, the policy would have been issued to Werner and would have named his two daughters as the beneficiaries. There is of course some probability that Werner would have changed his mind at the last minute and not signed the application form, but it is too small to figure in any realistic analysis of the parties' rights and duties.

Equitable reformation is an appropriate remedy when the conduct--often the fraudulent conduct--of one party to a contract, in this case Prudential through its agent Loochtan, causes the terms of the written contract to deviate materially from what the parties had agreed to. Robacki v. Allstate Ins. Co., 127 Ill.App.3d 294, 82 Ill.Dec. 471, 474, 468 N.E.2d 1251, 1254 (1984); Briarcliffe Lakeside Townhouse Owners Ass'n v. City of Wheaton, 170 Ill.App.3d 244, 120 Ill.Dec. 465, 470, 524 N.E.2d 230, 235 (1988), and cases cited there; Schons v. Monarch Ins. Co., 214 Ill.App.3d 601, 158 Ill.Dec. 289, 292, 574 N.E.2d 83, 86 (1991); Dan B. Dobbs, Law of Remedies Sec. 4.3(7) at p. 617 (2d ed. 1993). There are two problems with the plaintiffs' case against Prudential however. The lesser one is that, had it not been for Loochtan's misconduct, Werner might be alive today: he would have been much less worth killing had he succeeded in cutting his wife out of the insurance policies. And if he were alive the plaintiffs would not have received any proceeds of the policies even if they had been the named beneficiaries. Another possibility is that Werner might have died, but of natural causes, which would have halved the value of his policies to the beneficiaries. But these are at most issues about the amount of damages, rather than about Prudential's liability--"at most" because it is not even clear, though we can find no cases on the point, that Prudential should benefit from uncertainty concerning when and how Werner would have died in the ordinary course when its own agent played a material role in precipitating Werner's premature and violent death. However all this may be--for Prudential's liability if any is vicarious; Prudential is not an actual wrongdoer; and this may count against resolving all uncertainty against it--we shall see that the plaintiffs' choice of equitable reformation as the ground of the suit, a choice doubtless motivated by hope that it would give them a better shot at the full $800,000 rather than some lesser amount based on the actuarial value of the policies to them if the policies had named them as beneficiaries, has serious consequences for their attempt to fix liability on Prudential.

The second problem with the claim against Prudential is that it requires imputing Loochtan's conduct to Prudential. It is true that when an agent acts on behalf of his principal, he binds the principal even if he exceeds his instructions. Heider v. Leewards Creative Crafts, Inc., 245 Ill.App.3d 258, 184 Ill.Dec. 488, 498, 613 N.E.2d 805, 815 (1993); City of Chicago v. Roppolo, 113 Ill.App.3d 602, 69 Ill.Dec. 435, 443-44, 447 N.E.2d 870, 878-79 (1983); Tippecanoe Beverages, Inc. v. S.A. El Aguila Brewing Co., 833 F.2d 633, 638 (7th Cir.1987); Roberson v. Bethlehem Steel Corp., 912 F.2d 184, 187-88 (7th Cir.1990). He might be a collection agent and resort to methods that his principal would not have authorized and may even have forbidden; nevertheless the principal is bound. He is bound even if the agent has a dual motive, as where a police officer in lawfully arresting a man steals his wallet. Cf. Tippecanoe Beverages, Inc. v. S.A. El Aguila Brewing Co., supra, 833 F.2d at 638. But in general when an agent acts entirely on his own behalf, doing things that could not possibly be interpreted as the merely overzealous or ill-judged performance of his duties as agent, he is acting outside the scope of the agency and the principal is not bound. Vereen v. Liberty Life Ins. Co., 306 S.C. 423, 412 S.E.2d 425, 429 (A...

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