Gibraltar Cas. Co. v. Sargent & Lundy

Decision Date01 August 1990
Docket NumberNo. 1-89-1277,1-89-1277
Citation574 N.E.2d 664,214 Ill.App.3d 768
Parties, 158 Ill.Dec. 551, 18 A.L.R.5th 936 GIBRALTAR CASUALTY COMPANY, Plaintiff-Appellant and Cross-Appellee, v. SARGENT & LUNDY, Defendant-Appellee and Cross-Appellant (Wabash Valley Power Association, Defendant).
CourtUnited States Appellate Court of Illinois

Rehearing Denied June 19, 1991.

As Modified on Denial of Rehearing June 26, 1991.

Peterson, Ross, Schloerb and Seidel, Chicago, for plaintiff-appellant and cross-appellee.

McDermott, Will and Emery, Chicago, for defendant-appellee and cross-appellant.


Presiding Justice CERDA delivered the opinion of the court:

Plaintiff, Gibraltar Casualty Company, appeals from the entry of summary judgment in favor of defendant, Sargent & Lundy Engineers ("S & L"), in plaintiff's declaratory judgment action which sought a declaration that plaintiff did not have the duty to defend or indemnify S & L, its insured, which had been sued in federal court. Plaintiff argues that: (1) the trial court erred in finding that damages and an occurrence as defined in the insurance policy had been alleged in the federal complaint against S & L; (2) the granting of summary judgment was error because material issues of fact existed as to whether S & L gave the required notice to plaintiff and cooperated with plaintiff; (3) it should not be required to defend S & L because of conflicts in interest; and (4) coverage was excluded under several policy provisions. S & L cross-appeals from the denial of its motion for sanctions against plaintiff, and S & L requests sanctions on appeal.

S & L was one of the defendants in a federal lawsuit brought by Wabash Valley Power Association, Inc. ("Wabash"). Wabash's third amended complaint alleged defendants' securities laws violations, Racketeer Influenced and Corrupt Organizations Act ("RICO") violations, common law fraud, constructive fraud, deceit, and negligent misrepresentation and S & L's breach of contract and negligence.

The federal complaint alleged the following factual background. Wabash was an Indiana electric energy generation and transmission cooperative which served as a wholesale power supplier of its members by purchasing electric power and energy. Defendant Public Service Company of Indiana ("PSI") was an Indiana public utility. Defendant S & L was an Illinois engineering firm. Several individuals and other companies were also named as defendants. In 1975, Wabash agreed to invest in the Marble Hill project to construct two nuclear-powered generating units in Indiana based upon representations about the beginning of commercial operations and the estimated total construction cost. Agreements were entered into between PSI and Wabash, and PSI was given the sole responsibility for the design and engineering of the project. Wabash only had an investment interest in the project whereas PSI was to construct and operate Marble Hill. Wabash owned 17% of Marble Hill, and PSI owned 53%. Wabash obtained a loan for its investment based upon PSI's estimate of the total project cost. Wabash made an initial payment and was billed monthly by PSI for 17% of costs.

In 1979, the Nuclear Regulatory Commission stopped certain construction work at Marble Hill primarily because of faulty concrete placements. For about 30 months "nuclear-related" construction was stopped or slowed. In 1980, PSI informed Wabash that the commercial operation dates had been delayed and that the cost estimate had increased. As a result, Wabash's cost for its investment increased. PSI did not disclose to Wabash that it knew the cost would increase even more and that there was doubt about its ability to finance the increased cost. Wabash applied to borrow additional funds to continue its 17% investment.

Projected cost increases and additional delays were again announced in 1981 and 1982. PSI failed to disclose to Wabash that it did not have the financial ability to complete Marble Hill or that the cost estimates did not take into account problems known to PSI and the other defendants. Periodic reports from PSI failed to disclose and/or misrepresented material facts regarding the status of the project. The other defendants engaged in, knew of, aided and abetted, permitted, acquiesced in, or recklessly ignored PSI's failures to disclose or misrepresentations of these facts. Defendants failed to disclose the true magnitude of construction problems, misstated the necessary corrective measures, and misrepresented the impact on cost and schedule objectives.

In 1983, PSI again increased the cost estimate but represented that the commercial operations dates were still achievable. Later in that year, PSI announced a two year delay and again increased the cost estimate. PSI failed to disclose its knowledge prior to this time that construction and regulatory problems would increase the cost and delay construction. Later, PSI misrepresented the substantial likelihood that it would cancel Marble Hill. Wabash made payment to PSI after PSI had already decided to abandon the project which was not disclosed to Wabash.

Count I alleged violations of section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b) (1982)), Rule 10b-5 (17 C.F.R. § 240.10b-5 (1989)), and § 17(a) of the Securities Act of 1933 (15 U.S.C. § 77q(a) (1982)). Since at least the date of Wabash's initial investment, defendants engaged in a continuing course of conduct, including the making of false and misleading statements and the concealment of material facts necessary to make such statements not misleading, which had the purpose and effect of fraudulently inducing and maintaining Wabash's investment. S & L along with other defendants had knowledge of, aided, permitted, acquiesced in, or recklessly ignored misrepresentations and failures to disclose to Wabash material facts regarding Marble Hill's and PSI's financial conditions. As a result, Wabash lost an investment of over $466 million, it was liable for the interest due on repayment of its loan, and it was denied the income which it anticipated earning from the investment.

Count II alleged violations of RICO based upon the conduct alleged in Count I. It was alleged that defendants conspired to, conducted, and participated in the conduct of the affairs of the enterprise with which they were associated through a pattern of racketeering activity. Defendants devised a scheme to defraud Wabash which included: purposeful concealment; failing to disclose, concealing, and misrepresenting to Wabash material facts; and making false statements. Wabash had been injured because it made business, investment and operational decisions based upon defendants' conduct and because it paid substantially more for its investment than it otherwise would have paid.

Count III alleged defendants' common law fraud based upon the conduct alleged in Count I. It was also alleged that S & L defrauded Wabash, entered into a conspiracy with PSI and the other defendants to defraud, and aided and abetted the fraud by failing to make disclosures, concealing, agreeing to conceal and making misrepresentations. As a result of defendants' misrepresentations, Wabash invested and paid substantially more than it otherwise would have paid.

Count IV alleged constructive fraud and deceit based upon conduct alleged in Count I. Pursuant to the ownership agreement, PSI had sole responsibility to contract with third parties on behalf of Wabash, and PSI entered into a contract with S & L on behalf of itself and Wabash. S & L was a professional with ethical and professional duties to its clients to disclose material facts regarding its professional work and to exercise reasonable care to disclose facts basic to the transaction. S & L failed to disclose facts essential to Wabash's investment which it knew might reasonably induce Wabash to refrain from making payments although S & L had knowledge of the facts and was under a duty to exercise reasonable care to disclose such facts. S & L committed deceit against Wabash by failing to disclose certain facts. As a result of defendants' deceit, Wabash invested in Marble Hill and paid substantially more for its investment than it otherwise would have paid.

Count V alleged negligent misrepresentation against PSI.

Count VI alleged breach of contract against S & L. PSI retained S & L pursuant to an agreement which gave PSI the sole responsibility for the construction of Marble Hill and the authority to employ an engineering firm and execute contracts for the design and engineering. The agreement provided that contracts entered into by PSI after execution of this agreement would inure to the benefit of both parties. S & L was to provide the engineering and design work required for the procurement of plant equipment and construction of Marble Hill. PSI and S & L entered into an amended agreement for engineering services which provided that S & L was to design Marble Hill as a replicate of the Byron Nuclear Generating Station. PSI executed the engineering services agreement with S & L as Wabash's agent. It was alleged that Wabash had standing to sue for S & L's breaches of contract either as a party to the agreement or, alternatively, as a third-party beneficiary.

It was alleged that S & L breached the contract by: failing to accurately, timely and adequately review the Byron structural design before inclusion in the Marble Hill structural design; failing to correctly and timely investigate, analyze and identify the loads to be carried by the structural steel; providing a design for the structural steel beams and connections that was deficient and contrary to accepted standards of practice and regulatory requirements which resulted in the fabrication and installation of structural steel of insufficient load-carrying capacity; permitting construction to continue when it knew or should have known that the structural steel fabricated and...

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