Heller Intern. Corp. v. Sharp

• Decision Date: 03 December 1992
• Docket Number: Nos. 91-3218,91-3306,s. 91-3218
• Citation: 974 F.2d 850
• Parties: HELLER INTERNATIONAL CORPORATION, a Delaware Corporation, Plaintiff-Appellant-Cross-Appellee, v. Alec SHARP, a United Kingdom Subject, as Lead Underwriter of and for the Subscribing Syndicates of Underwriters at Lloyd's, London, Guardian Royal Exchange Assurance Company, Limited, a United Kingdom Corporation, Assicurazioni Generali, an Italian Corporation, Bellefonte Insurance Company, a United Kingdom Corporation, Sphere Insurance Company, Limited, a United Kingdom Corporation, and Drake Insurance Company, Limited, a United Kingdom Corporation, Defendants-Appellees-Cross-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 850

974 F.2d 850

HELLER INTERNATIONAL CORPORATION, a Delaware Corporation Plaintiff-Appellant-Cross-Appellee, v. Alec SHARP, a United Kingdom Subject, as Lead Underwriter of and for the Subscribing Syndicates of Underwriters at Lloyd's, London, Guardian Royal Exchange Assurance Company Limited, a United Kingdom Corporation, Assicurazioni Generali, an Italian Corporation, Bellefonte Insurance Company, a United Kingdom Corporation, Sphere Insurance Company, Limited, a United Kingdom Corporation, and Drake Insurance Company, Limited, a United Kingdom Corporation Defendants-Appellees-Cross-Appellants.

Nos. 91-3218, 91-3306.

United States Court of Appeals, Seventh Circuit.

Argued May 27, 1992.

Decided Sept. 4, 1992.

Rehearing Denied Dec. 3, 1992.

Dan K. Webb, Kimball R. Anderson (argued), Lawrence R. Desideri, Winston & Strawn, David E. Springer, Charles F. Smith, Katherine C. Grady, Linda A. Stark, Wayne W. Whalen, John K. Lyons, Skadden, Arps, Slate, Meagher & Flom, Charles L. Glick, Hedlund & Hanley, Chicago, Ill., for plaintiff-appellant.

Michael A. Pope (argued), Stanley V. Figura, Mark A. Brand, Neal R. Novak, Pope & John, Edward P. McNeela, McNeela & Griffin, Chicago, Ill., for defendants-appellees.

Wendi Sloane Weitman, Robert E. Shapiro, Barack, Ferrazzano, Kirschbaum & Perlman, Chicago, Ill., April A. Breslaw, Resolution Trust Corp., Washington, D.C., for amicus curiae Resolution Trust Corp.

Thomas W. Merrill, Jonathan K. Baum, Michael S. Sigal, Sidley & Austin, Chicago, Ill., for amicus curiae Chicago Clearing House Ass'n.

Before BAUER, Chief Judge, RIPPLE, Circuit Judge, and WOOD, Jr., Senior Circuit Judge.

BAUER, Chief Judge.

Heller International appeals the district court's denial of its motion for a judgment notwithstanding the verdict or, alternatively, for a new trial. Heller contends that the district court's refusal to give a proffered jury instruction requires reversal of the judgment and remand for a new trial. Given the facts presented here, we agree. Heller also appeals the district court's award of costs to defendants as prevailing parties under Federal Rule of Civil Procedure 54(d). That claim is rendered premature by our reversal of the judgment, and the cost award will have to be redetermined after the case is retried. The defendants-cross-appellants (Heller's insurers) also appeal the district court's denial of their motion for judgment n.o.v., and its refusal to give proposed instructions. We affirm these rulings.

I.

A. Background Facts

Heller, a commercial finance company, sued Alec Sharp, the lead underwriter of Lloyd's of London, and several other insurance companies to recover on a fidelity bond issued by these insurers. The bond insured Heller against losses sustained as a result of dishonest and fraudulent acts by Heller employees. This case arises from the activities of a Heller International regional vice president, Irving Chudy. Chudy managed the Phoenix branch office of Heller's subsidiary, Walter E. Heller Western, Inc. From December 7, 1971, until October 29, 1981, Chudy managed the Phoenix office and reported to Sidney Legg, the President of Heller Western, who worked in Los Angeles. Chudy opened the Phoenix office, and hired the key employees. Chudy's immediate subordinate, Rick Normand, stated that Chudy made personal loans to many of the employees in the Phoenix office in order to gain their favor, and so that the employees would feel "indebted" to him. Trial Transcript, Volume 10A, at 1494-95 (hereinafter "Tr. Vol. ____, at ____"). ¹ Chudy admitted that he made personal loans to his employees. Tr. Vol. 12, at 2025-26. Legg, Chudy's supervisor, testified that Chudy made a $60,000 loan to the employee who verified the authorization and signed the checks for Heller's Phoenix office. Tr. Vol. 7, at 1001-02. Legg also testified that Heller company policy prohibited personal loans to employees. Tr. Vol. 6, at 774-75.

Other loans Chudy authorized are at the heart of this suit. In 1975 or 1976 he began making personal loans to Rob Brunswick, a Phoenix businessman. Chudy loaned Brunswick over $400,000. In early 1977, Brunswick began borrowing money from Heller under Chudy's authorization. Brunswick used some of that money to repay Chudy. Tr. Vol. 12, at 2049-50. Chudy used the Brunswick loans to funnel money through Brunswick into his own accounts or to companies Chudy owned. Chudy ultimately received more than $1,875,000 through the sham Brunswick transactions. Chudy kept the records of the Brunswick transactions in his office, and marked them "personal and confidential." The defendants never seriously disputed the bond's coverage of these losses.

Another series of loans to El Paso businessman Bruce Evans caused losses to Heller that dwarfed those incurred in the Brunswick transactions. In July 1978, Chudy authorized Heller's financing of Evans' purchase of the Zenith Shirt Company. The previous owner, Herman Gross, agreed to guarantee some of Zenith's existing debt to suppliers. Gross was to receive a percentage of profits and payment for ongoing consulting work. Chudy authorized loans for operating expenses, up to eighty percent of Zenith's accounts receivable. Zenith agreed to document its merchandise shipments.

Problems with the Zenith loan began early in 1979. Chudy learned that Zenith violated the loan agreement by over-spending on capital improvements. Chudy waived the default but failed to disclose the waiver in his loan reports. In May 1979, Chudy authorized Heller's guarantee of Zenith debt to one of Zenith's suppliers. Heller's guarantees to suppliers increased to more than $3.3 million over the next two-and-a-half years. Chudy never disclosed these guarantees in the documents he sent to his supervisor, despite Heller regulations that required it.

In addition to the guarantees, Chudy asked Heller's Executive Committee to authorize a $3.4 million line of credit for Zenith. When he made his request, Chudy failed to disclose Zenith's loan violations or the guarantees. Zenith was Phoenix's largest borrower. Evans told Chudy to liquidate the Zenith loans, but Chudy believed the they should try to "string it along." Tr. Vol. 10, at 1558. Chudy told Evans that Zenith should not obtain audited financial statements and that he should be notified if Heller account examiners appeared at Zenith. In his 1979 year-end report on Zenith to Legg, Chudy did not mention the problems with the Zenith account. In 1980, Lee Ash, Heller's account executive assigned to Zenith, conducted a special examination of Zenith's business. Ash discovered that Zenith fraudulently "prebilled" Heller for goods that had been ordered, but not shipped. Because part of Heller's collateral was accounts receivable, the prebilling caused Heller to advance money to Zenith based on collateral that did not exist. Tr. Vol. 8, at 1069-70, 1081; Vol. 10, at 1531-32. Ash informed Chudy that Zenith prebilled about $1 million. Chudy vetoed Ash's suggestion that Chudy inform Legg of the problem. Ash testified that Chudy told him that Legg could not be informed "because it would ruin his [Chudy's] reputation in the business." Tr. Vol. 8, at 1072. Chudy's (and Ash's) failure to inform Legg of the prebilling in his June 1980 account review violated Heller procedures. Tr. Vol. 10A, at 1581.

Gross, Zenith's former owner, complained in September 1980 that Zenith had not made its required payments to him, and that a Zenith supplier was making a claim on Gross's guarantee. Chudy also discovered that Zenith (in violation of the loan agreement) sent $3.11 million of its loan proceeds to its Costa Rican subsidiary. Tr. Vol. 5, at 478-79, Vol. 13, at 2210-11. It was not until Evans, Zenith's then-current owner, left the company in 1981, that Chudy became convinced that Evans stole some of the Heller loan proceeds. Id. Finally, on September 15, 1980, Chudy informed Legg that there had been "a small amount of pre-billing, but that it had been taken care of[.]" Tr. Vol. 13, at 2210.

There were more problems with the Zenith loan. By December 1989, prebillings totalled approximately $5 million, Tr. Vol. 13, at 2224, and the loan balance was approximately $9.5 million. Legg told Chudy to reduce the loan balance. At the same time, Ash told Chudy that if the Zenith loan continued at its current rate, it would soon reach $15 million. Tr. Vol. 8, at 1106-07. Chudy suggested that he could use some approved credit, authorized by the executive committee, to loan more to Zenith without having to have it approved. Id. at 1108. Ash believed that Chudy wanted to avoid having the executive committee discover how much had been loaned to Zenith. Id.

At around the same time, Chudy began to feel uncomfortable with Evans, although he did not believe at that time that Evans was defrauding the bank. So he arranged for Peter Hirsh, an old friend, and Warren Hirsh, his brother, to take over management of Zenith. Tr. Vol. 10B, at 1604. On December 19, 1980, Warren and Peter Hirsh purchased a fifty percent interest in Zenith for $1,000, Tr. Vol. 14, at 2245-46, and the company was renamed Hirsh-Evans. Warren Hirsh was promised a $250,000 salary the first year, which he could increase to $400,000. Vol. 10B, at 1679. Thus, for a $1000 investment, Warren Hirsh received a guaranteed salary of $250,000. Chudy agreed that if the Hirshes came into the company Heller would loan Zenith at least an additional $10 million, and perhaps as much as $18 to $20 million. Tr. Vol. 14, at 2248-49. The "only way" the Hirshes would have gotten involved in the company was with "Heller's obligation to back the company." Tr. Vol. 10B, at 1616 (Testimony of Peter Hirsh).

On the same day the stock purchase agreement was executed, Heller amended its loan agreement to Zenith. The amendment committed Heller to loan an additional $6 million. Tr. Vol. 14, at 2263. As part of the arrangement to bring the Hirshes into the company, Chudy executed a release on...