Heritage Ins. Co. v. First Nat. Bank of Cicero

• Decision Date: 03 February 1986
• Docket Number: No. 84 C 8747.,84 C 8747.
• Citation: 629 F. Supp. 1412
• Parties: HERITAGE INSURANCE COMPANY OF AMERICA and Prestige Casualty Company, Plaintiffs, v. FIRST NATIONAL BANK OF CICERO, et al., Defendants.
• Court: U.S. District Court — Northern District of Illinois

629 F. Supp. 1412

HERITAGE INSURANCE COMPANY OF AMERICA and Prestige Casualty Company, Plaintiffs, v. FIRST NATIONAL BANK OF CICERO, et al., Defendants.

No. 84 C 8747.

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

February 3, 1986.

Jack Joseph, Arthur Susman, Michael Myers, Joseph Susman & Myers, Chicago, Ill., Dan K. Webb, Timothy J. Rivelli, Peter McCabe, III, Winston & Strawn, Chicago, Ill., Jill B. Berkeley, Dardick & Denlow, Chicago, Ill., for plaintiff Heritage Ins. Co.

Alan I. Boyer, Lincolnwood, Ill., for plaintiff Prestige Cas. Co.

Mary Anne Gerstner, Burke, Griffin, Chomicz & Wienke, Chicago, Ill., for defendant First Nat. Bank of Cicero.

James N. Kosmond, Roger Littman, Querrey Harrow Gulanick & Kennedy Ltd., Chicago, Ill., Orest Szewciw, Donnersberger & Szewicw, Munster, Ind., for defendant James T. Sheehan.

MEMORANDUM OPINION AND ORDER

GETZENDANNER, District Judge:

This civil action under the Racketeer Influenced Corrupt Organizations Act, 18 U.S.C. § 1964(c), is before the court on the plaintiffs' motion to reinstate and for leave to file a second amended complaint. Plaintiffs' first amended complaint was dismissed for failure to plead fraud with particularity. On August 30, 1985 when plaintiffs failed to file an amended complaint, the pendent state law claims were dismissed for lack of subject matter jurisdiction. Plaintiffs filed their motion to reinstate exactly ten days (excluding weekend days) after the dismissal order was docketed, as required by Fed.R.Civ.P. 59 and Fed. R.Civ.P. 6(a) (effective Aug. 1, 1985). A revised second amended complaint was filed on October 25, 1985. The issues presented on the motion to reinstate are whether the revised complaint pleads fraud with particularity and suffices to state a claim under RICO. For the reasons set forth herein, the court concludes that it does, and orders the case reinstated.

For purposes of the present motion, the well-pleaded factual allegations of plaintiffs' complaint are taken as true. Plaintiffs Heritage Insurance Company of America ("Heritage") and Prestige Casualty Company ("Prestige") are Illinois insurance companies licensed to issue performance and payment bonds for public contractors. Defendant First National Bank of Cicero ("Cicero Bank") is a national banking association with its principal place of business in Cicero, Illinois; defendant James T. Sheehan, an Indiana resident, was at all times relevant to the allegations of this complaint a Senior Vice-President of Cicero Bank. Jurisdiction is predicated on 28 U.S.C. § 1331 by virtue of plaintiffs' RICO claim.

The facts giving rise to this lawsuit concern the relationships of both plaintiffs and defendants to McKeever Construction Co., an Illinois corporation engaged in the business of public contracting. McKeever is currently undergoing Chapter 11 proceedings in this district. In or about February 1983, McKeever owed Cicero Bank approximately $1 Million, as evidenced by a series of promissory notes. Cicero Bank knew that McKeever was insolvent and that the only way McKeever could discharge its note obligations to the Bank was by successfully bidding on various public projects for road paving work. Such work was then being offered by the Illinois Department of Transportation, the City of Evanston, and the Town of Cicero (hereafter collectively "obligees"). Cicero Bank also knew that upon being awarded the work, McKeever would be required to deliver a performance and payment bond issued by a bonding company as a precondition to public approval of the contract.

At all relevant times, Midwest Indemnity Corp., an Illinois corporation, acted as general agent for plaintiffs in connection with the issuance of performance and payment bonds. During March 1983, Steven Berz, a Midwest underwriter, and Marvin Mann, a Midwest Vice-President, spoke to defendant Sheehan and Jack Cunningham, a Cicero Bank employee, by telephone. Berz and Mann on behalf of Midwest told Sheehan and Cunningham that as a precondition for the issuance of performance and payment bonds for McKeever, Midwest would require appointment of an escrow agent to receive payment from the obligees. Berz and Mann stated at that time that the agent would be required to deposit contract funds relating to each project in separate escrow accounts, with disbursements to be made only to trade creditors for materials supplied or work performed on each respective project and only upon proper documentation. At said time, Sheehan and Cunningham, on behalf of Cicero Bank, stated that the Bank would act as such escrow agent and would comply with the provisions specified by Midwest.

On or about April 28, 1983, defendant Sheehan, as agent for defendant Cicero Bank, executed escrow agreements with McKeever for two contracts with the Illinois Department of Transportation ("DOT"). The escrow agreements were delivered by McKeever, through its president Angelo Christopher, to Midwest on or about the same date. Midwest thereupon caused Prestige to issue performance and payment bonds on the contracts, and the DOT, in reliance on these bonds, subsequently approved the contracts. Similar escrow agreements for other public projects were executed by Christopher and Sheehan, on behalf of McKeever and the Bank, respectively, on or about May 5, 1983; July 19, 1983; and September 19, 1983. In the first two of these instances, Christopher delivered the agreement to Midwest upon execution, Midwest then caused Heritage to issue performance bonds, and the obligees in turn approved the contracts. In the case of the September 19, 1983 agreement, Midwest, in reliance on defendants' promise to execute the escrow, caused Heritage to issue the performance and payment bond a month before the escrow agreement was actually executed.

The escrow agreements themselves nowhere mention the specific promises discussed over the phone with Midwest. The agreements do, however, acknowledge that McKeever's "bonding arrangement" requires the establishment of an escrow account. The agreements further require that Cicero Bank notify Midwest, as a surety of McKeever, in the event that the Bank elects to terminate its responsibilities as escrow agent. The agreements affirmatively oblige Cicero Bank to deposit funds and to issue checks payable to suppliers and subcontractors at McKeever's direction and upon submission of appropriate documentation.

Up to and including March 5, 1984, the date on which McKeever filed for bankruptcy, Cicero Bank did not disclose to plaintiffs that McKeever was insolvent or in debt to the Bank for $1 Million, nor were plaintiffs aware of these facts. Cicero Bank also did not establish, and never intended to establish, the escrow accounts which it had agreed to maintain, but instead used the deposited funds to retire McKeever's past due debts to the bank. This conversion was part of a scheme whereby defendants conspired with Christopher to conceal McKeever's financial problems. It was a part of this scheme that defendants would, after retiring McKeever's debts, then loan McKeever additional amounts of money to hide both the diversion and the past due loans. During the months preceding McKeever's bankruptcy, the defendants and Christopher concealed from plaintiffs and Midwest that they were not placing into escrow the money received from the obligees, and further concealed that the money was in fact being diverted to the defendants' benefit. It was a foreseeable part of the scheme that the obligees would forward funds through the mails, and the complaint identifies twelve such mailings over a six months period, funds from which were then allegedly diverted.

With the various mailings identified as the predicate acts, plaintiffs assert three counts under § 1962(c) based on defendants' participation in the affairs of McKeever and First Cicero Bank Corporation (the Cicero Bank's parent), and based on Sheehan's participation in defendant Bank's affairs. Plaintiffs also assert a § 1962(a) claim against Cicero Bank. Finally, plaintiffs also assert four state law claims: breach of contract under a third party beneficiary theory; violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, common law fraud, and breach of fiduciary duty.

RICO

The court first examines whether the revised complaint now possesses the particularity necessary for pleading fraud under Fed.R.Civ.P. 9(b). The revised amended complaint expands upon the first amended complaint in several ways: 1) the new complaint is more specific about the dates of the escrow agreements and plaintiffs' acts in reliance on each agreement; 2) the new complaint reveals for the first time to this court that plaintiffs' agents spoke directly to the defendants in March of 1983 and that defendants affirmatively offered at that time to comply with plaintiffs' prerequisites; 3) the new complaint also alleges for the first time that the misappropriation of escrowed funds took place with the knowledge and cooperation of McKeever's president, Angelo Christopher. These amendments suffice to rectify the Rule 9(b) problems identified by the court in its June 25, 1985 opinion. The nature of the reliance is more fully set forth and the time frame is now clear. The court therefore turns to defendants' arguments that the fraud claims, even if particularized, are substantively defective, and that plaintiffs have not adequately alleged a "pattern" of such frauds to state a claim under civil RICO.

Plaintiffs' claim of mail fraud rests chiefly on three types of representations and/or omissions: 1) defendants' failure to disclose McKeever's insolvency and debts; 2) defendants' false promise to act as escrow agent; and 3) defendants' misapplication of the escrow funds. Defendants argue that plaintiffs allege no duty of disclosure which would render their omissions actionable, and that the sole representation on which plaintiffs relied was therefore a statement of future intent not...