Metro Federal Credit Union v. Federal Ins. Co.
| Decision Date | 30 March 2009 |
| Docket Number | No. 08 C 4087.,08 C 4087. |
| Citation | 607 F.Supp.2d 870 |
| Parties | METRO FEDERAL CREDIT UNION, Plaintiff, v. FEDERAL INSURANCE COMPANY, Defendant. |
| Court | U.S. District Court — Northern District of Illinois |
Coburn LLP d/b/a Thompson, Chicago, IL, for Plaintiff.
Donald L. Mrozek, Clifford E. Yuknis, Nabil G. Foster, Richard B. Polony, Hinshaw & Culbertson, Chicago, IL, for Defendant.
Plaintiff Metro Federal Credit Union ("Metro") has filed a two-count complaint against Defendant Federal Insurance Company ("Federal"), alleging breach of contract and vexatious refusal to pay, in violation of Illinois law, 215 ILCS 5/155. Before the court is Federal's motion to dismiss under Federal Rule of Civil Procedure 12(b)(6). For the following reasons, the motion is DENIED.
Metro, a federally chartered credit union organized in Illinois under the Federal Credit Union Act, 12 U.S.C. §§ 1751 et seq., with its principal place of business in Illinois, initially filed its complaint against Federal in an Illinois court, demanding over $300,000 in damages. Federal, an Indiana corporation with its principal place of business in New Jersey, timely sought removal to this court under 28 U.S.C. §§ 1441 and 1446. Because the parties are citizens of different states and the amount in controversy exceeds $75,000, the court may adjudicate the case under its diversity jurisdiction. 28 U.S.C. § 1332.
In its complaint, Metro alleges that it purchased from Federal a "Financial Institution Forefront Security By Chubb Credit Union Bond" ("the Bond") in 2005. Compl. ¶ 8. The Bond covered the period of May 1, 2005 to May 1, 2008. Id. ¶ 9. Metro alleges that it purchased the Bond to protect it in the event of fraudulent and dishonest acts by employees and/or third parties, and that it reasonably expected broad coverage for losses resulting from its giving value or extending credit in reliance on forged or fraudulently altered documents. Id. ¶ 13.
Metro submitted the Bond along with its complaint. Among other clauses, the Bond provides coverage for Metro under insuring clauses 16 (Forgery and Alteration) and 17 (Extended Forgery), each with coverage limits of $1.5 million and a $1,000 deductible. Id. ¶ 14. Metro alleges that Insuring clauses 16 and 17, when construed in conjunction with the entirety of the Bond, provide coverage for loss resulting from Metro's giving something of value or extending credit in reliance on instruments that are forged or fraudulently altered. Id. ¶ 17.
Metro alleges that, during the period covered by the Bond, it negotiated credit agreements with Scott G. Franz and Regina A. Franz, on behalf of their landscaping and tree maintenance business, Arbor Green, Ltd. The agreements were memorialized in two documents that the Franzes executed on August 23, 2004: a Business Credit and Continuing Security Agreement and a Business Guaranty Agreement, along with Business Loan Receipts that the Franzes executed on that day and thereafter, which established the credit limit (collectively, "the Agreements"). Id. ¶¶ 20-22. The Agreements designated the terms and conditions for Metro's advancing funds to Arbor Green. Id. ¶ 23. Arbor Green could borrow money on its line of credit in amounts up to 75% of its outstanding accounts receivables. Id. ¶ 25. And Arbor Green could borrow money on this line of credit only if an "Accounts Receivable Advance Request" ("Advance Request") was approved. Id. ¶ 24.
In each Advance Request, Arbor Green was required to provide documentation of its accounts receivables, which it would pledge as collateral for each loan. Id. ¶ 26. Metro submitted along with its complaint copies of the Advance Requests. Compl. Ex. 3. Each Advance Request identifies itself as an "application by Arbor Green, Ltd. for Accounts Receivable Financing," for a specified amount, Under the heading "Description of Collateral Pledged," Arbor Green would identify an invoice by number, date, and amount purportedly owed under it; calculate the maximum advance allowable under the Agreements, along with a recourse date; and date and sign the Advance Request. Compl. Ex. 3.
Metro alleges that Arbor Green, at Scott Franz's direction, submitted fraudulent invoices and falsified the related Advance Requests, along with other documentation, to cause Metro to extend loans under the Agreements that Metro would not have otherwise extended. Id. ¶ 27. Arbor Green, by and/or at Mr. Franz's direction, fraudulently altered invoices pledged to Metro as collateral by inflating the invoice amounts or otherwise manipulating Arbor Green's invoice forms in a manner not truly reflective of amounts billed to or owed by Arbor Green's customers. Id. ¶ 28. Metro submitted copies of those invoices and incorporated them in its complaint. Id. ¶ 29. Metro says that, in reliance on the inflated invoices, and without knowledge of their falsity, it loaned Arbor Green funds that it would not have loaned but for the fraud. Id. ¶ 30. As a result of Arbor Green's default on the Accounts Receivable Loan, Metro sustained loss in the amount of at least $309,027. Id. ¶ 32.
Metro alleges that the loss it incurred as a result of Arbor Green's default falls within the scope of coverage under the Bond and is not otherwise excluded from the Bond. Id. ¶ 33. As required by the Bond, after discovering its injury Metro gave Federal notice of its loss and sought coverage for it. Id. ¶ 34. Federal denied coverage initially and upon multiple reconsiderations. Id. ¶¶ 35-36.
Metro alleges that, because it performed and satisfied all conditions for coverage under the Bond, or is otherwise excused from such performance and satisfaction of conditions, Federal is obligated to provide coverage to Metro for the loss it incurred as a result of Arbor Green's fraudulent activities. Id. ¶¶ 40-41. Metro alleges damages in the amount of $309,027, and seeks foreseeable consequential damages, pre-judgment interest for liquidated sums, and attorneys' fees and costs in this action. Id. ¶¶ 43-45.
Metro further alleges that Federal's initial refusal to pay Metro for the loss violates the terms, provisions, and intent of the Bond, and was vexatious, without reasonable cause or excuse, outrageous, and in bad faith. ¶ 47. And Metro alleges that Federal's continued refusal, despite repeated requests by Metro to reconsider coverage under the Bond, is vexatious, without reasonable cause, and in bad faith. ¶ 49.
On a motion to dismiss, the court accepts as true all well-pleaded allegations in the plaintiff's complaint, drawing all possible inferences in the plaintiff's favor. See Tamayo v. Blagojevich, 526 F.3d 1074, 1081 (7th Cir.2008). Dismissal is appropriate only if, after accepting as true all facts in the complaint, the plaintiff cannot plausibly succeed. Id. at 1086. Where, as here, the plaintiff submits along with its complaint copies of contracts and other documents referenced therein, the court also may consider them. Centers v. Centennial Mortg., Inc., 398 F.3d 930, 933 (7th Cir.2005). And, if the unambiguous terms of an attached contract conflict with the plaintiff's allegations, the contract controls. INEOS Polymers Inc. v. BASF Aktiengesellsch, 553 F.3d 491, 498 (7th Cir.2009); Centers, 398 F.3d at 933.
Federal argues that Metro's allegations, taken as true, show that Metro's loss is not covered by the Bond, and thus that Metro is not legally entitled to relief. The parties agree that Illinois law governs interpretation of the Bond.
"An insurance policy is a contract, and the general rules governing the interpretation of other types of contracts also govern the interpretation of insurance policies." Hobbs v. Hartford Ins. Co., 214 Ill.2d 11, 291 Ill.Dec. 269, 823 N.E.2d 561, 564 (2005). Under Illinois law, "a court must initially look to the language of a contract alone, as the language, given its plain and ordinary meaning, is the best indication of the parties' intent." Gallagher v. Lenart, 226 Ill.2d 208, 314 Ill.Dec. 133, 874 N.E.2d 43, 58 (2007). Contracts should be read as a whole, and the "intent of the parties is not to be gathered from detached portions of a contract or from any clause or provision standing by itself." Id. If an insurance policy's language is unambiguous, it will be applied as written. Hobbs, 291 Ill.Dec. 269, 823 N.E.2d at 564. Generally, if a term in an insurance policy is ambiguous—i.e., if it is subject to more than one reasonable interpretation—it will be liberally construed in favor of coverage. Id.1
As an initial matter, the parties dispute whether any of the documents Metro relied on may be considered together as a "single instrument." Metro argues that the court should construe together the entire series of documents memorializing its relationship with Arbor Green—the Agreements, the Advance Requests, and the invoices —as a single instrument. Federal responds that none of these documents may be construed together.
In Illinois, "instruments executed for the same purpose and in the course of the same transaction will be construed as a single instrument." Community State Bank of Galva v. Hartford Ins. Co., 187 Ill.App.3d 110, 134 Ill.Dec. 810, 542 N.E.2d 1317, 1320 (1989). "Construing contemporaneous instruments together means simply that if there are any provisions in one instrument limiting, explaining, or otherwise affecting the...
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