Shapo v. O'Shaughnessy

Decision Date27 November 2002
Docket NumberNo. 01 C 5942.,01 C 5942.
Citation246 F.Supp.2d 935
PartiesNathaniel S. SHAPO, Director of Insurance of the State of Illinois, as Liquidator of Alpine Insurance Company, an Illinois Corporation, Plaintiff, v. Peter O'SHAUGHNESSY, Steven Shinn, Craig Rice, John Clark, Exstar Financial Corporation, TCO Insurance Services, Inc., TCO Insurance Services, and TCO Holdings, Inc., Defendants.
CourtU.S. District Court — Northern District of Illinois

John Patrick Killacky of Ross & Hardies, Chicago, IL, for Peter J. O'Shaughnessy and Steven Shinn.

Donald Flayton and Kenneth M. Gorenberg of Wildman, Harrold, Allen & Dixon, Chicago, IL, for Craig Rice.

Michael R. Hassan and Allegra R.D. Hyte of Lord, Bissel & Brook, Chicago, IL, for John Clark.

Douglas P. Roller of Roller & Associates, Chicago, IL, for Exstar Financial Corporation, TCO Insurance Services, Inc., TCO Insurance Services, and TCO Holdings, Inc.


ST. EVE, District Judge.

Nathaniel S. Shapo (the "Liquidator") filed an eleven count complaint on behalf of the defunct Alpine Insurance Company ("Alpine"). The Complaint is based primarily on accusations that the Defendants looted Alpine and its parent Transco from the late-1980s to the mid-1990s. The allegations include four Racketeering Influnced and Corrupt Organizations ("RICO") counts and seven state law claims. Before this Court are four motions to dismiss the Complaint. One motion is a joint filing based primarily on the Defendants' belief that the RICO claims are time-barred and arguments that the claims lack particularity and fail to otherwise allege recognized RICO violations. (R. 10-1.) Defendants John Clark and Craig Rice filed separate motions to dismiss, expanding the timeliness argument as it relates to them. (See R. 11-1, R. 12-1.) Rice also argues in his separate motion that the Complaint contains insufficient allegations to support a claim against him. Finally, Exstar Financial Corporation, TCO Insurance Services, Inc., TCO Insurance Services, and TCO Holdings, Inc. (the "corporate defendants") filed a supplemental motion to dismiss, primarily extending the Defendants' arguments concerning whether the Liquidator has alleged any conduct that amounts to a RICO violation. (See R. 13-1.) As detailed below, the motions are granted in part and denied in part.

I. The Parties
A. The Liquidator

Nathaniel S. Shapo is the Director of Insurance of the State of Illinois. (R. 1-1, Compl.¶ 10.) He became Liquidator of the Alpine estate on June 28, 2000, by order of the Circuit Court of Cook County. (Id.) As Liquidator, he brings this action on behalf of the Alpine estate to recover to recover property and damages allegedly sustained by Alpine as a result of the Defendants' alleged misconduct. (Id. mi.)

B. Alpine and Transco

Alpine was a stock property and casualty insurance company. It was organized under the laws of Illinois and it maintained its principal place of business in California. (R. 1-1, Compl.¶ 3.) Before the order of liquidation, Alpine principally wrote excess and surplus lines coverage for commercial casualty liability and ocean marine coverages. It also specialized in underwriting professional liability coverage for architects and engineers on a claims-made basis. (Id ¶ 3.)

On December 31, 1996, Alpine assumed the assets and liabilities of Transco, its corporate parent. (Id. ¶ 4.) Before then, Transco was an excess and surplus lines carrier that was incorporated in Illinois. (Id) Transco was once a member syndicate on the Illinois Insurance Exchange. (Id) Defendants O'Shaughnessy, Exstar Financial Corporation ("Exstar"), and ultimately TCO Holdings, Inc. wholly owned Transco from time to time. (Id)

C. The Defendants

The Defendants can be grouped into one of two categories. They are either (1) corporations related to Alpine and Transco or (2) directors and officers of Alpine, Transco, and the corporate defendants (the "individual defendants"). The corporate defendants consist of Exstar, TCO Insurance Services, Inc., TCO Insurance Services, and TCO Holdings, Inc. The individual defendants are Peter O'Shaughnessy, Steven Shinn, Craig Rice, and John Clark.

1. Corporate Defendants

Exstar, an insurance holding company, is a publicly held Delaware corporation headquartered in California. (R. 1-1, Compl.¶ 18.) Two of its subsidiary operating companies were Alpine and Transco. (Id.) TCO Holdings, Inc. is a Delaware corporation that was, at various times, Transco's parent. (Id. ¶ 20.)

TCO Services, Inc. ("TCO Illinois") is an Illinois corporation. (Id. ¶ 19.) TCO Illinois performed marketing, underwriting claims, management, investment, and general administrative functions for the various corporate defendants. (Id.) TCO Insurance Services ("TCO California") is a California corporation. (Id.) TCO California performed administrative services for TCO Illinois pursuant to a servicing agreement. (Id.) Together, TCO Illinois and TCO California acted as an affiliate underwriting manager and as the managing general agent for Alpine and Transco. (Id. 113.)

2. Individual Defendants

Peter J. O'Shaughnessy and Steve Shinn are residents of California. (R. 1-1, Compl.¶¶ 12, 14.) Craig Rice is a New Jersey resident, (Id. ¶ 16), while John Clark resides in Illinois. (Id. ¶ 17.) O'Shaughnessy, Shinn, Rice, and Clark had various roles with Alpine, Transco, and the corporate defendants. O'Shaughnessy was also the controlling shareholder of Alpine, Transco, Exstar, TCO Illinois, and TCO California (collectively, "TCO entities") through his interest in their ultimate parent, TCO Holdings. (Id. ¶ 2.)

The Complaint alleges that the individual defendants were executives and directors of the corporate parties as follows:

                Individual      Aloine            Transco               Exstar             TCO Companies
                O'Shaughnessy   Director 1986-96   Director 1985-96      President 1988-93   CEO
                                chairman 1988-96   President 1983-93     CEO 1988-2000       Director
                                Exec. VP 1986-92                         Chairman 1988-2000  (various dates)
                                                                         Director 1388-2000
                Shims           Exec VP 1992-95    Sr. Vice President    President 1993-95   President of TCO
                                Director 1992-95   Exec. Vice President  Exec. VP 1992-93    1993-95
                                President 1996     President             Director 1992-93    Exec. VP of TCO
                                                   (various dates)                           1992
                Rice            Director 1989-95   VP 1988-93            Director 1992-96     CFO 1991
                                CFO 1989-95        Asst. Tress.1988-93   CFO 1992-96
                                Exec. VP 1989-95   Controller 1988-89    Treasurer 1992-96
                                Treasurer 1989-95                        Exec. VP 1992-96
                Clark           President 1992-96  President 1992-96     Sr. VP 1992-95       President 1992-96
                                CFO 1992-96                              Asst. Treas. 1992-95
                                Director 1992-96

(Id. ¶¶ 12-17.)

II. Substantive Allegations

The Complaint alleges a course of illegal conduct that was purportedly masterminded by O'Shaughnessy and facilitated by Shinn, Rice, and Clark from 1987 until 1996. (R. 1-1, Compl.¶ 2.) This conduct was effectuated through a series of complex financial transactions that resulted in $19 million being illegally transferred out of Alpine and Transco. (Id. ¶ 6.) Because these funds were transferred out of Alpine and Transco, they were not available for the payment of policyholder and creditor claims. (Id. ¶ 21.) These transactions took three forms: (1) diversions from premium fund trust accounts; (2) filters of Transco funds through stock swaps; and (3) transfers of money through bogus loans and real estate deals. Each of the individual defendants allegedly profited from the schemes. (Id.)

A. Premium Fund Trust Account Diversions

Pursuant to agreements with Alpine and Transco, TCO Illinois and TCO California were responsible for the administration and safekeeping of Alpine and Transco policyholder premiums. (R. 1-1, Compl. ¶ 22.) Alpine entered into an Amended and Restated Management Agreement with TCO Illinois that was effective January 1, 1991. (Id ¶ 25.) Alpine's Board of Directors—comprised of Defendants O'Shaughnessy, Shinn, Clark, and Rice— executed a written consent of the agreement on November 15, 1991. (Id) Shinn and Rice also executed the agreement as officers of TCO Illinois. (Id.) The first paragraph of this agreement provided that:

[TCO Illinois] shall maintain a trust fund account in a bank that is a federally or state chartered bank and that is a member of the Federal Deposit Insurance Corporation. All premiums and other monies collected or received on behalf of [Alpine] promptly shall be deposited into such bank account.

(Id, ¶ 26.)

Transco entered into a similar agreement with TCO Illinois that was effective July 1, 1993. (R. 1-1, Compl.¶ 27.) Paragraph J of that agreement required TCO Illinois to "maintain a trust fund account into which all premiums and other monies collected or received ... shall be deposited." (Id) Along with TCO Illinois' contractual requirements, TCO California was also obligated to deposit premiums or other funds received in separate and segregated fiduciary accounts to be held on behalf of Alpine and Transco. (Id ¶ 23.) Even outside these contractual obligations, Illinois and California law required TCO Illinois and TCO California to create and maintain separate segregated premium fund trust accounts for premiums collected in those states. (Id ¶¶ 29-33.)

TCO Illinois and TCO California never established or...

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