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October 16, 1974


The opinion of the court was delivered by: Marshall, District Judge.


This is a motion for summary judgment by Ben B. Stein, third party defendant, against the Insurance Company of North America (INA), third-party plaintiff and original defendant, in an action filed by plaintiff, Sears, Sucsy & Co. (Sears).

Plaintiff Sears commenced this diversity action against INA alleging that INA had issued to Sears a Brokers Blanket Bond that provided coverage for losses through any dishonest or fraudulent conduct by the Sears' employees. Sears further alleged that as a result of various stock manipulations and conspiracy to commit the same by the three third-party defendants, Ben B. Stein, Wescott Trainor and Annette Solomon, Sears was forced to rescind the sale of certain "Leisure Trend" securities to the public. As a result of the rescission offer, Sears claimed losses in excess of $50,000 which, it asserted, INA was obligated to pay (up to $35,000) under the policy of insurance.

INA answered admitting that a policy of insurance was in force and that a demand had been made under the policy by the plaintiff but denied liability because, as it alleged, the rescission was occasioned by the failure of the plaintiff to register the stock as required by the Illinois Blue Sky Law, Ill.Rev.Stat., ch. 121 1/2, § 137.13 (1973), and therefore the loss was excluded from the policy under a provision exempting coverage for losses resulting from a statutory violation.*fn1 INA also denied any knowledge of the alleged Stein-Trainor-Solomon fraud.

INA also filed a third-party complaint, impleading Stein, Trainor and Solomon, alleging that if INA was liable to Sears, the three others were ultimately liable to INA as subrogee of Sears.

Stein answered the third-party complaint, denying all allegations of personal wrongdoing or any knowledge of any wrongdoing by Solomon and Trainor and raised four defenses: (1) that at all times his conduct was honest; (2) that the offer of rescission was made not because of any fraud, but because Sears had failed to register the securities as required by Ill.Rev.Stat., ch. 121 1/2, § 137.4 (1971); (3) that on July 28, 1972, an agreement was reached between Sears and Stein releasing the latter from all liability for the rescission offer in exchange for a cash payment of $2,270.50; (4) and that as a consequence of an agreement dated July 13, 1972, between Gerald Sears and Lawrence Sucsy (officers and directors of the plaintiff) to share all net losses from the rescission, Stein as a third-party beneficiary of the agreement was entitled to be "protected from any liability and responsibility for the losses . . . and the plaintiff is estopped from claiming any damages" caused by Stein.

Stein then moved for summary judgment pursuant to Fed.R.Civ.P. 56(b), raising essentially three theories in support of his motion. First, he did not participate in or know of any fraudulent transactions in Leisure Trend stock; second, he was released absolutely from all liability for the Leisure Trend rescission; third, he is entitled to the benefits because of an accord and satisfaction.*fn2

INA did not file a response to Stein's motion although one was filed by Sears with leave of court. Sears' response consists of an ambiguous affidavit by Edward Guarderas, an employee of the plaintiff, (the affidavit goes to the issue of fraud), a copy of a verified response to a motion for summary judgment that was filed in the Chancery Division of the Circuit Court of Cook County in a related action, an unverified memorandum that asserts various factual and legal conclusions, and several other exhibits that run to the issue of Stein's allegedly fraudulent stock manipulation. For reasons that are fully discussed later, these papers do not challenge the affidavits and papers filed by Stein, or raise a genuine issue of material fact on the affirmative defense of release.

The dispute in this lawsuit is difficult to understand unless certain events prior to the filing of the complaint are fully detailed.

Sears, a Delaware corporation with its principal place of business in Chicago, Illinois, is engaged in the business of buying and selling securities. Apparently the firm has had a number of difficulties with the Securities and Exchange Commission (SEC) and the National Association of Securities Dealers, Inc. (NASD), stemming in part from certain alleged failures to comply with various regulations of the SEC promulgated pursuant to the securities acts. These difficulties led to the termination of five individuals, Lawrence G. Sucsy, Nathan Shapiro, Paul F. Fisher, Ben B. Stein and Sheldon R. Nissen, as officers, employees and stockholders of the plaintiff. Each of these individuals claimed certain assets of the firm. After a number of negotiations and meetings, which apparently began on May 18, 1972,*fn3 a separation agreement, dated June 8, 1972, was reached and signed by all parties on June 26, 1972. The closing, set for June 28, 1972, did not take place, however, because of the discovery of the alleged Leisure Trend fraud.

On June 28, 1972, Gerald Sears allegedly called Lawrence G. Sucsy and informed him that the June 8, 1972 agreement was off until certain just discovered problems with Leisure Trend stock were resolved. On July 13, 1972, an agreement of the same date was signed by Sears and Sucsy, which arranged for the apportionment of the Leisure Trend losses. Shapiro was also present at the meeting but refused to sign the agreement. The agreement required third-party defendants Stein, Trainor and Solomon to return all profits made from trading in Leisure Trend stock in order to fund the rescission. Any additional funds necessary were to be provided by equal contribution from the plaintiff on one hand and Sucsy and Shapiro on the other. Whether Shapiro ever signed the agreement is unclear.

The crucial transaction relevant to the motion for summary judgment took place on July 28, 1972. On this date the contribution to the rescission fund (as provided in the July 13 agreement) was raised with the third-party defendants. After much argument and discussion Stein agreed to pay into the fund $2,270.50 in exchange for a discharge of any and all liability and responsibility in connection with all trading in the Leisure Trend stock. Stein did make the payment which is evidenced by a copy of the check bearing a notation "as per agreement re: rescission of Leisure Trend stock." The check was subsequently cashed by the plaintiff. The other third-party defendants also made the requested payments. The agreement and payments are the alleged basis for Stein's claim of an accord and satisfaction and release.

While not raised by the parties, the first issue presented is determination of the rule of decision. Under Erie R.R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), a federal court sitting in a diversity action must apply the substantive law of the state in which it sits as well as that state's conflicts of laws. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). The rule in Illinois is that the validity of a release is governed by the law of the jurisdiction under which the release is given and delivered. Woodbury v. U.S. Casualty Co., 284 Ill. 227, 120 N.E. 8 (1918); Frazier v. Sims Motor Transport Lines, 196 F.2d 914 (7th Cir. 1952).*fn4 Therefore, Illinois law would apply in the case. (Other questions on choice of law are not considered because they are not relevant for purposes of this memorandum.)

The second and third arguments raised by Stein in his memorandum accompanying his motion are based on an alleged release and accord and satisfaction, which was pleaded as his third defense in his third party answer. Apparently the agreement and release were oral because no documents have been submitted by Stein to establish the existence of a written release. The affidavits of Lawrence G. Sucsy*fn5 and Ben B. Stein*fn6 do, however, attest to an agreement whereby the third-party defendants would contribute certain monies to a rescission fund for the Leisure Trend stock and the plaintiff would in turn discharge the third-party defendants from any liability or responsibility in connection with and trading of the stock. Stein did make this payment ($2,270.50) to the fund on July 28, 1972.*fn7 Other reference to the agreement is found in an agreement, dated July 13, 1972, reached between the plaintiff and Lawrence Sucsy and Nathan Shapiro. The affidavits have not been contradicted on the issue of release by any party to the litigation.

Sears' unverified memorandum does make several allegations regarding the alleged release. In paragraph seven it states the agreement of July 13, 1972 was never intended to be a release of Stein. The release was reached on July 28, however, and Stein was not a party to the July 13, agreement. The July 13, agreement is only important in so far as it might constitute a third-party beneficiary contract and as it evidences the plan to finance a rescission fund. Sears does not contradict Stein's or Lawrence Sucsy's affidavit that the agreement of July 28, was intended as a release.

Sears also argues there could be no accord and satisfaction because the check does not represent its total loss suffered. This is a misconception of the law. Simply stated, an accord is an agreement or settlement of an existing dispute, controversy or demand which presupposes a disagreement as to what is due. Canton Union Oil Co. v. Parlin S. Orendorff, 117 Ill. App. 622, 624, aff'd, 215 Ill. 244, 74 N.E. 143 (1905). The payment and acceptance of an amount in full settlement of a larger amount that is unliquidated or in dispute constitutes a good accord and satisfaction of the whole claim or demand. Smyth v. Kaspar Amer. State Bank, 9 Ill.2d 27, 136 N.E.2d 796 (1936); Metro-Goldwyn Mayer, Inc. v. ABC Great States, Inc., 8 Ill. App.3d 836, 291 N.E.2d 200 (1972). Thus the payment by Stein need not have been equal to the total loss since the loss was disputed and unliquidated and liability was contested. Furthermore, the rule in Illinois is that the acceptance of a check given in full settlement of a disputed claim is an accord and satisfaction if the creditor took the check with notice of the condition upon which the check was tendered. See cases collected at 1 Ill. Law & Prac., Accord & Satisfaction § 27, at 182 n. 51.

In summary, there was a valid accord and satisfaction reached on July 28, 1972, and there is no material issue of fact raised about its execution. All the argumentative questions of fraud raised by plaintiff run to another agreement that is not the subject of this motion.

There remains the question whether the release, given with the accord, precludes the third-party action against Stein. None of the parties has undertaken to research the law of release in Illinois. A release is a contract, Bracken v. Milner, 88 Ill. App.2d 50, 232 N.E.2d 241 (1st Dist. 1967), and is governed by ordinary contract principles. Accordingly, it may be oral.*fn8

Under Illinois decisions, if an insurer pays a loss suffered by the insured as a result of the actions of a third party, the insurer is subrogated to the insured's right of action against the party primarily at fault. National Cash Register Co. v. Unarco Indus., Inc., 490 F.2d 285 (7th Cir. 1974); Dworak v. Temple, 17 Ill.2d 181, 161 N.E.2d 258 (1951), aff'g 18 Ill. App.2d 225, 152 N.E.2d 197 (1st Dist. 1951). See 6A J. Appleman, Insurance Law & Practice, § 4051 (1962). As a consequence, "if an insured settles with one primarily responsible for the loss and releases him fully from all liability, such release detroys the insurer's right to subrogation and is a complete defense to an action on the policy." Tarzian v. West Bend Mutual Fire Ins. Co., 74 Ill. App.2d 314, 221 N.E.2d 293, 298 (1st Dist. 1966).*fn9 6A J. Appleman, Insurance Law & Practice, § 4093 (1972), Annot. 92 A.L.R.2d 102 (1963). Cf. Bernardini v. Home & Auto. Ins., 64 Ill. App.2d 465, 212 N.E.2d 499 (1st Dist. 1965).*fn10

The general view of the cases is that when an insured settles with a tortfeasor and the settlement is intended to be a total release of the tortfeasor, the insurer may not maintain an action against the wrongdoer for indemnity or reimbursement because the insurer's rights arise by subrogation to the insured's rights. And since the insured has released the tortfeasor and therefore has no further rights against him, neither does the subrogee. Annot. 92 A.L.R.2d 102, 112 (1963).

In summary, Illinois' decisional law and the treatises agree that when the insured releases a wrongdoer, the release destroys the insurer's right of subrogation.

Stein was fully released by Sears by virtue of an accord and satisfaction supported by adequate consideration. Because of the release INA lost its right of subrogation against Stein.

Therefore, it is the judgment of the court that the motion of third-party defendant Ben B. Stein for summary judgment should be granted. Judgment will enter in favor of third-party defendant Ben B. Stein and against third-party plaintiff Insurance Company of North ...

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