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SEARS, SUCSY & CO. v. INSURANCE COMPANY OF NO. AMER.
October 16, 1974
SEARS, SUCSY & CO., A DELAWARE CORPORATION, PLAINTIFF,
INSURANCE COMPANY OF NORTH AMERICA, DEFENDANT AND THIRD-PARTY PLAINTIFF, V. WESTCOTT TRAINOR ET AL., THIRD-PARTY DEFENDANTS.
The opinion of the court was delivered by: Marshall, District Judge.
MEMORANDUM OPINION AND ORDER
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).
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
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
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
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
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
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 ...