APPEAL from the Circuit Court of Cook County; the Hon. BEN
SCHWARTZ, Judge, presiding.
MR. JUSTICE JIGANTI DELIVERED THE OPINION OF THE COURT:
Rehearing denied February 9, 1977.
Plaintiffs, Central National Chicago Corporation, a Delaware corporation (Central National), and Rawleigh, Moses & Co., Inc., a Delaware corporation (Rawleigh, Moses of Delaware), brought this action to recover on an insurance contract issued by defendant Lumbermens Mutual Casualty Co., an Illinois corporation (Lumbermens). Plaintiffs also brought an action against Indiana Industries, Incorporated, an Indiana corporation (Indiana Industries) and Rawleigh, Moses & Co., Inc., an Indiana corporation (Rawleigh, Moses of Indiana) for alleged breach of contract. Suit was brought in the alternative: count I alleged Indiana Industries and its subsidiary Rawleigh, Moses of Indiana breached certain warranties as to the validity of accounts receivable it sold to plaintiffs as part of a contract of sale dated December 30, 1970; and count II alleged that Lumbermens had issued an insurance policy to protect the plaintiffs against losses arising from the purchase of those accounts receivable. The coverage on the insurance policy became effective the same date as the sales contract, December 30, 1970. Defendants Indiana Industries and Rawleigh, Moses of Indiana refused to indemnify plaintiffs on the ground that plaintiffs' loss was caused by the purchase of fraudulent accounts during 1971, that is, after the contract of sale of December 30, 1970. Defendant Lumbermens refused to indemnify plaintiffs on the ground that the loss occurred prior to the issuance of the insurance contract on December 30, 1970.
Defendant Lumbermens filed a counterclaim as subrogee of plaintiffs for indemnification against defendants Indiana Industries and Rawleigh, Moses of Indiana in the event judgment was entered against Lumbermens on the insurance policy issued to the plaintiffs.
All parties stipulated that there was no genuine issue of material fact and moved for summary judgment. Summary judgment was granted in favor of plaintiffs against defendant Lumbermens on count II, from which Lumbermens appeals; in favor of defendants Indiana Industries and Rawleigh, Moses of Indiana against plaintiffs on count I, from which plaintiffs appeal in the event the judgment against Lumbermens on count II is reversed; and on the counterclaim, in favor of counterdefendants Indiana Industries and Rawleigh, Moses of Indiana against counterplaintiff Lumbermens, from which Lumbermens appeals. Plaintiffs cross-appeal from the court's denial of prejudgment interest on the judgment against Lumbermens. The question of liability rests upon a determination of when the loss was sustained. To make such a determination, a basic understanding of the circumstances surrounding the occasion of the loss is needed.
Plaintiff Rawleigh, Moses of Delaware is a wholly owned subsidiary of plaintiff Central National Chicago Corporation. It is a commercial factor which is described by the parties as a company which provides financing to manufacturers by purchasing their accounts receivable which represent goods delivered but not yet paid for.
Rawleigh, Moses of Indiana is a subsidiary of the Bank of Indiana, which in turn is substantially owned by defendant Indiana Industries. Rawleigh, Moses of Indiana is also a factor, and as part of its business it at various times purchased accounts receivable from the E.C.T. Corporation of Fayetteville, North Carolina, a manufacturer chiefly of heavy duty canvas items such as tents, ammunition carriers, and other textile products. On December 30, 1970, plaintiffs entered into an agreement with Indiana Industries and Rawleigh, Moses of Indiana to purchase the business assets and assume all obligations and liabilities of Rawleigh, Moses of Indiana. Included in the purchase were 20 factored accounts of E.C.T. The purchase agreement included representations and warranties by defendants Indiana Industries and Rawleigh, Moses of Indiana that the factored accounts purchased were "valid, enforceable, genuine" and what they purported to be on their face. Defendants Indiana Industries and Rawleigh, Moses of Indiana also agreed to indemnify and hold harmless Rawleigh, Moses of Delaware and Central National against any loss suffered by Rawleigh, Moses of Delaware or Central National arising from any breach of the representations and warranties contained in the agreement.
The E.C.T. Corporation accounts receivable purchased by plaintiffs purported to be valid claims against one of E.C.T.'s customers, the Defense Contract Administration Services Region of the Defense Supply Agency of the United States Government (DCASR). After its purchase of Rawleigh, Moses of Indiana, Rawleigh, Moses of Delaware continued to act as a factor and purchased DCASR accounts directly from E.C.T. Corporation. In late August, 1971, over eight months after the contract of sale, Rawleigh, Moses of Delaware began to notice irregularities in the collection of the DCASR accounts: there was an increase in the length of the collection period, and DCASR appeared to be taking a purchaser's discount for prompt payment on invoices apparently past due. Upon investigation, Rawleigh, Moses of Delaware discovered that E.C.T. had been engaged in the fraudulent practice of selling accounts receivable representing goods which either had not yet been shipped or had not been produced at the time the accounts were sold to the factor.
The scheme was perpetrated through the efforts of Morton M. Rose, president of E.C.T. Corporation. Rose would furnish the factor with lists of accounts allegedly due, supported by forged and fraudulent bills of lading and government inspection report forms. The factor, Rawleigh, Moses of Delaware, would then pay E.C.T. for these alleged accounts receivable. In the course of its business, E.C.T. would ship or manufacture and ship the goods represented by these accounts. When this occurred, Rose would see to it that the valid invoices issued to DCASR bore the same serial numbers as those sold to the factor, though the dates were obviously later. Upon receipt of the goods, DCASR would remit the amount due, based on the valid invoices. The remittance advices submitted by DCASR referred only to the serial numbers and amounts of the invoices; the dates of the accounts were not included. Payments thus received were credited to the like-numbered but invalid invoices held by Rawleigh, Moses of Delaware. This scheme began in April, 1970, some nine months before the purchase of Rawleigh, Moses of Indiana by plaintiffs, and continued until it was discovered in September, 1971.
Defendant Lumbermens insured plaintiff Central National under a policy known as a Bankers Blanket Bond against losses resulting from acceptance or purchase of forged or counterfeited business securities, documents, or other written instruments. When plaintiffs purchased the business and assets of Rawleigh, Moses of Indiana, including the E.C.T. accounts receivable, Central National asked that Rawleigh, Moses of Delaware be added as an insured under the bond. Coverage was extended by the addition of a loss sustained endorsement, effective December 30, 1970, which provided that:
"* * * no loss shall be recoverable under the bond unless it occurred subsequent to the date the above named insured [Rawleigh, Moses of Delaware] was purchased by Central National Bank in Chicago."
The critical issue in determining liability is deciding when the loss was sustained. On December 30, 1970, as part of the purchase of the business and assets of defendant Rawleigh, Moses of Indiana, plaintiffs purchased twenty fraudulent DCASR accounts receivable. These accounts had a net value of $363,078.34. Pursuant to Rose's scheme, E.C.T. shipped or manufactured and shipped all the goods represented by these accounts. Shipment was made at various times, but all the goods represented by the accounts transferred December 30, 1970, had been delivered by March 3, 1971. DCASR made payments to Rawleigh, Moses of Delaware for these goods throughout January, February and March of 1971. The final payment from DCASR for the goods represented by the fraudulent accounts of December 30, 1970, was received by Rawleigh, Moses on March 26, 1971.
During 1971, after plaintiffs Central National and Rawleigh, Moses of Delaware had purchased the business and assets of Rawleigh, Moses of Indiana, Rose continued the practice of selling fraudulent accounts to the factor and later shipping or manufacturing and shipping the goods, for which DCASR would remit payment to Rawleigh, Moses of Delaware. Between May 17 and September 9, 1971, when the sceme was discovered, plaintiff Rawleigh, Moses of Delaware bought 30 additional fraudulent DCASR accounts directly from the E.C.T. Corporation, having a net value of $386,307.46. E.C.T. was unable to either manufacture or ship the goods represented by these accounts to DCASR, which consequently never made payments to be applied to these accounts.
Defendant Lumbermens claims that there was in fact no interruption in E.C.T.'s methods of operation between December 30, 1970, and May 17, 1971. Rose continued his practice of furnishing the factor with predated DCASR invoices after Rawleigh, Moses of Indiana was sold. Lumbermens contends that the notion of a gap between March 26, 1971, and May 17, 1971, grew from Central's limited examination of the fraud, and that if the examination had begun earlier, fraudulent invoices prior to May 17, 1971, would have been discovered. However, ...