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Thornton v. Evans

November 1, 1982

LEONARD THORNTON AND WILLIAM CAROTHERS, ETC., ET AL., PLAINTIFFS-APPELLANTS,
v.
JAMES E. EVANS, ET AL., DEFENDANTS-APPELLEES



Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 79-C-2331 -- Thomas R. McMillen, Judge.

Cudahy, Circuit Judge, Fairchild, Senior Circuit Judge, and Peck, Senior Circuit Judge.*fn*

Author: Cudahy

CUDAHY, Circuit Judge.

Plaintiffs, who are members of the Teamsters Union and beneficiaries of the Central States, Southeast and Southwest Areas Health and Welfare Fund (the "Fund"), brought suit to recover damages allegedly resulting from a conspiracy to defraud the Fund of millions of dollars through an insurance scam. Defendants involved in the present appeal include Richard G. Kleindienst, former Attorney General of the United States, the law firm of Welch, Morgan and Kleindienst, James E. Evans, Donald P. Klekamp, and American Financial Corporation. Evidence presented in this case and in other proceedings arising out of the same alleged fraud*fn1 traces a pattern which seems distressingly prevalent today: the savings of working men and women are pilfered, embezzled, parlayed, mismanaged and outright stolen by unscrupulous persons occupying positions of trust and confidence. Plaintiffs here have obtained a default judgment against the defendant (Joseph Hauser) who was the primary actor in the fraudulent scheme. We must decide on this appeal whether the remaining defendants, who plaintiffs claim were part of a conspiracy to facilitate the fraud, were properly either dismissed or accorded summary judgments by the district court. We conclude that summary judgment was improperly granted to two defendants and that the case was improperly dismissed on the pleadings as to the other defendants.*fn2

I. FACTS

A. Alleged Fraudulent Transactions

The facts in this case, as gleaned from plaintiffs' succession of complaints, the depositions and affidavits of the defendants, and other record evidence, reveal a complex web of dubious financial arrangements among individuals and corporations.*fn3 Plaintiffs allege, and Kleindienst admits in his affidavit filed in Baker v. Old Security Life Insurance Co., No. 76 C 2904 (N.D. Ill.) (the " Baker affidavit"),*fn4 that in April, 1976, Kleindienst asked his friend, the late Frank E. Fitzsimmons, then president of the Teamsters Union, to intervene on behalf of Old Security Life Insurance Company ("Old Security") to encourage the Fund to favorably consider Old Security's bid to furnish insurance for members of the Fund. Kleindienst's overtures to Fitzsimmons were made at the request of an old acquaintance of Kleindienst, Thomas Webb, who had in turn been requested by defendant Joseph Hauser to seek avenues of influence in the union to secure the Fund's acceptance of Old Security's bid. Old Security subsequently received a contract award from the Fund to provide the insurance coverage, and Kleindienst and Webb received a $250,000 fee, which they split, for their role in securing the contract. In addition, Kleindienst was asked to represent a Hauser-controlled corporation in other matters.

Although the Fund began paying substantial insurance premiums to Old Security in May, 1976, the premiums were not retained or invested by Old Security. Rather, through an undisclosed co-insurance agreement with Family Provider Life Insurance Company ("Family Provider"), Old Security transferred 80% of the premiums to Family Provider and Family Provider assumed 80% of Old Security's risk.*fn5 The parent corporation of Family Provider, Great Pacific Corporation ("Great Pacific"), was controlled by Joseph Hauser and his associates, including John Boden and Brian Kavanaugh.*fn6

On May 3, 1976, Great Pacific, acting through Hauser and its new counsel, Kleindienst, reached an agreement with defendant American Financial Corporation ("American") to acquire an American subsidiary (an insurance firm licensed in New Jersey) and Arizona real estate owned by another American subsidiary, Continental Homes, Inc. ("Continental Homes"). American was represented in this transaction by attorneys James Evans and Donald Klekamp, who are also defendants here. Great Pacific's check to American for $1 million as a partial down payment was returned to American on May 6 as dishonored for lack of sufficient funds.

The transaction did not fall through on this account, however, because, according to plaintiffs' complaint, Hauser and his associates illegally diverted premiums paid by the Fund to Old Security to cover the Great Pacific check. On May 10, the Fund paid premiums of $1.7 million to Old Security under the insurance agreement. On or about May 11, Hauser caused Old Security to transfer $1.5 million to Family Provider's Arizona bank accounts, presumably pursuant to the co-insurance agreement between those two corporations. At about the same time, Hauser caused Family Provider to declare a $1.8 million dividend to its parent, Great Pacific.*fn7 Great Pacific allegedly used these funds, most of which were originally deposited with Old Security as premiums, to complete the down payment to American with respect to the acquisition of the insurance company and the real estate, by placing approximately $1 million in an account at the Provident Bank in Cincinnati, Ohio.*fn8 The complaint does not allege that any of the defendants, other than Hauser, were aware at the time of these transactions that premiums paid to Old Security had been surreptitiously transferred to Great Pacific as a "dividend" from Family Provider, and then transferred to American. Further, the plaintiffs have cited to specific evidence linking the other defendants to Hauser's alleged diversion of premiums paid by the Fund to Old Security and his manipulation of Family Provider to declare a dividend to Great Pacific. The allegation connecting defendants, other than Hauser, to these actions is to the effect that, at a later time, the defendants, including Hauser, conspired together to conceal the diversion of these premiums.

Hauser's scheme began to unravel several days later when J. W. Trimble, Director of the Arizona Insurance Department, discovered the unlawful dividend paid by Family Provider to Great Pacific.*fn9 Trimble notified Family Provider that he would suspend its license to operate in Arizona unless the $1.8 million dividend was immediately returned to Family Provider. On May 19, Hauser and Boden met with Kleindienst in his Washington, D.C. office and informed him of Trimble's demand; Kleindienst states in his affidavit filed in support of his motion for summary judgment in this case that this was the first time he learned of the Family Provider dividend to Great Pacific. The apparent effect of Trimble's demand was to imperil the deal between Great Pacific and American (if the $1.8 million were to be returned). Further, Trimble's action affected the contract between the Fund and Old Security (since Family Provider's problems necessarily implicated the primary insurer).

The role of the defendants in the events of the next few days is crucial to determining whether these defendants "conspired" with others to defraud the Fund of millions of dollars of insurance premiums in breach of fiduciary duties. Kleindienst states in his affidavit filed in the instant case that immediately after Hauser's revelation to him about the Family Provider dividend, he researched Arizona law, concluded that the dividend was illegal and advised Hauser and Boden to return, on behalf of Great Pacific, an unencumbered $1.8 million to Family Provider. Kleindienst further asserts that Hauser and Boden informed him later on May 19 that $1.8 million in unencumbered funds had been placed in Family Provider's bank accounts in the Provident Bank and in the Diplomat Bank in Washington, D.C. Kleindienst then informed Trimble in a telephone conversation (confirmed with a telegram sent by Kleindienst to Trimble on the same day) that Great Pacific had deposited $1.8 million in Family Provider's unencumbered bank accounts. Although not specifying in his affidavit the date or time, Kleindienst also claims that he "subsequently" requested both the Provident Bank and the Diplomat Bank to confirm to Trimble the deposits of unencumbered funds in the Family Provider accounts.

A meeting was held the next day, May 20, at Kleindienst's office allegedly attended by, among others, Hauser, Kavanaugh, Boden, Kleindienst, Evans and Klekamp. Plaintiffs claim that at this meeting, the defendants agreed to fraudulently represent to Trimble that the $1.1 million held in Family Provider's Provident Bank account was unemcumbered even though that money was actually "controlled" by American. Defendants Evans and Klekamp explained in their depositions that the May 20 meeting resulted in an agreement that American's $1.1 million interest in the proceeds of the real estate transaction between its subsidiary, Continental Homes, and Great Pacific would be deposited in Family Provider's account at the Provident Bank. With this money, Family Provider was permitted to "invest" in the real estate transaction between Continental Homes and Great Pacific. During the meeting, several letters were drafted by Evans, Klekamp and Kavanaugh for the purpose of effectuating the transfers of funds resulting from these decisions. One of these letters provided, in furtherance of the new investment by Family Provider in the Great Pacific -- Continental Homes transaction, that the deposit in Family Provider's account at the Provident Bank was to be pledged to Continental Homes, the American subsidiary. See Ex. II (Plaintiffs' App. at 10). Evans and Klekamp explained that this unusual and questionable transaction*fn10 was in American's interest since this pledge kept the transaction between American and Great Pacific from collapsing. It is undeniable, however, that as a result of the transactions, the $1.1 million held in Family Provider's Provident Bank account was pledged as security to Continental Homes; thus, the $1.1 million was not unencumbered as Kleindienst represented to Trimble.

Although the meeting where these agreements were reached was held in Kleindienst's personal office, and the letters setting out the agreements and the security arrangements necessary to the agreements were drafted in his office and typed by his secretary, Kleindienst asserts in his affidavits that he was not aware that Kavanaugh, Evans and Klekamp had prepared letters pledging the $1.1 million in Family Provider's Provident Bank account to American's subsidiary (Continental Homes).*fn11 Kleindienst asserts this lack of knowledge and awareness even though he was the attorney purportedly representing Great Pacific at the time.

Evans testified in his deposition that, on the day after the meeting in Kleindienst's office (May 21), Kleindienst informed him in a telephone conversation*fn12 that Trimble wanted confirmation that $1.1 million was held unencumbered in Family Provider's account at the Provident Bank and Kleindienst asked Evans to provide such confirmation by telegram. Evans asserts, albeit somewhat equivocally, that he "voic[ed] some objection to Mr. Kleindienst's suggested language and I believe the words in respect to unencumbered would not be acceptable as a result of the escrow pledge." Evans Dep. at 53-54; see id. at 50-55. Instead of using the term "unencumbered," Evans caused the Provident Bank to send the following telegram to Trimble:

On Thursday, May 20, 1976, there was deposited to the account of the Family Provider Life Insurance Company by Great Pacific Corporation the sum of $1.1 million into account #0362-351. As of 2:30 p.m. on May 20, 1976 Phoenix, Arizona time, such balance was in the account and is currently maintained. If you have any further questions please call me at (513) 579-2000.*fn13

Plaintiffs' App. at 11-12. Kleindienst's affidavits filed in support of summary judgment in this case and in the Baker case, although admitting that he asked the banks to confirm the status of Family Provider's accounts to Trimble, are silent with respect to this alleged conversation with Evans.*fn14

Plaintiffs argue that the defendants facilitated Hauser's efforts to defraud the Fund by making a knowing misrepresentation (perhaps more precisely characterized as a deceptively incomplete representation) to Trimble. This alleged misrepresentation dissuaded Trimble from further investigation of Family Provider and related companies, through which the fraud on the Fund might have been uncovered sooner.

According to the allegations of the complaint, defendants' next step in furtherance of the conspiracy was taken on May 24 at a hearing held before Trimble in Arizona.*fn15 Plaintiffs allege that Kleindienst told Trimble that the $1.1 million held in Family Provider's Provident Bank account was unencumbered. In reliance on Kleindienst's representation, Trimble, according to plaintiffs, did not suspend Family Provider's license to conduct insurance business in Arizona. Kleindienst claims, on the other hand, that he represented Great Pacific and not Family Provider at this hearing, and that he advised Trimble only that Family Provider would not pay any more illegal dividends to Great Pacific. The transcript of the hearing reveals that Kleindienst, although not specifically claiming that the funds were unencumbered, at least argued to Trimble that Family Provider "has, as the evidence shows, the $1.8 million dollars." In re Family Provider Life Insurance Co., No. 2129, Tr. at 46 (Ariz. Dept. of Ins. May 24, 1976).*fn16 This representation becomes more significant in light of Boden's false testimony at this hearing that the Family Provider account at the Provident Bank was not encumbered. Id. at 33-34.*fn17 Plaintiffs allege that, absent the representations made by Boden and Kleindienst, the illegal diversion of funds from Family Provider would have been halted sooner.

The deal between American (and its subsidiaries) and Great Pacific (joined by its subsidiary, Family Provider) collapsed shortly after the hearing in Arizona when New Jersey authorities apparently refused to approve Great Pacific's acquisition of American's insurance company subsidiary. Kleindienst relates in his affidavit filed in the Baker case that he and one of his law partners then sought another insurance company for acquisition by Great Pacific. An appropriate candidate -- National American Life Insurance Company ("NALICO") -- was found, an agreement to purchase was drafted, and the sale was completed on June 15, 1976.*fn18 Kleindienst claims that shortly before this new transaction was consummated, he asked Hauser if any of the $2 million Hauser planned to use to purchase NALICO would come from the Family Provider accounts at the Provident and Diplomat Banks; according to Kleindienst, Hauser said "No." Sometime early in June, 1976, however, the $1.1 million in Family Provider's Provident Bank account had been withdrawn and, in fact, it was used by Hauser to fund in part the purchase of NALICO. Boden also claims, as reported by Kleindienst, that in a June 11 telephone conversation, Kleindienst told him that ...


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