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Regas v. Continental Casualty Co.





Appeal from the Circuit Court of Cook County; the Hon. James C. Murray, Judge, presiding. JUSTICE MCNAMARA DELIVERED THE OPINION OF THE COURT:

Plaintiffs, James A. Regas and R. Kymn Harp, brought a declaratory judgment action against defendant, Continental Casualty Company, to determine their rights under a policy of insurance for legal malpractice issued by Continental, and to recover any proceeds due. Continental had refused to defend plaintiffs in an action brought by a third party which resulted in a judgment against plaintiffs. Both sides sought summary judgment in the present case, and the trial court granted plaintiffs' motion and entered judgment against Continental in the amount of $30,000. Continental appeals.

Continental issued a policy of insurance for legal malpractice coverage to plaintiffs, as attorneys with the firm of Regas and Frezados, a/k/a James A. Regas & Associates of Chicago. The policy provides in pertinent part:

"To pay on behalf of the insured, all sums which the insured shall become legally obligated to pay as damages:

1. arising from the performance of professional services for others in the insured's capacity as a lawyer, real estate title insurance agent or notary public because of an act or omission of the insured or of any other person or firm for whose act or omission the insured is legally responsible.

When the insured acts as an administrator, conservator, executor, guardian, trustee, receiver, or in any other similar fiduciary activity, any act or omission committed by the insured in such capacity shall be deemed to have been committed during the performance of the insured's professional services.

The Company [Continental] shall have the right and duty to defend any suit against the insured seeking damages which are payable under the terms of this policy * * * even if any of the allegations of the suit are groundless, false or fraudulent, and may make such investigation and settlement of any claim or suit as it deems appropriate; * * *."

During the fall of 1982, plaintiffs represented Karen S. Hettenbach in the purchase and resale of an art collection. On December 23, 1982, Hettenbach requested that Harp, an attorney employed by Regas, represent her in the closing of a real estate transaction in Indiana on that day. Hettenbach was purchasing an interest in certain real property. The funds for the purchase were to be transferred to Hettenbach on December 23 at the Southern Indiana Bank and Trust Company (bank) in Evansville, Indiana. That morning Harp was informed by Elmer Lant, president of the bank, that the funds for the purchase had not arrived at the bank. Thereafter, Hettenbach informed Harp that the necessary funds would be transferred into the law firm's escrow account at a bank in Chicago. This escrow account existed only for the receipt and distribution of clients' funds, and Hettenbach had previously used the account in connection with the art transaction.

Harp made several telephone calls to determine if the funds had arrived in his firm's escrow account, but was told that the account had not received the funds. Hettenbach also made several calls in an attempt to secure and verify a transfer of funds to the account. Without the transfer of funds, it was not possible to close the real estate transaction. Finally, Lant suggested that Hettenbach obtain an escrow check from plaintiffs to cover the down payment of $675,000. Lant informed Hettenbach that he had bank-to-bank confirmation that the funds had been wire-transferred to plaintiff's account. After a telephone conversation with Regas, plaintiffs agreed to issue the escrow check on the conditions that Lant verify that the necessary funds had been wire-transferred to the escrow account and would arrive by the following Monday; that Lant agree not to deposit the check drawn on the escrow account until there was a confirmation of receipt of the funds into the escrow account; and that plaintiffs would stop payment on the check if the funds were not received. Lant orally agreed to these conditions.

Harp then wrote the check drawn on the escrow account for $675,000 made payable to the bank. The escrow account did not have sufficient funds to cover the check, nor did it contain any funds of Hettenbach at that time. Hettenbach did not offer to guarantee payment of the escrow check. After receiving the check, Lant directed the bank to issue cashier's checks to the sellers of the property. Lant did not issue the cashier's check until receipt of the escrow check because he had told the sellers that the funds had been received by the bank. Neither Harp nor Hettenbach told the sellers that there were insufficient funds of Hettenbach to purchase the property.

No funds were transferred to the escrow account on behalf of Hettenbach by Monday, December 27, the next regular business day. In response, plaintiffs stopped payment on the escrow check to the bank on December 28. They also notified the bank by mailgram that payment had been stopped. By letter dated January 10, 1983, the bank made a formal demand upon plaintiff law firm to deliver $675,000, which was refused. By letter dated January 24, 1983, plaintiffs notified Continental of a possible claim subject to coverage under their insurance policy, related the facts and circumstances surrounding the transaction, and forwarded the bank's letter.

On February 9, 1983, the bank filed suit against plaintiffs in the Federal district court for the Southern District of Indiana. According to count I, plaintiffs issued an escrow check to the bank knowing that it would not be honored or paid, which constituted "check deception." (Ind. Code secs. 35-43-5-5, 34-4-30-1 (1981).) Count II charged a violation of the Indiana Code which provides that one who delivers a check payable to a financial institution, and stops payment on the check without legal cause, if found liable in a court action, is also liable for interest of 18% per annum on the check amount from the date of its execution until payment in full. (Ind. Code sec. 28-2-8-1 (1981).) The bank sought recovery of $675,000 plus treble damages, costs and attorney fees. On February 16, 1983, when Harp was served, he transmitted the summons and complaint to Continental along with an explanatory letter. In March 1983, Harp again notified Continental of the potential claim and enclosed sworn statements from himself and Hettenbach, setting forth facts relating to the bank's claim.

On May 5, 1983, the bank filed an amended complaint against plaintiffs, adding a third count. Count III alleges in pertinent part:

"2. That Defendant James A. Regas & Associates, conducted business as a law firm utilizing their account with American National Bank & Trust Company of Chicago for the purpose and in the course of legal representation.

3. That Defendant R. Kymn Harp, was at all relevant times hereto an attorney in the law firm of James A. Regas & Associates and was acting in his capacity as an ...

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