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December 16, 1993

HELLER INTERNATIONAL CORPORATION, a Delaware corporation, Plaintiff,
ALEC SHARP (a United Kingdom subject, as Lead Underwriter of and for all the Subscribing Syndicates of Underwriters of Lloyd's London); GUARDIAN ROYAL EXCHANGE ASSURANCE COMPANY, LIMITED, a United Kingdom Corporation; ASSICURAZIONI GENERALI, an Italian corporation, BELLEFONTE INSURANCE COMPANY, a United Kingdom corporation, SPHERE INSURANCE COMPANY, LIMITED, a United Kingdom corporation; and DRAKE INSURANCE COMPANY, LIMITED, a United Kingdom corporation, Defendants.


The opinion of the court was delivered by: GEORGE M. MAROVICH

Plaintiff, Heller International Corporation ("Heller") brings this action for breach of contract in its Fifth Amended Complaint against Alec Sharp, lead underwriter of a syndicate of underwriters at Lloyd's of London, Guardian Royal Exchange Assurance Company, Ltd., Assicurazioni Generali, Bellefonte Insurance Company, Sphere Insurance Company, Ltd., and Drake Insurance Company, Ltd. ("Defendants"). Heller alleges that Defendants refused to indemnify it under a fidelity bond issued by Defendants for losses sustained due to an employee's dishonest and fraudulent acts. As a result of the Defendants' refusal to honor the bond, Heller maintains that it was forced to borrow $ 10 million dollars and has now paid in excess of $ 10 million in interest. Defendants now move this Court under Fed. R. Civ. P. 12(b)(6) to dismiss Heller's claim for recovery of consequential damages. In addition, Defendants also seek summary judgment in their favor on Heller's alternate claim for recovery of prejudgment interest. For the reasons set forth below, the Court denies Defendants' motion to dismiss and denies Defendants' motion for summary judgment as moot.


 Heller was assured under a periodically-renewed "Comprehensive Commercial Bond" ("bond") throughout most of the period relevant to this action. Under this bond, Defendants received premiums from and assumed several liability to Heller in the following manner: Underwriters of Lloyd's, London, 85.29%; Assicurazioni Generali, 6.54%; Guardian Royal Exchange Assurance Company Ltd., 3.27%; and Sphere Insurance Company, Ltd., Drake Insurance Company, Ltd., and Sphere Insurance Company, Ltd. "B" 1.63% (shared among themselves 45%, 45%, and 10% respectively). Heller paid all premiums and complied with the conditions of the bond.

 Under a section of the bond entitled "Fidelity Coverage," the bond provided Heller with indemnification up to $ 10 million for:

Loss of Money, Securities and other property which the Insured shall sustain resulting from one or more fraudulent or dishonest acts committed by an Employee, acting alone or in collusion with others.
Dishonest or fraudulent acts as used in this Insuring agreement shall mean only dishonest or fraudulent acts committed by such an employee with the manifest intent:
(a) to cause the Insured to sustain such loss; and
(b) to obtain financial benefit for the employee, or for any other person or organization intended by the Employee to receive such benefit, other than salaries, commissions, fees, bonuses, promotions, awards, profit sharing, pension or other employee benefits earned in the normal course of employment.

 Payment was due within 30 days of Heller's submission of a Proof of Loss for sustained losses falling within the terms of the bond.

 On December 21, 1982, Heller delivered a Proof of Loss to Alfred J. Morgan ("Morgan"), the Defendants' agent, setting forth losses in excess of $ 15 million resulting from the fraudulent activities of one of its employees, Irving Chudy. Chudy had been responsible for making, monitoring, and funding various loans from the Phoenix office.

 Defendants refused to indemnify this claim. As a result, Heller claims it was forced to borrow an additional $ 10 million from January 20, 1983 to the present. Heller alleges that the interest costs on this loan exceed $ 10 million and seeks the original $ 10 million on the bond and additional consequential damages in the amount of the interest cost of these borrowings. In the alternative, Heller seeks the $ 10 million on the bond plus prejudgment interest from January 20, 1983 to the date of any judgment. Pursuant to the Illinois Interest Act, 85 ILCS 205/2 (1993), this prejudgment interest would be calculated at an annual rate of five percent.

 As noted above, between December 7, 1971 and October 29, 1981, Chudy managed Heller Western's Phoenix office. Beginning about February 21, 1978 and continuing through October 29, 1981, he engaged in a series of transactions resulting in the misappropriation of Heller funds for the benefit of himself and others. Chudy misappropriated funds, amounting to over $ 15 million, by giving false oral and written reports and establishing, manipulating and funding nonexistent loans.

 The first series of transactions resulted in an alleged loss to Heller of approximately $ 2 million. Between February 22, 1978 and September 14, 1981, Chudy falsely approved loans to a number of Heller borrowers' accounts, including Brunswick Construction, Arizona Furniture, Sandia Steel, and Con Lee. Subsequently, the proceeds of these loans were transferred from the borrowers' accounts into a variety of banking accounts in which Chudy had interest. Heller claims a sustained loss of $ 1,985,000 as a result of Chudy's actions. Because the first two transactions in this series occurred before the effective date of coverage, Heller claimed indemnification for losses of $ 1,885,000 within the terms of the bond.

 In a second series of similar transactions between February 14, 1979 and August 7, 1979, Chudy allegedly obtained $ 38,253.39 for the benefit of Brunswick Construction Company, a Heller borrower. Heller claims a sustained loss for this entire amount and seeks indemnification under the terms of the bond.

 In a third series of transactions, Heller claimed Chudy fraudulently obtained funds amounting to $ 13,750,490.09 for the benefit of himself and a Heller customer, Hirsh-Evans, Inc. ("Hirsh-Evans"). This complicated series of events began in late 1980 when Sidney Legg ("Legg"), Heller Western's Los Angeles-based President, directed Chudy to maintain the balance of Hirsh-Evans' loans at or below its then current level of $ 9.5 million. Chudy falsely assured Legg that Hirsh-Evans was about to obtain $ 4 million from other sources that it would apply to its outstanding debt to Heller. In order to reduce this debt, Chudy advanced $ 2 million of Heller monies to Condo Corporation, a borrower affiliated with a dormant Heller account. He subsequently caused these funds to be transferred or "washed" through a bank and returned to Heller as a payment to the Hirsh-Evans account to "reduce" its debt. Chudy then created a second fictitious account for Pioneer Corporation and reactivated a third dormant account, American ...

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