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SORRANO v. NEW YORK LIFE INSURANCE CO.

June 6, 2005.

Frank P. and Jean M. Sorrano, et al., Plaintiffs,
v.
New York Life Insurance Co., et al., Defendants.



The opinion of the court was delivered by: RONALD GUZMÁN, District Judge

MEMORANDUM OPINION AND ORDER

This case involves some thirty-four plaintiffs. The case was tried concurrently to the court and to the jury. On August 31, 2001, after four weeks of trial and the presentation of dozens of witnesses and more than one thousand exhibits, the jury returned verdicts on plaintiffs' claims for fraud and negligent supervision and retention. The jury found New York Life ("NYL") liable for negligence as to some plaintiffs, Carmela and Samuel Ciraulo, $206.00, Cathy and Daniel Crivellone, $5004.00, Estate of Dominick Giacomino, $8,116.00, Lena Karczewski, $42,100.00, Timothy Karczewski, $35,348.00, but not as to others; and found for the defendant, NYL, as to all of the common-law fraud counts. The pretrial order reserved for the court the determination of plaintiffs' claims under the Illinois Consumer Fraud and Deceptive Business Practices Act, 815 ILL. COMP. STAT. 505/1 et seq. ("the Act" or "ICFA"). The remaining plaintiffs are Joseph & Mary Lobraico, Frank & Jean Soranno, the Estate of Martha Soranno, Lena & Timothy Karczewski, Elroy & Maria Wilke, Raymond & Ann Witczak, Peter Witczak, Paul Giacomino, Pasquale Matranga, Frank Matranga, Catherine Crivellone, Daniel Crivellone, Samuel & Carmella Ciraulo, Lynn Von Boeckmann, William Von Boeckman, Jay Von Boeckmann and Tod Von Boeckmann. (Am. Compl., Count XII.)*fn1

To maintain a cause of action under ICFA, a plaintiff must prove: (1) a deceptive act or practice by the defendant, (2) the defendant's intent that the plaintiff rely on the deception, (3) the occurrence of the deception in the course of conduct involving trade or commerce, and (4) actual damage to the plaintiff (5) proximately caused by the deception. Oliveira v. Amoco Oil Co., 776 N.E.2d 151, 160 (Ill. 2002). In the case at bar, each plaintiff must establish that the defendant, NYL, engaged in the misrepresentation or concealment, suppression or omission of any material fact, with the intent that the plaintiff rely upon the misrepresentation, concealment, suppression or omission of such material fact and that they suffered actual damage as a result of the misrepresentation concealment, suppression or omission. The plaintiff's burden of proof under ICFA is a preponderance of the evidence rather than the clear and convincing standard required in the common-law fraud counts submitted to the jury. Avery v. State Farm Mut. Auto. Ins. Co., 746 N.E.2d 1242, 1262 (Ill.App.Ct. 2001); Cuculich v. Thomson Consumer Elecs., Inc., 739 N.E.2d 934, 939-40 (Ill.App.Ct. 2000); Malooley v. Alice, 621 N.E.2d 265, 268-69 (Ill.App.Ct. 1993); Roche v. Fireside Chrysler-Plymouth, Mazda, Inc., 600 N.E.2d 1218 (Ill.App. Ct. 1992) (stating standard of proof required on statutory fraud claim is lenient, and single transaction is sufficient to establish claim under ICFA). A material fact exists where a buyer would have acted differently knowing the information, or if it concerned the type of information upon which a buyer would be expected to rely in making a decision whether to act. Mackinac v. Arcadia Nat'l Life Ins. Co., 648 N.E.2d 237, 207 (Ill. 1995). Under ICFA, it is unnecessary to plead or prove a common-law duty to disclose in order to state a valid claim of consumer fraud based on an omission or concealment. Connick v. Suzuki Motor Co., Ltd., 656 N.E.2d 584, 595 (Ill. 1996) (citing Celex Group, Inc. v. Exec. Gallery, Inc., 877 F. Supp. 1114, 1129 (N.D. Ill. 1995)); Totz v. Continental Du Page Acura, 602 N.E.2d 1374, 1380-81 (Ill. 1992) (stating that the legislature intended the Act to expand the rights of consumers beyond the common law to eliminate all forms of deceptive or unfair business practices). In order to recover damages under the ICFA, a plaintiff must establish that his injury is a direct and proximate result of the alleged violation of the Act. Petrauskas v. Wexenthaller Realty Mgmt., Inc., 542 N.E.2d 902, 909 (Ill. 1989).

  Because the elements necessary to prove a cause of action under ICFA are substantially different from a common law fraud claim, and the burden of proof is lower under the ICFA, the plaintiffs' failure to obtain a jury verdict on their common law claims does not preclude a finding for plaintiffs on their ICFA count.

  Plaintiffs assert that NYL is liable for the deceptive acts of its agent, David Freitag. Under Illinois law, an agent is a person who acts for a principal in accordance with a consensual arrangement and who is subject to the control or right to control by the principal. Olympic, Commissary Co. v. Industrial Comm'n, 20 N.E.2d 86, 89 (Ill. 1939); Heartly v. Red Ball Transit Co., 176 N.E. 751, 753-754 (Ill. 1931). A principal is liable to third persons for the acts of its agent in the transaction of the business of the principal if the acts are done within the scope of the agent's employment. Pacific Mut'l Life Ins. v. Haslip, 499 U.S. 1 (1991); Ackerman v. Northwestern Mut'l Life Ins. Co., 172 F.3d 467 (7th Cir. 1999); Holley v. Gurnee Volkswagen & Oldsmobile, Inc., No. 00 C 5316, 2001 WL 243191 (N.D. Ill. Jan. 4, 2001). The court finds that David Freitag was hired as an insurance agent by NYL. He was trained extensively by NYL as to the different types of products NYL sold and how to sell such products to the public. He was expressly authorized to sell NYL products. He was paid by commission on the products he sold. His NYL supervisor's compensation also was based on the commissions earned by Freitag as well as the other agents he supervised. He was supervised by NYL in all aspects of his sales. He was required to spend certain hours making phone calls and contacts for new clients. He was supervised in the types of representations he could make and although authorized to use NYL's letterhead and logo on his business cards, his use in that regard was also supervised and controlled by the company. He was supervised as to the amount and type of products he sold to particular clients. (Tr. 92.) He was clearly acting as an agent within the scope of his employment for NYL and NYL is liable for Freitag's actions.*fn2

  From a review of the evidence, the court finds that NYL made the various material misrepresentations both through its agent Freitag and through other employees and officials in the course of conduct involving trade or commerce.*fn3 These representations took different forms as the relationship between the parties progressed. Initially, Freitag misrepresented the amount of interest that the products would earn and the cash value to each plaintiff. He also misrepresented how quickly the life insurance policies would become self-funding. He misrepresented to plaintiffs that whole life policies were good retirement endowments and good college saving plans. He told them it was smart to use annuities to fund life insurance products and sold them policies that were not suitable for them. (Tr. at 372, 373.) Later on, he misrepresented, both orally and by sending them false statements on company letterhead, the balance of their accounts. Specifically, he misrepresented to Ray Witczak the rate of return or interest he would receive on the annuity he sold to Witczak. (Id. at 107.) He also sent a confirmation sheet to Witczak repeating the inflated rate of return. At some point, he told Witczak that the withdrawals he was making on his account with NYL from the pension rollover were only interest and not principal. (Id. at 909.) He repeated this lie to Nordic Financial as well to help Witczak obtain a loan. (Id. at 119-21.) He sold NYL products based upon the same or similar misrepresentations to Paul & Pat Giacomino, Frank & Jean Soranno, Mary & Joseph Lobraico (id. at 879), Elroy & Maria Wilke, Martha Sorrano, Frank Matranga (id. at 140, all sales based upon false representations), Cathy Crivellone, Lena Karczewski, Timothy Karczewski and Peter Witczak, (id. at 130-42) Carmela & Samuel Ciraulo (id. at 156) and others. Even as to those products that were sold without misrepresentation, he subsequently made misrepresentations as to the value of the policy through the monthly statements that he sent. (Id. at 143). In order to cover up the fact that the plaintiffs' withdrawals were depleting their account balances and that he had lied to them in telling them that they would not have to pay premiums on their accounts, Freitag moved funds from one client's account to another without permission and sometimes even from clients' accounts to his own bank account without anyone at NYL ever questioning the transactions. (Id. at 224-51.) He deliberately hid and omitted information about these transactions from the plaintiffs.

  Freitag began sending out false monthly statements to plaintiffs at about the time he sold his first fraudulent annuity to Ray Witczak. (Id. at 118.) The monthly statements Freitag sent were often in substantially the same format as the annual statements the plaintiffs received directly from NYL. Moreover, the annual statements from NYL also referred the clients to their agent for the "latest guaranteed rate" and any additional information. Plaintiffs who had questions regarding the discrepancies between their annual statements and Freitag's monthly statements did in fact call him for explanations. (Id. at 147-48.) Freitag testified that he was the plaintiffs' only contact with NYL.

  NYL also engaged in deceptive practices when Freitag oversold insurance to plaintiffs or manipulated their accounts in ways to benefit the company at the expense of the client. (Id. at 93, 349 (Witczak), 350 (Giacomino), 351 (Matranga), 351 (Lobraico), 351-53 (Soranno).) Although he was told by his superiors at NYL to go back and correct the situation if he undersold a client NYL products, he was never corrected when he oversold a client. (Id. at 93-94.) Freitag testified that the managers at NYL would know in reviewing the applications for the products that they were unsuitable for the plaintiffs, yet NYL managers did nothing to stop these sales. NYL's repeated failures to stop Freitag's improprieties or disclose them to plaintiffs were misrepresentations by omission — the only ones who benefitted from these one-sided reviews of Freitag's sales activites were NYL and Freitag. These are deceptive acts and the premiums and surrender charges that resulted from these acts benefitted NYL at the expense of the plaintiffs.

  Plaintiffs claim that they made important financial judgments based upon their belief that they had the cash value reflected in their false statements, on Freitag's misrepresentations that their withdrawals were not depleting their principals, and on NYL's failure to advise them of Freitag's lies. Defendants counter that any damages caused by plaintiffs' financial judgments were not proximately caused by defendants' conduct. Defendants, citing Movitz v. First National Bank of Chicago, 148 F.3d 760 (7th Cir. 1998), argue that plaintiffs have failed to establish causation. In Movitz, the plaintiff alleged that First National Bank of Chicago had failed to inform him of glaring deficiencies in the real estate investment it procured for him. The Movitz court held that the plaintiff was entitled only to the cost of repairing the deficiencies in the building that the bank's evaluation had failed to disclose, i.e., the difference in value between what he believed he was getting as a result of the bank's omissions and what he actually got. Plaintiff was not entitled to be compensated for the loss of his entire investment on the theory that he would never have invested in the building in the first place had he known the truth, as that loss would likely have occurred regardless of the building's condition because it was caused by an intervening event — the dramatic collapse of the real estate market in the area. Movitz is distinguishable from the case at bar for these reasons. First, Plaintiffs' damages claims are not predicated upon the theory that they would not have invested at all if they had known the truth. Second, in the present case there is no independent intervening event that would likely have caused plaintiffs' losses regardless of the condition of the product (the annuities and insurance policies) sold to them by NYL as there was in Movitz. The only "events" subsequent to the investment that occurred in the case at bar were the continuing material misrepresentations by the defendants and the decisions made by the plaintiffs as to how they would spend the assets they were led to believe they owned by these misrepresentations and omissions. These losses were certainly not the result of the type of independent, unforeseeable, intervening cause that was present in Movitz. In Movitz, the intervening cause was independent of the misrepresentations made by the defendant. Not so here. In this case there were succeeding and continuous misrepresentations by NYL both through Freitag and, after Freitag's conduct was discovered on Nov. 16, 1992, by other NYL employees and supervisors, that caused plaintiffs' damages to compound. Many, if not all of these subsequent misrepresentations were made at a time when NYL knew or should have known that plaintiffs were, or were reasonably likely to be, operating under drastically erroneous beliefs as to the value of the products NYL had sold them. These subsequent material omissions and misrepresentations formed a chain of causation with Freitag's initial misrepresentations that continued well beyond the initial lies. It is not unreasonable to foresee that a person who believes that he has a certain amount of income available to him will adopt a lifestyle commensurate with that income. That is precisely what happened in this case.*fn4 See Tan v. Boyke, 508 N.E.2d 390 (Ill.App.Ct. 1987):
In an action for fraud, consequential damages proximately resulting from the fraud are recoverable . . . expenses incurred in preparing to use property in a manner the defendant has represented as appropriate are recoverable. Tan clearly believed that the buildings and all of their units were lawful. He went to great expense to secure financing commitments and to meet the financing company's requirements prior to the closing, as was necessary, customary and clearly foreseeable in a $1.7 million real estate transaction.
Id. at 394 (internal quotation marks and citations omitted).
  Freitag himself encouraged some of these expenditures. He encouraged the leasing of new automobiles by some of the plaintiffs as a way of building loyalty, which also had the effect of providing more cash for them to invest in NYL products. NYL knew that Freitag had sent false monthly statements not only to the plaintiffs but also to third-party mortgage brokers who were helping the plaintiffs obtain financing. (Tr. at 120-24, 133; PX 327; PX 346.) NYL also was aware that Freitag had arranged for transfers of large sums of money between accounts of unrelated clients. (Tr. at 225-27.) NYL therefore knew that Freitag's customers, which included the plaintiffs, were making financial decisions based upon their false beliefs as to the value of their investments with NYL. That such decisions, based as they were on erroneous financial information, would result in severe financial damages was clearly foreseeable.

  This, of course, is entirely different from the factual situation found in the Movitz case. In that case, it was a totally unforeseen downturn in the real estate market after his initial investment that caused plaintiff's damages. The defendant's misrepresentations in that case did not cause or contribute to the downturn in the real estate market. In the case at bar, as we have pointed out above, the damages caused by defendants' wrongdoing were not only foreseeable, they were known and caused in part by the defendants' continued wrongdoing, i.e., Freitag's continuing deceptions and NYL's decision to withhold a full and frank explanation of Freitag's duplicity from the very people to whom he had lied and from whom he had stolen, all in NYL's name and to its profit.

  What is also clear from the evidence is that NYL deliberately decided to tell the plaintiffs only part of the truth. At his termination interview, in which he admitted his deceit and misrepresentations to NYL investigators and supervisors, Freitag was told that if anyone found out what was disclosed by him at that meeting it would be because of him and not because NYL told them. Thus, NYL knowingly and deliberately chose to hide the full truth from the defrauded plaintiffs. To make good on this promise, NYL instructed the two secretaries who continued to receive phone calls from Freitag's clients not to tell the clients that Freitag had been fired. (Tr. at 795-96, 798.) Further evidence of this intentional coverup is found in the copy of the initial notice of termination that Freitag received. Incredibly, this U5 form, which NYL sends to the NASD, listed "insufficient production" as the reason for Freitag's termination. This could not possibly have been an innocent error as Freitag was one of the star salesmen in his region and his production had absolutely nothing to do with his termination. His termination was for misappropriation of funds, unauthorized withdrawals and lying to clients. Approximately five days later, a second U5 form was sent to him indicating misappropriation and unauthorized withdrawals as the basis for his termination. These conflicting U5 notices are undoubtedly a reflection of the debate taking place within NYL as to how much of their internal scandal they could safely hide. This same information was never sent to the plaintiffs. As a result of NYL's decisions, plaintiffs were never made aware of the fact that Freitag had been terminated for lying to them and cheating them. (Tr. at 819-20.)

  Subsequently, NYL sent out notices with the history and "true" value of the plaintiffs' assets that invited plaintiffs to contact them if they believed there was any discrepancy. Unfortunately, even this limited disclosure was flawed. The notices did not give the plaintiffs any basis for crediting the new statements over those which Freitag had been sending them for months and on which they had grown to rely. The notices also did not give the plaintiffs any reason to discredit Freitag's information even though NYL knew by then that Freitag had been manipulating accounts for months to convince the plaintiffs of the truth of the statements he had been sending them. (Id. at 795.) Some of the letters sent by NYL had as many as one hundred pages of attachments apparently describing past transactions. (Id. at 527.) Had NYL simply told the complete truth, the plaintiffs would have had a basis for reevaluating Freitag's credibility. Had they been told that Freitag had lied to them from the very first, that the statements they had been receiving were false and unauthorized, and that Freitag had admitted such and been fired from NYL for his misconduct, then any determination to continue believing in Mr. Freitag would indeed have been an intervening cause of all future losses.*fn5 But this was not the case.

  In choosing to omit this extremely important information, NYL avoided openly admitting its failures and its potential liabilities. The company chose to minimize its exposure at the expense of a full and truthful disclosure to the people whom, by its agent's actions, it had placed at risk. Instead, it chose simply to send what were essentially statements of accounts stating the true value of plaintiffs' investment and the history of their transactions.

  Unfortunately, as NYL well knew, the plaintiffs already had many such statements from Freitag himself. They were given no basis for discrediting these prior statements. This failure to disclose fully the most crucial of all of the facts, acting in combination with Freitag's prior and continuing manipulations, proximately caused the damages of which plaintiffs now complain. It was not the only cause, but it was certainly a substantial and contributing cause. Had NYL made a substantial disclosure of all material facts, it would not have engaged in any further continuing misrepresentation. Any determination by ...


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