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Safeco Insurance Co. v. Wheaton Bank and Trust Co.

January 24, 2008

SAFECO INSURANCE COMPANY, A WASHINGTON CORPORATION, PLAINTIFF,
v.
WHEATON BANK AND TRUST COMPANY, AN ILLINOIS CHARTERED BANK, DEFENDANT.



The opinion of the court was delivered by: Rebecca R. Pallmeyer United States District Judge

Judge Rebecca R. Pallmeyer

MEMORANDUM OPINION AND ORDER

Safeco Insurance Company ("Safeco") contracted to act as a surety for Integrated Construction Technology Corporation ("ICTC"), an Illinois construction contractor. ICTC had a deposit account with Wheaton Bank and Trust Company ("the Bank"), and also borrowed more than $4 million from the Bank. When a portion of the debt had matured, the Bank set off a total of $515,000 from ICTC's deposits in order to satisfy its debt. In this action, Safeco contends that this set-off was improper, and that as a result of the Bank's use of ICTC's deposits, Safeco has been forced to pay more than $1.6 million to satisfy ICTC's debts to subcontractors. Safeco claims here that it is entitled to recover some of its losses from the Bank under theories of conversion (Count I), improper use of trust funds held in connection with a mechanics lien waiver under 770 ILCS 60/21.02 (Count II), and constructive trust (Count III).

The Bank has moved to dismiss the Second Amended Complaint for failure to state a claim on which relief can be granted. (Mot. to Dismiss [36].) For the reasons stated below, this motion is granted, and the complaint is dismissed without prejudice.

BACKGROUND

The following alleged facts are drawn from the Second Amended Complaint ("the Complaint"), and are recounted in the light most favorable to Safeco.

Safeco, a Washington corporation, has its principal place of business in Seattle, and is licensed to transact surety business in Illinois. (2d Am. Compl. [24, hereinafter "Compl."] ¶ 1.) Safeco agreed to issue payment bonds as a surety for ICTC, a general contractor in the construction industry. (Id. ¶ 8.) In consideration for these surety bonds, ICTC entered into an Indemnity Agreement which obligates ICTC to reimburse Safeco for any losses it sustained in its role as a surety. (Id. ¶ 6.) One provision of this agreement reads as follows:

[ICTC agrees] that all monies earned by Contractor [ICTC] under any Contract are trust funds, whether in the possession of the contractor or otherwise, for the benefit of, and for payment of Contractor's obligations for, labor, material, and supplies furnished to Contractor in performance of such Contract for which Surety [Safeco] would be liable under any Bond on such Contract . . . . (Id. ¶ 7; Gen. Agr. of Indemnity at 2, Ex. A to Compl.) After entering into this surety agreement, ICTC entered into numerous construction contracts for which Safeco issued surety bonds. (Compl. ¶ 8.)

The Bank is an Illinois chartered bank and lending institution having offices in Wheaton, Illinois. (Compl. ¶ 2.) In the first half of 2005, the Bank gave three loans to ICTC, in a total principal amount of $4.25 million, in exchange for promissory notes maturing in January, May, and November of 2006, respectively. (Id. ¶ 10.)

ICTC also maintains a deposit account with the Bank. (Compl. ¶ 12.) Without identifying any individual Bank personnel, Safeco alleges that "[the] Bank learned that" ICTC was a contractor, that ICTC acquired nearly 80% of its receivables from public contracts requiring surety bonds, and that ICTC performed these contracts by hiring subcontractors. (Id. ¶ 11.) Furthermore, Safeco alleges that "[the] Bank was aware" that ICTC regularly deposited large sums of money into its account, and, after making such deposits, would routinely make immediate payments of a majority of such funds to its subcontractors, suppliers, and workers. (Id. ¶ 12.)

Safeco alleges generally that the funds deposited in ICTC's account were trust funds held for the use and benefit of Safeco as well as ICTC's subcontractors and suppliers. (Id. ¶¶ 20-21.) Safeco does not allege, however, that the Bank knew that these deposits were trust funds, nor that the Bank had received or reviewed any documents, such as the Indemnity Agreement, that might put it on notice of any trust relationships.

From June through September of 2006, the Bank set off a total of $515,000 to reduce the principal balance on ICTC's promissory notes. (Compl. ¶ 16.) Because of these set-offs, there were insufficient funds in ICTC's accounts with which to pay outstanding claims to subcontractors and suppliers. (Id. ¶ 17.) When ICTC was unable to pay these suppliers, Safeco become obligated as a surety to cover the gap. (Id. ¶ 18.) Safeco has already made more than $1.6 million in payments as ICTC's surety, and it expects to become liable for more than $2 million in future payments on ICTC's behalf. (Id. ¶¶ 18-19.)

In March of 2007, Safeco made a demand on the Bank for payment of $515,000, which it asserted as a subrogee of the subcontractors it had paid on ICTC's behalf. (Compl. ΒΆ 23.) The Bank refused ...


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