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Independent Trust Corp. v. Fidelity National Title Insurance Company of New York

August 26, 2008


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

Judge Rebecca R. Pallmeyer


In the 1990s, Jack Hargrove and Laurence Capriotti used a web of companies they controlled to steal tens of millions of dollars from real estate escrowees and other trust beneficiaries. This lawsuit is one of many that arose in the aftermath of their crimes. The Plaintiff, Independent Trust Corporation ("InTrust"), a provider of long-term trust services, was controlled by Hargrove and Capriotti at the time of their theft; it lost more than $68 million of its customers' money due to their actions, and is now in receivership. The Defendant, Fidelity National Title Insurance Company of New York ("Fidelity"), was the reinsurer for numerous real estate escrow accounts that were depleted by Hargrove and Capriotti; in this capacity, Fidelity was liable to compensate the escrowees' insurer after the scheme came to light. In 2000, the Illinois Department of Financial Institutions ("DFI"), which regulates title insurance companies, appointed Fidelity to serve as trustee over the remaining escrow funds, with the sole duty of distributing the remaining money to pay outstanding claims. By doing so, Fidelity also reduced its own liability to the escrowees' insurer.

InTrust filed suit against Fidelity in this court, claiming that Fidelity engaged in fraudulent transfers when it acquired various collateral from Hargrove in 2000 without giving him adequate consideration in return. InTrust subsequently amended its complaint to include allegations that InTrust obtained its trusteeship over the escrow funds by means of misrepresentations and misleading omissions. InTrust currently claims that Fidelity's actions make it liable to InTrust for:

(1) breach of fiduciary duty, (2) common law fraud, (3) fraudulent concealment, (4) Illinois Consumer Fraud Act violations, (5) Illinois Title Insurance Act violations, (6) fraudulent transfers, and (7) unjust enrichment.*fn1 Fidelity has now moved for summary judgment on the common law and statutory fraud claims, on the fraudulent transfer claims, and on the unjust enrichment claim. Both parties have also filed motions to strike portions of the other side's Local Rule 56.1 filings. For the reasons stated below, the motion for summary judgment is granted, and the motions to strike are stricken as moot.


The following facts are drawn from the parties' Local Rule 56.1 submissions and from the attached exhibits. The facts are recounted in the light most favorable to InTrust.

I. The Hargrove and Capriotti Fraud

From 1990 through 2000, Jack Hargrove and Laurence Capriotti stole at least $98 million from the beneficiaries of escrow accounts. (LR 56.1 ¶ 30.) Much of this money was stolen from real estate escrowees, who had placed their money in trust with a family of companies controlled by Hargrove and Capriotti; two of these companies were Intercounty Title Company of Illinois ("Old Intercounty") and Intercounty Title Company ("New Intercounty"). (LR 56.1 ¶¶ 6, 10, 20, 28-30; LR 56.1 Resp. ¶¶ 20, 28; LR 56.1 Add'l Resp. ¶ 4.) Hargrove and Capriotti concealed their activities by commingling the escrowees' funds in large combined accounts, and by "lapping" the funds-that is, by paying out money owed to earlier escrowees with funds obtained from later escrowees. (LR 56.1 ¶ 31.)

Not surprisingly, the theft of escrowee funds at times left the escrow account underfunded, and the trust accounts were sometimes drawn down into negative balances in order to permit payment of sums owed to escrowees. (See LR 56.1 ¶ 32.) In order to keep their scheme from coming to light, Hargrove and Capriotti caused InTrust, which they also controlled, to transfer tens of millions of dollars into the Intercounty escrow accounts. (LR 56.1 ¶¶ 12-13, 33.) Most of that money was taken from individual retirement trusts that were being managed by Intrust as trustee. (See LR 56.1 Add'l ¶ 1.)

The money taken from InTrust was transferred into three different bank accounts. The first account ("the First LaSalle Account") was maintained by Old Intercounty at LaSalle National Bank, under account number 2132728. (LR 56.1 ¶ 8; LR 56.1 Add'l ¶ 5.) InTrust deposited a net amount of more than $41 million into this account, and it never recovered that money. (LR 56.1 ¶ 14.) Old Intercounty ceased doing in business in January 1996, but InTrust contends that the First LaSalle Account remained active until 1999. (LR 56.1 ¶¶ 16-17; LR 56.1 Add'l ¶ 7.)

According to Fidelity, the second account ("the Second LaSalle Account") was opened by New Intercounty*fn2 in 1995 at LaSalle National Bank, under account number 5800017427. (LR 56.1 Add'l Resp. ¶ 5.) Fidelity maintains that no escrow funds were transferred from the First LaSalle Account into the Second LaSalle Account; InTrust disputes this, contending that someone transferred $100 million from the first account to the second between 1995 and 1997. (LR 56.1 ¶ 26; LR 56.1 Resp. ¶ 26.) After the Second LaSalle Account ran down into negative balances in early April 1999, Capriotti and Hargrove caused InTrust to transfer $9.2 million into it, in order to conceal the shortfall. (LR 56.1 ¶¶ 32-33.) InTrust does not contend that any of its funds were transferred into accounts controlled by Hargrove, Capriotti, Old Intercounty, or New Intercounty after April 1999. The Second LaSalle Account was closed on approximately September 30, 1999. (LR 56.1 ¶ 36.)

The third escrow account was located at Harris Bank with account number 300-615-2. (LR 56.1 Add'l ¶ 8.) According to Fidelity, the Harris Account was opened in the fall of 1999.*fn3 (LR 56.1 Add'l Resp. ¶8.) InTrust contends that, before closing the Second LaSalle Account, "Old Intercounty and/or ITI" transferred all of the funds remaining in that account-over $20 million-into the Harris Account; Fidelity disputes this, complaining that InTrust has failed to adduce proper evidence of such a transfer. (LR 56.1 Add'l ¶ 8; LR 56.1 Add'l Resp. ¶ 8.) Regardless, it is undisputed that the Harris account was depleted and ran a negative balance from January 3, 2000 through January 13, 2000. (LR 56.1 Resp. ¶¶ 37-38.) Fidelity contends that InTrust did not make any deposits into the account from January 14, 2000 through April 26, 2000, and InTrust does not dispute this. (LR 56.1 ¶ 39; LR 56.1 Resp. ¶ 39..)

On April 14, 2000, the Illinois Commissioner of Banks and Real Estate took control of InTrust and placed it in receivership. (Ans. to 2d Am. Compl. ¶ 12.) The Commissioner appointed PricewaterhouseCoopers ("the Receiver") for the purpose of liquidating InTrust and satisfying its debts. (Id. ¶ 13.) In total, between 1990 and 2000, InTrust deposited a net amount in excess of $68 million (including accrued interest) into escrow accounts controlled by Old Intercounty and New Intercounty. (LR 56.1 Add'l ¶ 2.) This money was never returned: InTrust secured a $50 million judgment against Hargrove as well as a $68 million judgment against Capriotti, ITI, and Old Intercounty, but it claims that neither of these judgments has been satisfied.*fn4 (LR 56.1 Add'l ¶ 12; LR 56.1 Add'l Resp. 12.) Capriotti pleaded guilty to four counts of fraud in federal court on July 14, 2005. United States v. Capriotti, 03 CR 779-1 (N.D. Ill. Jul. 14, 2005) (minute order entering Capriotti's guilty plea). Hargrove was convicted by a federal jury of ten counts, including mail fraud, wire fraud, and tax fraud, on September 15, 2005. Id. Capriotti's plea agreement, and the jury's findings against Hargrove, establish that the two participated in a scheme to defraud InTrust and its account holders. Id. Following the guilty plea and the conviction, Hargrove and Capriotti were each sentenced to fourteen years in prison. Id.

III. The Hargrove Collateral Agreements

Intercounty National Title Insurance Company ("INTIC") was formed in 1995 under the nominal ownership of two former Old Intercounty officers, Susan Peloza and Terry Cornell, but it was actually under the control of Hargrove and Capriotti. (LR 56.1 ¶18; LR 56.1 Add'l ¶ 4.) Hargrove and Capriotti also owned ITI Enterprises, Inc. ("ITI"), which contracted with INTIC and New Intercounty in 1995 to provide "title, closing, and escrow services." (LR 56.1 Add'l ¶ 4.) Under this contract, INTIC acted as underwriter for the escrow accounts that were managed by ITI as agent for New Intercounty. (LR 56.1 ¶ 23; LR 56.1 Add'l ¶ 4.)

Fidelity is an underwriter of title insurance and a reinsurer of title insurance policies underwritten by others. (LR 56.1¶ 3.) Fidelity entered into a reinsurance agreement with INTIC in 1995, under which it was obligated to reinsure policies issued by INTIC. (LR 56.1 ¶ 21.) Specifically, Fidelity agreed to reimburse INTIC for any losses INTIC sustained on its policies beyond a fixed threshold (initially set at $2500). (LR 56.1 ¶ 21; Reinsurance Agreement at 1, Ex. 14 to LR 56.1.)

In early March 2000, Fidelity learned that there was a shortfall in the Harris Account. (LR 56.1 ¶ 40.) Later that month, New Intercounty represented (via an unidentified individual) that the shortfall was between $8 million and $10 million. (Id.) On March 17, 2000, Fidelity entered into an agreement with Hargrove ("the Hargrove I Agreement"), in which Hargrove pledged certain collateral to Fidelity in exchange for a partial release of liability to Fidelity relating to the shortfall.*fn5 (LR 56.1 ¶ 42.) This partial release provided that Hargove would not be liable to Fidelity for any damages up to the value of the collateral plus $2,033,194.86, an amount that Hargrove had deposited in the account to reduce the shortfall. (LR 56.1 ¶ 42.) Despite this facial equivalency, InTrust disputes that the partial release was of reasonably equivalent value to the pledged collateral. (LR 56.1 Resp. ¶ 42.)

On April 20, 2000, Fidelity's auditors reported that the Harris Account shortfall was between $47.8 and $55.9 million. (LR 56.1 ¶ 44.) Fidelity terminated its reinsurance agreement with INTIC the next day. (LR 56.1 ¶ 45.) In response, Hargrove represented to Fidelity that the shortfall was not as large as Fidelity believed, and offered additional collateral. (LR 56.1 ¶ 46.) Within days, Fidelity agreed to reinstate its reinsurance agreement with INTIC. (LR 56.1 ¶ 47.)

Hargrove pledged additional collateral to Fidelity in two agreements. (LR 56.1 ¶ 48.) An April 26, 2000 agreement ("the Hargrove II Agreement") pledged to Fidelity interests in identified real estate parcels in the Ruffled Feathers Country Club, a 122-foot yacht named "Alexis," two apartment complexes, two limousines, and a credit reporting agency. (LR 56.1 ¶¶ 48-50; Hargrove II Agreement at 1-2, Ex. 40 to LR 56.1.) As before, Fidelity agreed in exchange to release Hargrove from any liability in connection with the escrow shortfalls "to the extent of the actual, realized value of the collateral . . . ." (Hargrove II Agreement at 4.) Fidelity also promised that it would renew its reinsurance agreement with INTIC for a five-year period. (Hargrove II Agreement at 1.) Later, in a May 23, 2000 "Supplement to the 'Hargrove Letter' . . . and the 'Second Hargrove Agreement'" ("the Hargrove III Agreement"), Hargrove agreed, in addition, to provide Fidelity with the proceeds from the sale of certain real estate as additional collateral. (LR 56.1 ¶ 52; Hargrove III Letter at 1, Ex. 41 to LR 56.1.)

By these three agreements, Hargrove pledged more than $10 million worth of assets to Fidelity. (LR 56.1 Add'l ¶ 39.) Fidelity has already recovered more than $8 million from these transfers, and is attempting to derive further value from the remaining assets. (Id.) None of this recovery has been shared with InTrust. (Id.) At the time these agreements were executed, Fidelity had not yet asserted any claims against Hargrove. (Id. ¶ 41.)

InTrust contends that Fidelity did not provide any commensurate value to Hargrove in exchange for the pledged collateral. (LR 56.1 Add'l ¶ 40, 42.) In support of this contention, it cites the agreements themselves, as well as an expert report by Mark J. Hosfield.*fn6 Hosfield opined that the release represented "purported value to Hargrove" because "as an economic matter, . . . [Fidelity's] claim would have to be reduced by the value of the collateral that Hargrove pledged regardless of this agreement." (Hosfield Rep. at 14, Ex. 83 to LR 56.1 Add'l.) He added that he was not aware "of any value provided by Fidelity for the value of the assets it received." (Id. at 14.) He noted that although Fidelity had agreed to extend the reinsurance agreement with INTIC, it in fact terminated that agreement on June 23, 2000.*fn7 (Id. at 15.) He concluded that Fidelity had not provided reasonably equivalent value in exchange for the collateral pledged to it by Hargrove. (Id.)

Edwin Thomas is an attorney at Bell, Boyd and Lloyd in Chicago, who represented Fidelity in its dealings with Hargrove in March 2000. (Thomas Test. at 1483-84, Ex. 80 to LR 56.1 Add'l.) Thomas testified in a lawsuit brought by Fidelity against INTIC in 2004, explaining that he had been working to acquire collateral from Hargrove on Fidelity's behalf. (Thomas Test. at 1494.) When asked whether Hargrove had informed him of his motives in turning over the collateral, Thomas testified that he had been concerned "about . . . having an agreement with consideration that would be enforceable," and that he had added some language to the agreement in order to generate consideration because "it looked like [Hargrove] was a bystander to it . . . ."*fn8 (Thomas Test. at 1559-60.)

In September 2000, Fidelity sued Hargrove for conversion, breach of fiduciary duty, and violation of the Illinois Title Insurance Act. (LR 56.1 ¶ 54.) The suit went to trial in the Northern District of Illinois before the Honorable Samuel Der-Yeghiayan, and the jury was instructed that Hargrove had asserted, as an affirmative defense, a partial release from Fidelity. (LR 56.1 ¶ 56.) The verdict form instructed the jurors that, if they found that Hargrove had been released, it should reduce any damages accordingly. (LR 56.1 ¶ 57; Verdict Form at 7-8, Ex. 55 to LR 56.1.) Although the jury found in Fidelity's favor on the fiduciary duty and Title Insurance Act claims, it awarded only $1.5 million for the former claim and nothing for the latter. (LR 56.1 ¶ 58.) The verdict forms, however, do not indicate whether the jury had relied upon the release to reduce its damage award. (Verdict Form at 7-8.) The jury also found against Fidelity on its claims against Stewart Title Guaranty Company ("STG")*fn9 , and Fidelity appealed this ruling. Fid. Nat'l Title Ins. Co. of N.Y. v. Intercounty Nat'l Title Ins. Co., 412 F.3d 745, 748 (7th Cir. 2005). There was no cross-appeal by any of the defendants, including Hargrove. Id. The Seventh Circuit vacated the verdict due to evidentiary errors, and remanded for a new trial. Id. at 753-54. Even though Hargrove did not appeal the judgment against him, Fidelity asserted in the subsequent litigation that the Seventh Circuit had reversed its judgment against Hargrove. See, e.g., Mot. for Initial Status Conf. ¶ 6, in Fid. Nat'l Title Ins. Co. of N.Y. v. Intercounty Nat'l Title Co., No. 00 C 5658, Docket Entry No. 782 (N.D. Ill. Mar. 8, 2006) (asserting that the Seventh Circuit had "reversed the judgment entered on Fidelity's claims against . . . Jack Hargrove"). Hargrove, who was sentenced to serve fourteen years in a federal penitentiary shortly after the remand, has declined to defend himself in the subsequent proceedings, and Fidelity has since moved for a default judgment against him. Mot. for Default J. ¶¶ 1-2, 11, in Fid. Nat'l, No. 00 C 5658, Docket Entry No. 920 (Aug. 6, 2008).

IV. Fidelity Becomes Trustee of the Harris Account Funds

As discussed above, Fidelity learned of the escrow shortfall, and began to investigate it, in early March 2000. Sometime that month, the president of New Intercounty, Robert Martos, orally informed Fidelity auditor Paul Hunsinger of a potential transfer from InTrust to New Intercounty of $9.2 million, although he did not provide any documentation of this. (LR 56.1 ¶¶ 66-67.) In a status report written on April 20, 2002, Fidelity's internal auditors noted this "potential transfer." (LR 56.1 Add'l ¶ 45; Status Report at 1, Ex. 1 to LR 56.1 Add'l.)

At this time, as recounted above, Fidelity was negotiating with Hargrove and INTIC regarding the possibility of reinstituting the reinsurance contract. In connection with these negotiations, Fidelity informed the DFI on April 24, 2000 that "an important element" of any such agreement would be "Fidelity's appointment [by the DFI] to oversee and control existing escrow accounts." (LR 56.1 Add'l ¶ 20.) Fidelity also informed the DFI, via a letter from its Senior Vice President, Thomas Simonton, that it planned to "control, monitor, and oversee all aspects" of the Harris Account. (Letter from Simonton to Vega, 4/26/00, at 1, Ex. 30G to LR 56.1 Add'l.) Simonton opined that "the magnitude of the escrow account make it unfeasible to do a total accounting of all its activity over a sufficient period of time."*fn10 (Id.) Instead, he wrote:

[A] more accurate and cost-effective determination of any escrow shortfall can be made by closing the old account and opening a new one. . . . In the meantime, Fidelity will fund the obligations of Fidelity, [New Intercounty], and INTIC to INTIC's insureds (the consumers themselves) pursuant to its reinsurance agreement . . . . (Id.)

On April 26, New Intercounty and INTIC transferred control over the Harris Account to Fidelity. (LR 56.1 Add'l ¶ 20.) As of April 28, 2000, the closing balance in this account was $19.7 million. (LR 56.1 Add'l Resp. ¶ 20; Harris Account Statement at 12468, Ex. 84 to LR 56.1 Add'l.) Over the next two months, Fidelity deposited more than $16 million of its own funds into the Harris Account in order to cover escrow shortages. (LR 56.1 Add'l ¶ 22.) Although Fidelity deposited money in order to keep a positive balance on the account, it did not use its control over the Harris Account to prevent escrowees from withdrawing more than a pro rata share of the total account balance. (LR 56.1 Add'l ¶ 24.)

Fidelity hired Deloitte & Touche to further investigate the escrow shortfall on May 15, 2000. (LR 56.1 ¶ 71.) On June 19, 2000, Deloitte produced a draft report stating that "$9.2 million may have been transferred inappropriately from InTrust to fund a deficit in the [New Intercounty] Master Escrow account." (Deloitte Rep. at 2169, Ex. 3 to LR 56.1 Add'l.) Fidelity did not disclose this information to the Receiver. (LR 56.1 Add'l ¶ 29.)

On June 20, 2000, Fidelity's outside counsel, Edwin Thomas; its general counsel, Alan Stinson; and Deloitte partner Don Svendson met with representatives from the DFI, including DFI Director Sara Vega, DFI Chief Counsel Elizabeth Byrne, and DFI employee Carl LaSusa. (LR 56.1 ¶ 73.) At this meeting, Fidelity informed the DFI representatives of the preliminary results of Deloitte's investigation. (LR 56.1 ¶ 74.) Thomas asserts that he provided a copy of the June 19 Deloitte Report to the DFI at this meeting, and that he told the DFI's representative about the InTrust deposits, telling them that the deposits "smacked of criminality." (Thomas Dep. at 232:9-19, Ex. 6 to LR 56.1.)InTrust disputes this testimony, but relies primarily on the affidavit of Henry Stirmell, a DFI Supervisor who was not present at the meeting. (LR 56.1 Resp. ¶ 74.)Stirmell swears that "to his knowledge," Fidelity never gave the DFI a copy of the Deloitte Report, and that Thomas never spoke to him regarding the InTrust transfer. (Stirmell Aff. ¶¶ 24-28, 30, Ex. 30 to LR 56.1 Add'l.) The DFI has not produced any audit reports in connection with this litigation, and Stirmell claims it has no such documents in its possession. (LR 56.1 Add'l ¶ 30.)

The rest of InTrust's evidence that Thomas did not bring up the $9.2 million deposit is similarly equivocal. Both LaSusa and Byrne took handwritten notes at the meeting, but neither set of notes mentions the InTrust deposit. (LR 56.1 Add'l ¶ 28.) When deposed in August 2007, Svendson testified that he did not remember whether anyone had discussed InTrust at the June 2000 meeting. (Svendson Dep. at 40:4-20.) Byrne, when deposed in December 2002, testified that she "had not been informed" of any commingling of InTrust and INTIC escrow funds. (Byrne Dep. at 44:8-18, Ex. 51 to LR 56.1 Add'l.) Unfortunately, the contextual time frame for this statement is unclear; Byrne was testifying to her lack of knowledge prior to being informed by LaSusa that commingling was taking place, but she could not remember when LaSusa had first informed her. (Byrne Dep. at 43:1-6.) Byrne was not asked whether Thomas had discussed InTrust at the June 20, 2000 meeting nor whether the DFI was given a copy of the Deloitte Report at that meeting. Nor has InTrust provided testimony from Vega or LaSusa on this point. (LR 56.1 Resp. ¶ 74.)

The day after the June 20 meeting with the DFI, Thomas, Sadowski, and Svendson met with representatives from the Department of Justice, the Federal Bureau of Investigation, and the Internal Revenue Service. (LR 56.1 ¶ 76.) At this meeting, they described Deloitte's preliminary findings. (LR 56.1 ¶ 76.) InTrust does not dispute that the information provided included a reference to the $9.2 million InTrust deposit. (LR 56.1 Resp. ¶ 76.)

The DFI ordered that INTIC stop doing business, effective June 23, 2000, and appointed Fidelity as trustee over INTIC's escrow accounts on June 26, 2000. (LR 56.1 ¶¶ 81-82.) InTrust contends that the DFI would not have authorized Fidelity to act as trustee over the Harris Account if it had known that the account contained funds outside of its purview, and that the DFI in fact had no power to take this action. (LR 56.1 Add'l ¶ 26.) In support of this contention, it cites only the deposition testimony of DFI Director Vega, who stated that InTrust was not an entity regulated by the DFI, and that the DFI accordingly had no responsibility to investigate potential misconduct by InTrust. (Vega Dep. at 248:23-249:9, Ex. 69 to LR 56.1 Add'l.) No support is provided for the central contention, that the DFI cannot or would not have authorized Fidelity to act as a trustee over an account that contained funds misappropriated from entities the DFI did not regulate.

After becoming trustee over the Harris Account, Fidelity wound it down, transferring approximately $13.5 million into a new account at the Bank of America by July 26, 2000. (LR 56.1 Add'l. ¶ 27.) On August 30, 2000, the DFI authorized Fidelity to disburse the $13.5 million in the Bank of America Account. (LR 56.1 Add'l. ¶ 27.) Fidelity agreed to pay "all remaining verifiable claims, made or to be made, which are based on funds deposited in escrow with Intercounty or its agents, pursuant to escrow instructions, for the purpose of completing bona fide . . . real estate transactions, which transactions remained uncompleted . . . as of 5 p.m. June 23, 2000 . . . ." (Agreement at 3596, Ex. 62 to LR 56.1.) In a letter to the DFI in early September, Thomas stated that "Fidelity's only goal has been to wind down Intercounty as quickly as possible and satisfy its obligations as reinsurer. Fidelity has now undertaken the additional obligation to satisfy all claims to the escrow, in full."*fn11 (Letter from Thomas to Byrne at 1-2, Ex. 29 to LR 56.1 Add'l. at 042939.) Fidelity admits that its reinsurance liability was reduced by its ability to use the $13.5 million in the Harris Account to pay out existing claims. (LR 56.1 Add'l Resp. ¶ 27.)

InTrust admits that it did not learn of any of Fidelity's statements to the DFI until 2004 or 2005. ...

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