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The Gray Insurance Co. v. Zosky

United States District Court, N.D. Illinois, Eastern Division

August 6, 2014

THE GRAY INSURANCE COMPANY, Plaintiff,
v.
SUSAN D. ZOSKY, Defendant.

MEMORANDUM ORDER AND OPINION

ROBERT M. DOW, Jr., District Judge.

In this diversity breach of contract action, Plaintiff The Gray Insurance Company contends that Defendant Susan D. Zosky has failed to perform under the parties' indemnity agreement. Defendant disputes the validity of the indemnity agreement and has asserted two counterclaims, for fraud and negligent hiring/supervision, against Plaintiff. Defendant alleges that Plaintiff allowed one of its employees to fraudulently alter financial documents crucial to the parties' transaction, and, moreover, failed to alert her to the fraud before she signed the indemnity agreement (which she avers that she would not have signed had she been aware of the fraud). Plaintiff has moved to dismiss Defendant's counterclaims [19]. For the reasons stated below, the Court grants the motion without prejudice. Defendant is given 21 days in which to replead if she believes that she can do so consistently with her obligations under Federal Rule of Civil Procedure 11.

I. Background

The instant dispute stems from Plaintiff's issuance of several surety bonds to Defendant's husband's construction company, ZCorp. In connection with the issuance of the bonds, Defendant, her husband, and ZCorp all signed an indemnity agreement on May 30, 2011. The indemnity agreement provides that the indemnitors, Defendant, her husband, and ZCorp, "shall exonerate, indemnify, hold harmless and keep the Surety indemnified from and against all Loss, liability, damages and expenses of whatsoever kind or nature." [1-1] ¶ 2. The indemnity agreement also provides that "[t]he Indemnitors acknowledge that any and all financial statements and other financial representations provided to the Surety act as a warranty of the Indemnitors' financial viability, " and that "any misinformation provided to the Surety is a basis for denying a discharge of the Indemnitors' liability to the Surety in bankruptcy."[1] Id. ¶ 6. Plaintiff alleges that it has "received numerous claims on the Bonds totaling over [ ] $1.3 million and has sought reimbursement of the losses associated with those claims from Defendant." [1] ¶ 12. Plaintiff alleges that because Defendant has not acquiesced to Plaintiff's demands for payment, Defendant has breached the indemnity agreement. Plaintiff seeks both damages and specific performance.

Defendant denies that she is obligated to perform under the indemnity agreement. She "affirmatively states that because Plaintiff's agent for issuing bonds issued them fraudulently, there was a failure of consideration for any Indemnity Agreement signed by Joseph and/or Susan Zosky." [15] Ans. ¶ 9. In addition to denying many of Plaintiff's material allegations, Defendant raises two affirmative defenses: unclean hands and failure to mitigate damages.[2] Plaintiff also asserts two counterclaims against Plaintiff: negligent hiring and supervision (Count I) and fraud and misrepresentation (Count II). Plaintiff has moved to dismiss Defendant's counterclaims pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6). See [19].

II. Motion to Dismiss Counterclaims

A. Facts

For purposes of ruling on Plaintiff's motion to dismiss Defendant's counterclaims, the Court accepts as true all well-pleaded facts asserted in Defendant's counterclaims and draws all reasonable inferences in Defendant's favor. Cozzi Iron & Metal, Inc. v. U.S. Office Equip., Inc., 250 F.3d 570, 574 (7th Cir. 2001).

Plaintiff is an insurance company that has its principal place of business in Louisiana and is a citizen of Louisiana. [15] ¶ 1. Defendant is a citizen of Illinois. Id. ¶ 2. At all times relevant to this action, Defendant employed non-party John Davis ("Davis") as its Regional Manager of the Midwest Region. Id. ¶ 3.

Immediately prior to his employment with Defendant, Davis was employed by Developers Surety and Indemnity Company ("Developers") as a Regional Manager in the Midwest Region. Id. ¶ 6. In his capacity as Regional Manager for Developers, Davis was authorized to sign and issue surety bonds on behalf of Developers to various contractors within the Midwest Region. Id. While employed by Developers, Davis embarked on a scheme to defraud Developers and contractors, including Defendant's husband's company ZCorp, by issuing surety bonds without the knowledge or authorization of Developers. Id. ¶ 7. Davis personally retained the premiums paid by the contractors for the "bonds." Id. After discovering the scheme, Developers filed a civil action against Davis in Illinois state court on June 23, 2011. Id. ¶ 11; see id. Ex. C. A federal grand jury indicted Davis on November 1, 2012. See United States v. Davis, No. 12-cr-850, Dkt. 1 (N.D. Ill.). The grand jury later issued a superseding indictment charging Davis with nine counts of federal mail, wire, and insurance fraud. See [15] ¶ 8; id. Ex. A. Davis pleaded guilty to the federal charges on November 11, 2013. Id. ¶ 8.

Defendant alleges that Plaintiff should have investigated Davis's personal and professional background before hiring him. Id. ¶ 9. Defendant alleges that a reasonable investigation into Davis's "business and personal background including, but not limited to, contacting his prior employer, Developers, conducting a search of any legal actions involving Davis, investigating Davis' creditworthiness, and speaking with contractors such as ZCorp about the details of Davis' dealings with them" would or should have revealed to Plaintiff that Davis was not a suitable employee. Id. ¶ 10. Defendant further alleges that Plaintiff "failed to properly supervise Davis' conduct following his hiring in that Davi[s] continued to engage in unlawful conduct by altering the financial statements of ZCorp without ZCorp's knowledge or consent to permit the issuance of bonds to ZCorp that would not otherwise have been issued." Id. ¶ 13. Absent Davis's unauthorized alteration of ZCorp's financial statements, Defendant asserts, "surety bonds would not have issued to ZCorp, and [she] would not have executed any indemnity agreement for bonds issued by [Plaintiff]." Id. ¶ 17. Defendant claims that, as a proximate result of Plaintiff's negligence in hiring and/or supervising Davis, she signed an indemnity agreement that she otherwise would not have. See id. ¶ 22. Because of Plaintiff's negligence, Defendant asserts, Davis was able to "intentionally fabricate[] and submit[] to [Plaintiff] a false financial statement for ZCorp for the purpose and intent of causing bonds to be issued to ZCorp which Davis and [Plaintiff] knew should never have been issued to ZCorp." Id. ¶ 22. She asserts that "[a]s a proximate result of [Plaintiff's] negligence, " she "has suffered compensatory damages including the legal fees and costs incurred to respond to [Defendant's] wrongful demand and subsequent suit on the indemnity agreement." Id. ¶ 23.

Defendant also advances a claim of fraud and misrepresentation (Count II). See id. ¶¶ 24-33. She alleges that Plaintiff and Davis submitted the indemnity agreement to her and her husband for execution without disclosing material facts relating to Davis's misconduct at Developers or his alteration of ZCorp's financial statements. Id. ¶ 25. According to Defendant, "Davis knew, and [Plaintiff] knew or should have known, that ZCorp's actual financial condition was such that it was not qualified to procure bonds from [Plaintiff]." Id. ¶ 27. Yet Davis and Plaintiff allegedly "withheld the material information regarding Davis' fraudulent conduct while employed by Developers and [Plaintiff] for the purpose and with the intent of inducing [Defendant] to execute the Indemnity Agreement." Id. ¶ 29. Defendant alleges that she relied on Davis's and Plaintiff's omissions and misrepresentations, id. ¶ 30, and would not have signed the indemnity agreement if Davis and Plaintiff "had disclosed the truth regarding Davis' fraudulent conduct while employed by Developers and [Plaintiff] as well as Davis' fraudulent conduct in altering ZCorp's financial statements." Id. ¶ 31. Defendant contends that, "[a]s a proximate result of Davis' and [Plaintiff's] fraudulent acts and omissions, [she] has suffered compensatory damages including the legal fees and costs incurred to respond to [Plaintiff's] wrongful demand and subsequent suit on the indemnity agreement." Id. ¶ 32. She further avers that she is "entitled to recover exemplary damages" because the alleged "acts and omissions" were "willful and wanton and made in reckless disregard" of her rights. Id. ¶ 33.

Plaintiff has moved to dismiss Defendant's counterclaims pursuant to Federal Rules of Civil Procedure 12(b)(6). Plaintiff also contends that Count II lacks the particularity ...


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