United States District Court, N.D. Illinois, Eastern Division
Travelers Casualty and Surety Co. of America, Plaintiff,
John P. Paderta and Fifth Third Bank, Defendants.
MEMORANDUM OPINION AND ORDER
Honorable Thomas M. Durkin United States District Judge.
Casualty and Surety Co. of America seeks to have Fifth Third
Bank pay it funds deposited in a Fifth Third account, which
Fifth Third took to satisfy a loan it made to the account
holder. Travelers alleges that it has standing because,
pursuant to certain surety and indemnity agreements, it is
the equitable subrogee of (a) the account holder, (b) the
entities that paid the funds in question to the account
holder, and (c) entities that the account holder had an
obligation to pay using the funds. Travelers and Fifth Third
have cross moved for summary judgment on liability on Counts
I (conversion) and II (constructive trust)-i.e., the issue of
which of them has priority to the funds. See R. 184;
R. 187. For the following reasons, Travelers's motion is
granted, and Fifth Third's motion is denied.
judgment is appropriate “if the movant shows that there
is no genuine dispute as to any material fact and the movant
is entitled to judgment as a matter of law.”
Fed.R.Civ.P. 56(a); see also Celotex Corp. v.
Catrett, 477 U.S. 317, 322-23 (1986). The Court
considers the entire evidentiary record and must view all of
the evidence and draw all reasonable inferences from that
evidence in the light most favorable to the nonmovant.
Ball v. Kotter, 723 F.3d 813, 821 (7th Cir. 2013).
To defeat summary judgment, a nonmovant must produce more
than “a mere scintilla of evidence” and come
forward with “specific facts showing that there is a
genuine issue for trial.” Harris N.A. v.
Hershey, 711 F.3d 794, 798 (7th Cir. 2013). Ultimately,
summary judgment is warranted only if a reasonable jury could
not return a verdict for the nonmovant. Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).
Krahl & Travelers
was a general contractor in the business of providing general
contracting services for construction projects. R. 185 ¶
6. The owners of some of the projects Krahl undertook
required Krahl to obtain performance surety bonds to
guarantee Krahl's performance, including payment of
subcontractors, and required the subcontractors to submit
lien waivers in order to receive payment from the project
owners through Krahl as general contractor. Id.
¶ 7. Travelers issued such surety bonds for Krahl.
Id. ¶¶ 8, 10. To receive surety bonds from
Travelers, Krahl also had to enter into a indemnity agreement
with Travelers. Id. ¶ 11. According to the
indemnity agreements, Krahl was required to hold the funds it
received from project owners in trust. Id. ¶
15. But the agreement does not specifically require Krahl to
segregate the funds or otherwise identify them as funds held
in trust. Id. ¶ 19; see also Id.
Krahl's request, Travelers issued surety bonds for the
following seven projects in Illinois and Colorado relevant to
this case: Northwestern Memorial Hospital (Bond 105150320);
Rush University Medical Center (Bonds 105150332, 105200157,
105200155, 105268775); Trammell Crow Co. (Bond 105268769);
City and County of Denver (Bond 105268766). Id.
¶ 23. These seven bonds covered a “combined penal
sum” of about $40 million. Id. The
subcontractors on these projects submitted lien waivers.
Id. ¶¶ 94, 101, 108, 115, 122, 129, 135.
Krahl & Fifth Third
borrowed $6 million from Fifth Third over a period of about
five years pursuant to a revolving line of credit.
Id. ¶ 28. The loan documents provided Fifth
Third a security interest in all of Krahl's accounts
receivable and proceeds thereof, and in all of Krahl's
deposit accounts. Id. ¶ 29. The loan documents
also defined “Right of Setoff” as follows:
To the extent permitted under applicable law, [Fifth Third]
reserves a right of setoff in all [Krahl's] accounts with
[Fifth Third] (whether checking, savings, or some other
account). . . . However, this does not include . . . any
trust accounts for which setoff would be prohibited by law.
Id. ¶ 56.
also opened a deposit account with Fifth Third. Id.
¶ 30. The account was not designated as a trust account,
and included no other similar restriction or designation.
Id. Krahl regularly made deposits into and
withdrawals from this account. Id.
Fifth Third's Knowledge of Krahl's Business
Third considered its loans to Krahl to be “high
quality, high performing.” Id. ¶ 31.
Because of the quality of the loans made to Krahl, Krahl was
only required to submit “gross numbers and balances on
its various projects-the details of each project, information
about accounts receivable [and payable]” were not
required by Fifth Third. Id. Nevertheless, Fifth
Third admits that it had documents in its possession showing
that some of Krahl's projects required Krahl to obtain
surety bonds, and that Travelers had issued such bonds for
some of Krahl's projects. Id. ¶ 33. For
example, Krahl submitted to Fifth Third a document titled,
“Request for Credit Commitment, ” describing
Krahl's business and noting that it sometimes was
required to obtain surety bonds for its projects, and that
the number of projects requiring such bonds was
“growing.” Id. ¶¶ 34-35. Fifth
Third's analysis also noted that all five of Krahl's
largest accounts were bonded projects. Id.
¶¶ 38-39. Additionally, Fifth Third's analysis
of Krahl's finances distinguished between bonded and
non-bonded accounts receivable, because bonded accounts
receivable had “diminished collateral value.”
Id. ¶ 40; see also Id. ¶¶
37, 40-42, 58-59. Fifth Third received monthly reports from
Krahl regarding its accounts receivable and payable. These
reports identified which accounts were bonded and unbonded.
These reports were the basis for Krahl to demonstrate a new
collateral borrowing base that would enable Krahl to continue
to borrow from Fifth Third. Id. ¶¶ 78-80.
Doucet was part of Fifth Third's relationship management
team for the Krahl account. Id. ¶ 48. Prior to
becoming employed by Fifth Third, Doucet worked for surety
companies underwriting construction projects. Id.
¶¶ 44-46. At his deposition, he testified that he
has general knowledge of the business of surety companies and
that they obtain indemnity agreements from the principals on
the bonds, such as Krahl. Id. ¶¶ 51-54. He
also testified that he knows that the “intent” of
a surety bond is that the general contractor is to
“treat” bonded funds as “trust
funds.” Id. ¶ 55.
testified Fifth Third had quarterly meetings with Krahl, and
at those meetings Fifth Third obtained financial statements,
account receivable reports, and work in progress reports from
Krahl. Id. ¶¶ 48-49. Doucet also testified
that he would ask Krahl about its surety relationships, and
he knew that Krahl had a surety relationship with Travelers.
Id. ¶¶ 49-50. He testified further,
however, that he did not know which projects Travelers had
bonded. Id. ¶ 50. He testified further that
“[i]n the eyes of the bank, we view bonded accounts to
be the collateral of the surety company, ” and that
“[i]n the case of those particular surety bonded
projects, the surety company has a priority to those
funds.” Id. ¶ 61.
Krahl in Default
executed a search warrant on Krahl's offices on January
6, 2010. Id. ¶ 69. When Fifth Third inquired
about the situation, Krahl informed Fifth Third that as a
result of the FBI investigation it would not be pursuing
collection of accounts receivable worth approximately $5
million. Id. ¶ 70. The next day, on January 7,
Krahl and Fifth Third held a meeting at which Fifth Third
asked Krahl to provide a business plan showing that it could
maintain profitability. Id. ¶ 71. Fifth Third
placed a hold on Krahl's accounts in the meantime.
was involved in the meetings with Fifth Third during this
time period. He testified that Fifth Third knew that Krahl
had pending payments to subcontractors. Id. ¶
77. Krahl did not present a business plan on January 8,
leaving it in default on its loans from Fifth Third.
Id. ¶ 75. That day, Fifth Third took the $3,
086, 931.05 in Krahl's account. Id. ¶ 76.
Doucet also testified that, at the time Fifth Third swept
Krahl's accounts, he had no knowledge of what deposits in
Krahl's account were bonded or not, and he does not
believe anyone else at Fifth Third had such knowledge.
Id. ¶ 82.
086, 931.05 that was in Krahl's account, $1, 829, 250.60
were bonded funds received on November 19 and 30, 2009;
December 4 and 16, 2009; and January 4 and 6, 2010, from the
owners of the seven projects referenced above. Id.
¶¶ 87, 91-135. Six of these deposits were checks,