Court Opinion

ID: 3147727
Source: CourtListenerOpinion
Date Created: 2015-10-22 18:36:23.900191+00
Date Added: 2024-06-11T12:07:34.513605
License: Public Domain

ILLINOIS OFFICIAL REPORTS
                                         Appellate Court

       Independent Trust Corp. v. Kansas Bankers Surety Co., 2011 IL App (1st) 093294

Appellate Court            INDEPENDENT TRUST CORPORATION, Plaintiff-Appellant, v.
Caption                    KANSAS BANKERS SURETY COMPANY, a Kansas Corporation,
                           Defendant-Appellee.

District & No.             First District, Sixth Division
                           Docket No. 1-09-3294

Filed                      June 30, 2011
Rehearing denied           August 8, 2011
Held                       Section 6-7.1 of the Corporate Fiduciary Act tolls the contractual
(Note: This syllabus       termination provision of a financial institution crime bond insurance
constitutes no part of     policy, and when plaintiff, the insured, notified defendant, the insurer, of
the opinion of the court   a claim or right of action before a receiver was appointed to liquidate the
but has been prepared      insured, the order granting the insurer summary judgment on the
by the Reporter of         insured’s declaratory judgment complaint seeking indemnification for
Decisions for the          losses plaintiff alleged were covered by the insurance was reversed, since
convenience of the
                           section 6-7.1 of the Act tolled the termination provision on the date the
reader.)
                           receiver was appointed, and plaintiff had six months from the date of the
                           receiver’s appointment to comply with the notice/proof of loss provisions
                           of the insurance.

Decision Under             Appeal from the Circuit Court of Cook County, No. 04-CH-4889; the
Review                     Hon. Martin S. Agran, Judge, presiding.

Judgment                   Reversed and remanded.
Counsel on                 Robert J. Shelist and Mark A. Schwartz, of Shelist & Schwartz, LLP,
Appeal                     of Chicago, for appellant.

                           John R. Zemenak, of Rathje & Woodward, of Wheaton, and Stanley R.
                           Parker, of Parker & Hay, LLP, of Topeka, Kansas, for appellee.

Panel                      JUSTICE CAHILL delivered the judgment of the court, with opinion.
                           Presiding Justice Garcia and Justice R. Gordon concurred in the
                           judgment and opinion.

                                             OPINION

¶1           The core issue in this case is whether section 6-7.1 of the Corporate Fiduciary Act (Act)
        (205 ILCS 620/6-7.1 (West 2006)) tolls the contractual termination provision of a financial
        institution crime bond insurance policy (Bond) when the insured, Independent Trust
        Corporation (Intrust), notified the insurer, Kansas Bankers Surety Company (KBS), of a
        claim or right of action before a receiver was appointed to liquidate the insured. We believe
        the Act tolls the termination provision of the Bond. We reverse the trial court’s order
        granting KBS’s cross-motion for summary judgment and remand for further proceedings.
¶2           This case has a complicated litigation history, and various matters related to the
        dissolution and liquidation of Intrust have previously been before this court. See In re
        Possession & Control of the Commissioner of Banks & Real Estate of Independent Trust
        Corp., 327 Ill. App. 3d 441, 764 N.E.2d 66 (2001) (Possession of Intrust); Independent Trust
        Corp. v. Hurwick, 351 Ill. App. 3d 941, 814 N.E.2d 895 (2004). We revisit the facts here to
        the extent necessary to understand the issues raised on appeal.
¶3           Intrust was an Illinois corporate fiduciary organized under the Act and regulated by the
        Illinois Commissioner of Banks and Real Estate (the CBRE). Possession of Intrust, 327 Ill.
        App. 3d at 449. Intrust served as a custodian for various investment trust assets customers
        placed in its custody, such as individual retirement accounts, qualified benefit plans and
        personal trusts. Possession of Intrust, 327 Ill. App. 3d at 449-50.
¶4           On December 20, 1999, Intrust and KBS executed the Bond in question. Under the Bond,
        KBS agreed to indemnify Intrust for various losses resulting from criminal activity,
        including losses incurred from fraudulent acts committed by employees, forgeries and
        securities. These insuring agreements were subject to two relevant conditions and limitations
        of the Bond: (1) a termination provision and (2) a notice/proof of loss provision.
¶5           The termination provision provides that the Bond terminates “immediately upon the
        taking over of the Insured by a receiver or other liquidator or by State or Federal officials.”
        The provision also terminates KBS’s liability for a loss discovered after the appointment of
        a receiver:

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                    “Termination of the bond as to any Insured terminates liability for any loss
                sustained by such Insured which is discovered after the effective date of such
                termination.
                    After termination or cancellation, no State or Federal official, agency, receiver,
                or liquidator, acting in the capacity of supervisor, liquidator, receiver, regulator,
                corporate, or any other capacity shall have or exercise any right to make any claim
                against the Underwriter, unless a Proof of Loss, duly sworn to, with full particulars
                and complete documentation has been received by the Underwriter prior to the
                termination or cancellation of this bond.”
¶6          The notice/proof of loss provision of the Bond reads:
                    “(a) At the earliest practicable moment, not to exceed 30 days, after discovery
                of loss, the Insured shall give the Underwriter notice thereof.
                    (b) Within 6 months after such discovery, the Insured shall furnish to the
                Underwriter proof of loss, duly sworn to, with full particulars.”
¶7          The Bond was effective from December 20, 1999, to December 20, 2000, and provided
       insurance coverage in the amount of $10 million. The Bond covered losses discovered
       during the policy period, irrespective of whether the losses occurred during that period.
¶8          As of April 14, 2000, Intrust acted as custodian for approximately $1.84 billion in cash
       and noncash assets. Possession of Intrust, 327 Ill. App. 3d at 450. In the course of its
       business, Intrust held large amounts of cash on a daily basis in a single, commingled
       account. Possession of Intrust, 327 Ill. App. 3d at 450. From December 1990 through April
       23, 1999, Intrust transferred substantial amounts of cash from the commingled account to
       an escrow account at Intercounty Title Company (Intercounty). Possession of Intrust, 327
       Ill. App. 3d at 451. Intercounty’s corporate officers were also, to varying degrees, corporate
       officers of Intrust. See Hurwick, 351 Ill. App. 3d at 943-44. Because a majority of the
       transferred funds was never returned to Intrust, the CBRE directed Intrust to reestablish
       control of the money. Possession of Intrust, 327 Ill. App. 3d at 450-51. In an effort to do so,
       Intrust retained counsel.
¶9          The record shows that Intrust’s attorney sent a letter to KBS on March 10, 2000,
       informing it:
                    “Pursuant to Section 5(a) [(proof of loss provision)] of the Kansas Bankers
                Surety Company’s Bonds & Policies for [Intrust], [Intrust] hereby provides notice
                that a loss of a type that may be covered by the bond has been or will be incurred by
                [Intrust]. Although the exact amount of the loss is currently unknown, it may exceed
                $63 million.
                    Pursuant to Section 5(b), [Intrust] will furnish the Underwriter of proof of loss,
                duly sworn to, with full particulars at the earliest practicable moment.”
¶ 10        On March 13, 2000, KBS responded to the letter, directing Intrust to provide a proof of
       loss within six months of the date of discovery of the loss. On April 14, 2000, because
       Intrust failed to reestablish control of the money transferred to Intercounty, the CBRE seized
       control of Intrust under the Act, appointed PriceWaterhouseCoopers, LLP, as receiver and
       commenced an action for dissolution and liquidation of Intrust. Possession of Intrust, 327

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       Ill. App. 3d at 451. In June 2000, the receiver conducted an investigation and found a
       shortage of about $68.1 million in Intrust’s cash trust assets. Possession of Intrust, 327 Ill.
       App. 3d at 452. The investigation showed the missing funds were misappropriated by
       Intercounty and its corporate officers over a period of 10 years. Possession of Intrust, 327
       Ill. App. 3d at 450. Intrust sent its first proof of loss to KBS on October 25, 2000. Intrust sent
       its second proof of loss to KBS on November 30, 2000.
¶ 11        The receiver sued Intercounty and the court found that the shortage should be allocated
       among the affected account holders. Possession of Intrust, 327 Ill. App. 3d at 457. We
       affirmed the court’s allocation order on direct appeal. Possession of Intrust, 327 Ill. App. 3d
       441.
¶ 12        The receiver also sued Intrust’s corporate officers for breach of contract, fraud, breach
       of fiduciary duties, conversion and an accounting. The complaint sought compensatory and
       punitive damages in excess of $68 million. In 2001, the court granted summary judgment
       in favor of Intrust and against the various defendants for fraud and breach of fiduciary duty.
¶ 13        After the court entered judgments against its corporate officers, Intrust filed a complaint
       against KBS for declaratory judgment, seeking indemnification for losses Intrust alleged
       were covered under the Bond. Intrust claimed it was entitled to coverage under three
       separate agreements of the Bond: (1) agreement A, providing fidelity coverage in the amount
       of $5 million for losses resulting from dishonest or fraudulent acts committed by an
       “employee”; (2) agreement D, providing $3 million in coverage for forgeries or alterations;
       and (3) agreement E, providing $3 million in coverage for securities. Intrust maintained that
       KBS’s refusal to provide payment under the Bond constituted a vexatious and unreasonable
       delay in violation of section 155 of the Illinois Insurance Code (Code) (215 ILCS 5/155
       (West 2004)).
¶ 14        KBS answered Intrust’s complaint, raising three affirmative defenses: (1) Intrust’s claims
       were barred by waiver and estoppel; (2) the claims were barred by the termination and the
       notice/proof of loss provisions of the Bond; and (3) KBS reserved the right to assert
       additional defenses that may be revealed through discovery.
¶ 15        Intrust moved for summary judgment on KBS’s affirmative defenses. In its amended
       motion for summary judgment, Intrust argued, as a threshold matter, that its claim was not
       barred by the termination provision of the Bond because section 6-7.1 of the Act tolled that
       provision on April 14, 2000, the date the receiver was appointed to liquidate Intrust. Intrust
       also argued that KBS waived the notice/proof of loss requirement by failing to assert lack
       of notice as a defense. In the alternative, Intrust claimed it complied with the notice
       requirement on March 10, 2000, the date its attorney sent a letter to KBS informing them of
       a possible loss.
¶ 16        KBS responded that Intrust was not entitled to summary judgment because it failed to
       satisfy the time requirements of the Bond. KBS argued that Intrust’s claim was barred by the
       termination provision of the Bond because Intrust did not discover the loss before the
       appointment of the receiver which triggered the automatic termination of the Bond on April
       14, 2000. KBS maintained that Intrust’s claim was barred by the plain language of both the
       termination and the notice/proof of loss provisions of the Bond because Intrust failed to file
       a timely “proof of loss, duly sworn to, with full particulars” before the receiver was

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       appointed and the Bond terminated. KBS also filed a cross-motion for summary judgment
       based on these two arguments.
¶ 17       The court bifurcated the summary judgment proceedings, addressing Intrust’s motion for
       summary judgment on KBS’s affirmative defenses first. The court denied Intrust’s motion
       for summary judgment with respect to KBS’s affirmative defense based on the termination
       provision of the Bond. In a written order, the court found that KBS was not liable for the loss
       because Intrust did not discover the loss before appointment of a receiver on April 14, 2000,
       the date the Bond was terminated under the termination provision. In reaching this
       conclusion, the court did not consider whether section 6-7.1 of the Act tolled the termination
       provision on the appointment of a receiver.
¶ 18       In a separate written order, the court addressed KBS’s cross-motion for summary
       judgment. The court took notice of its earlier conclusion that the termination provision
       terminated the Bond on April 14, 2000, and that KBS was not liable for the loss at issue
       because the loss was not discovered until after that date. Based on this, the court found that
       KBS owed no duty to indemnify Intrust and granted KBS’s cross-motion for summary
       judgment. Intrust appeals.
¶ 19       Summary judgment is appropriate if the pleadings, depositions and admissions on file
       show no genuine issue of material fact and the moving party is entitled to a judgment as a
       matter of law. 735 ILCS 5/2-1005(c) (West 2006). Summary judgment is a drastic measure
       and should be allowed only when the right of the moving party is clear and free from doubt.
       Mydlach v. DaimlerChrysler Corp., 226 Ill. 2d 307, 311, 875 N.E.2d 1047 (2007). We
       review de novo a trial court order granting summary judgment. Mydlach, 226 Ill. 2d at 311.
¶ 20       Intrust argues that the court erred in concluding that the termination provision of the
       Bond terminated the Bond on the appointment of the receiver. Intrust claims that section 6-
       7.1 of the Act tolled the termination provision for six months because that section tolls all
       deadlines facing a receiver.
¶ 21       Section 6-7.1 of the Act, “[t]olling of the statute of limitations,” provides:
               “If the Commissioner appoints a receiver to take possession and control of the assets
               of the beneficiaries of such fiduciary relations, for the purpose of holding such assets
               as fiduciary for the benefit of such beneficiaries pending the winding up of the affairs
               of the corporate fiduciary being liquidated and the appointment of a successor
               fiduciary or fiduciaries for such beneficiaries, any period of limitation fixed by
               statute, rule of court or agreement which would otherwise expire on a claim or right
               of action in favor of or against the beneficiary of such fiduciary relations, or upon
               which an appeal must be taken or a pleading or other document which must be filed
               by a corporate fiduciary on behalf of a beneficiary in any pending action or
               proceeding shall be tolled for a period of 6 months after the appointment of a
               receiver ***.” 205 ILCS 620/6-7.1 (West 2006).
¶ 22       Intrust argues that the termination provision of the Bond attempts to circumvent section
       6-7.1 tolling by terminating the Bond immediately on the appointment of a receiver. Intrust
       claims that the termination provision is void because it conflicts with the public policy
       expressed in section 6-7.1.

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¶ 23       KBS responds that section 6-7.1 applies only to policy provisions that set a date for the
       termination of the Bond following the appointment of a receiver. KBS argues that the
       termination provision in question does not conflict with section 6-7.1 because it does not set
       a date for when the Bond would expire after appointment of a receiver but, rather, requires
       certain conditions to be fulfilled before the receiver is appointed and the Bond terminated.
¶ 24       Neither the parties nor our research provided Illinois cases discussing similar termination
       provisions. KBS relies on federal cases upholding substantially similar termination
       provisions. See Federal Deposit Insurance Corp. v. Aetna Casualty & Surety Co., 903 F.2d
       1073 (6th Cir. 1990) (finding that a bond provision providing for termination of the bond on
       takeover of the insured by the FDIC was not void); Sharp v. Federal Savings & Loan
       Insurance Corp., 858 F.2d 1042 (5th Cir. 1988) (finding an identical termination provision
       to be enforceable); California Union Insurance Co. v. American Diversified Savings Bank,
       948 F.2d 556 (9th Cir. 1991) (enforcing a substantially similar termination provision).
       Although it is helpful to look to other jurisdictions for guidance, we are not bound by those
       decisions and must decide the case in a manner consistent with Illinois law. International
       Minerals & Chemical Corp. v. Liberty Mutual Insurance Co., 168 Ill. App. 3d 361, 370, 522
       N.E.2d 758 (1988).
¶ 25       Under Illinois law, courts will apply the terms of an insurance policy as written, unless
       those terms contravene public policy. State Farm Mutual Automobile Insurance Co. v. Smith,
       197 Ill. 2d 369, 372, 757 N.E.2d 881 (2001). Statutes are an expression of Illinois public
       policy. American Federation of State, County & Municipal Employees v. State, 124 Ill. 2d
       246, 260, 529 N.E.2d 534 (1988). The purpose of a statute cannot be circumvented by
       inserting a contrary provision in an insurance policy. Cummins v. Country Mutual Insurance
       Co., 178 Ill. 2d 474, 483, 687 N.E.2d 1021 (1997); Smith, 197 Ill. 2d at 372. A statute in
       force at the time an insurance policy was issued is controlling and we resolve a conflict
       between a statute and an insurance policy in favor of the statute. Smith, 197 Ill. 2d at 372;
       Cummins, 178 Ill. 2d at 483.
¶ 26       Here, we believe the termination provision of the Bond cannot be read as precluding
       recovery because section 6-7.1 of the Act must be considered. Under the plain language of
       section 6-7.1, “any period of limitation fixed by *** agreement which would otherwise
       expire on a claim or right of action in favor of or against the beneficiary *** shall be tolled
       for a period of 6 months after the appointment of a receiver.” 205 ILCS 620/6-7.1 (West
       2006). The termination provision in question effectively fixes a limitation period on Intrust’s
       claim or right of action to be the date a receiver is appointed regardless of whether the claim
       was in existence before the appointment of the receiver. This the provision cannot do. We
       find that under section 6-7.1 a claim or right of action in existence on the date the receiver
       is appointed tolls the operation of the Bond by six months. Because the record shows Intrust
       notified KBS of a claim or right of action on March 10, 2000, a month before the receiver
       was appointed, section 6-7.1 tolled the termination provision on April 14, 2000, the date the
       receiver was appointed.
¶ 27       We are unpersuaded by KBS’s argument that Intrust was required to comply with all
       elements of the notice/proof of loss provision before the appointment of the receiver. Under
       the plain language of section 6-7.1, the only requirement to trigger tolling is the existence

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       of a claim or right of action on the date the receiver is appointed. As mentioned, the March
       10, 2000, letter was sufficient to notify KBS of Intrust’s claim or right of action. In its
       response to the letter, KBS acknowledged as much by directing Intrust to provide a proof of
       loss within six months of the date of discovery of the loss. Although the March 10, 2000,
       letter did not comply with the notice/proof of loss provision as it was not “duly sworn to,
       with full particulars,” it did not need to because section 6-7.1 tolled the Bond, including the
       requirements of the notice/proof of loss provision, for six months. With the benefit of tolling,
       Intrust had six months from April 14, 2000, the date the receiver was appointed, to comply
       with the notice/proof of loss provision of the Bond.
¶ 28       KBS argues that even if section 6-7.1 is applicable to the Bond it is still entitled to
       summary judgment because Intrust did not submit proof of loss within six months of the
       receiver being appointed. We note that in its response to the March 10, 2000, letter, KBS
       directed Intrust to provide a proof of loss within six months of the date of discovery of the
       loss, not the date the receiver was appointed. The receiver did not discover the loss until June
       2000. Intrust sent its first proof of loss to KBS on October 25, 2000. Under this timeline,
       Intrust’s proof of loss appears to be timely. We need not resolve this matter here. We believe
       there exists a question of fact as to whether Intrust complied with the notice/proof of loss
       provision of the Bond within the extended six-month period allowed by section 6-7.1 of the
       Act. Given our ruling on this issue, we need not consider the other arguments raised by
       Intrust.
¶ 29       We reverse the summary judgment entered on behalf of KBS and remand for further
       proceedings.

¶ 30      Reversed and remanded.

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