Bergman & Lefkow Insurance Agency v. Flash Cab Co.

Citations: 249 N.E.2d 729; 110 Ill. App. 2d 415; 1969 Ill. App. LEXIS 1237Docket: Gen. 52,391

Court: Appellate Court of Illinois; June 4, 1969; Illinois; State Appellate Court

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William B. Shapiro, Samuel N. Bergman, and Bergman and Lefkow Insurance Agency, Inc. appeal judgments awarded to Flash Cab Company and Public Taxi Service, Inc. on a counterclaim alleging misrepresentations and failure to disclose relevant facts, which led the cab companies to insure with a financially unsound insurer. The jury awarded Flash Cab $44,657.18 and Public Taxi $28,876.08. The appellants argue the judgments should be reversed on several grounds: 

1. Lack of proof for any misrepresentation.
2. Insufficient evidence for a finding of failure to disclose an interest in the recommended insurance company.
3. Absence of privity, claiming the cab companies lacked standing to sue.
4. Assertion that the cab companies dealt with Shapiro as a principal, not as an agent for the others.
5. Claim that Bergman and Lefkow Insurance Agency, Inc. was not incorporated at the time of the alleged misrepresentation.

Alternatively, the appellants seek a new trial, arguing the trial court improperly admitted evidence, gave misleading jury instructions, and that the verdict was against the manifest weight of the evidence. They also contend that if found liable, they are entitled to offsets against the judgments. The context includes Shapiro’s and Bergman’s professional backgrounds, their involvement with various insurance entities, and previous interactions with Dickholtz, the president of Flash Cab, regarding insurance needs following a prior insurer's liquidation.

Shapiro indicated he could not propose a definitive arrangement but would consult his office. In early 1960, he met with Dickholtz and Bergman to discuss a proposal, which Dickholtz rejected due to an inability to make a deposit. In October 1960, Shapiro informed Dickholtz that a viable arrangement could be established with Exchange Casualty and Surety Co., a company previously co-owned by him and Bergman. Shapiro claimed that only he could facilitate this deal due to his past association with the company, and Dickholtz agreed to pay Shapiro $50 weekly if the deal transpired, believing Exchange would also provide him a commission.

Dickholtz expressed caution in selecting an insurance program due to prior negative experiences, but Shapiro assured him of Exchange's financial stability and urged him to rely on his expertise as a former officer. A memorandum from their meeting indicated that the weekly payment to Shapiro was for consulting services. Shapiro testified he consulted with Dickholtz about claims approximately eight times, each session lasting about 45 minutes. 

On November 8, 1960, a meeting took place involving Shapiro, Dickholtz, and two Exchange representatives, followed by a letter from Shapiro indicating a potential agreement. This letter was on Bergman and Lefkow Insurance Agency stationery and signed by Shapiro. A final agreement was reached on January 1, 1961, allowing Dickholtz to solicit insurance applications and issue policies, retaining 29% of the premiums as commission and for expenses. Premiums collected were deposited into Exchange's account, with commissions retained by Flash Cab and fees in Dickholtz's personal Taxi Drivers Emergency Fund. Claims were managed by Dickholtz or the cab companies, paid from the Emergency Fund and deducted from monthly premiums, with Shapiro's payments sourced from this fund.

In March 1962, Dickholtz learned from Exchange and the Illinois Director of Insurance that Exchange's license had been revoked and all agents' licenses canceled, leading him to inquire with Shapiro about the next steps. Shapiro relayed that Bergman would support older clients' claims but that Flash Cab would be left to manage its own claims. The total net premium paid to Exchange during the insured period was $241,301.03, with differing testimonies on commission amounts retained by cab companies, reported as $60,255.66 by the companies and $68,141.14 by appellants. Exchange was under the ownership of Exchange Management Company until May 15, 1959.

Bergman served as president of both the holding and insurance companies, while Shapiro held the positions of secretary-treasurer of the insurance company and vice-president of the holding company. On May 15, 1959, the holding company sold Exchange to Donald Elbel for $160,000, with an agreement for Elbel to pay half of any savings on loss reserves upon Exchange's liquidation, with a settlement date of June 30, 1960, although no savings were realized. Following the sale, Shapiro became vice-president of Exchange until March 9, 1960. 

Expert witness Paul Plesko testified regarding Exchange's financial status, revealing that the company incurred losses in operations for 1957, 1958, and 1959, with policyholders' surplus declining from $702,667 in 1957 to $439,748 in 1959. Shareholders contributed significant assets in both years to prevent insolvency. Plesko noted that loss reserves were insufficient compared to actual losses, and both liquid and total assets experienced substantial declines. 

The cab companies sought to present Plesko's testimony on Exchange's financial condition as of December 31, 1960, but objections were raised and sustained, despite the admission of the 1960 and 1961 annual reports, which indicated continued deterioration in liquid assets and reserve ratios. Exchange stopped writing new business in March 1959 and did not resume until October of that year. 

The jury awarded the cab companies amounts related to accident claims and associated defense costs following Exchange's failure. Appellants argued that there was no evidence of misrepresentation, contending that Shapiro's statements were mere opinions, lacking evidence of Exchange's financial condition in October 1960, and asserting that Exchange was solvent at that time. Citing Buttitta v. Lawrence, the court emphasized that statements could be treated as factual if presented in a manner that another party could reasonably rely upon them as facts. The excerpt also references Endsley v. Johns, illustrating the implications of misrepresentation in transactions.

Judgment was entered for the plaintiff against a third party who made false assertions. The court affirmed this judgment, distinguishing between false assertions of value in vendor-vendee relationships, which are not actionable due to inherent antagonism, and false representations made by a disinterested third party regarding another's credit or reliability. In the latter scenario, the relationship is based on confidence, and if a materially false representation is knowingly made to someone unaware of its falseness, leading to injury, an action for fraud can be pursued. 

In the case at hand, sufficient evidence allowed the jury to conclude that statements made by Shapiro—asserting that Exchange was "financially sound" and that Dickholtz could completely rely on his knowledge—were material representations. Unlike the cited case of Fetherston v. National Republic Bancorporation, where the statements were deemed mere encouragement, Shapiro's claims were factual and accompanied by assurances of reliability. 

The appellants argued that there was no evidence of Exchange's financial condition in October 1960, but the court found ample evidence indicating Exchange's precarious financial state by the end of 1959, including diminished policyholders' surplus and reliance on capital contributions. Additionally, while expert testimony regarding 1960 was excluded, Exchange's annual reports for 1960 and 1961 showed continued financial deterioration. The fact that Exchange was solvent during Shapiro's statements did not validate his claim of financial soundness, as he did not clarify that the company was solvent at that time.

Dickholtz was reassured by Shapiro regarding Exchange's ability to manage risk, despite the company having paused new business for several months prior. Shapiro was aware of the cab companies' past negative experiences with insurers and Dickholtz's desire for a reliable insurance partner. The record showed no failure to disclose a financial interest in Exchange, as Shapiro and Bergman had sold their interests in May 1959, with any potential supplementary interest expiring on June 30, 1960—four months before Shapiro's assurances to Dickholtz. Shapiro identified himself as a former officer and owner, indicating no current interest was concealed.

The cab companies presented two claims to the jury: misrepresentation of Exchange's financial condition and failure to disclose retained interest. An objection was made to the misrepresentation instruction, but none to the non-disclosure instruction, nor was there a motion to withdraw either claim. According to Section 68(4) of the Civil Practice Act, a jury verdict cannot be overturned for a defective ground if other grounds are sufficient. The court found adequate evidence supporting the misrepresentation claim, affirming the verdict as both claims were submitted to the jury without objection.

The court dismissed the appellants' argument regarding lack of privity, asserting that a misrepresentation claim does not require a contractual relationship. The necessary components include a material misrepresentation made with either knowledge of its falsity or reckless disregard for its truth, intended for reliance by the other party, who must then rely on it and suffer damages. Shapiro's misrepresentations were directed at Dickholtz, who was seeking a viable insurance option for the cab companies.

Dickholtz’s subsequent role as an agent for Exchange does not negate the impact of prior misrepresentations, nor does his payment agreement with Shapiro affect liability. Appellants' cited cases are distinguishable: in National Iron, Steel Co. v. Hunt, the misrepresentation was made to a third party, and in Aetna Ins. Co. v. Illinois Cent. R. Co., the plaintiff was not a party to the relevant contract, preventing recovery. Appellants argue that Dickholtz's lack of independent investigation constitutes negligence, but in Illinois law, a defrauded party can recover from a party that intentionally misrepresented facts. Dickholtz was justified in relying on Shapiro's representations due to Shapiro’s claimed expertise regarding Exchange’s financial condition.

Appellants also claim Shapiro acted solely on his behalf, not as an agent for others. However, evidence supports Shapiro's partnership with Bergman, as he represented himself as such to Dickholtz, including in communications on letterhead featuring both names. Testimony indicated Shapiro’s knowledge regarding Exchange's receivership and his assurance to Dickholtz about Bergman’s intentions toward existing clients. The jury received appropriate instructions regarding agency and authority, and the evidence substantiates findings against Bergman personally. Lastly, appellants assert that Bergman and Lefkow Insurance Agency, Inc. cannot be held liable for misrepresentations made before its incorporation, as it was not in existence at that time.

Appellees argue for liability based on the premise that the new corporation is merely a continuation of the old corporations. Citing Loughlin v. United States School Furniture Co., the court established that if the officers or stockholders of a corporation create a new corporation and transfer the old corporation's goodwill, business, and assets without settling its debts, equity will attach the new corporation's assets to those debts. This principle was further supported in Plaza Express Co. v. Middle States Motor Freight, Inc., where it was recognized that a new corporation might implicitly assume tort liabilities of the old corporation.

Evidence indicated that Bergman and Lefkow Insurance Agency, Inc. was a continuation of the dissolved companies, as all prior companies operated from the same office and engaged in the same business. Key individuals from the previous companies remained in leadership roles in the new corporation, and there was clear intent to service existing clients, affirming the continuity.

Appellants requested outright reversal of judgments or a new trial, claiming the trial court improperly admitted the contract of sale between Exchange and Donald Elbel. However, the court found the contract relevant, demonstrating the appellants' awareness of Exchange's poor financial state at the time of sale. The admission of Exchange's annual statements from 1957 to 1959 was also deemed relevant for illustrating the decline in financial health and the falsity of Shapiro's representations. The court correctly allowed expert testimony interpreting financial data, and the use of trial exhibits was within the court’s discretion. 

Regarding the jury instructions on misrepresentation, the court found sufficient evidence supporting the charge, thus affirming that the jury was properly instructed and that the trial court's evidentiary decisions did not constitute prejudicial error. The verdict was upheld as consistent with the weight of the evidence presented.

Appellants claim entitlement to offsets against judgments based on the reasonable value of services rendered, arguing that this value equals the total commission paid, exceeding $60,000. They sought to present this argument to the jury, but the trial court ruled against it, instructing that the cab companies' damages should not be reduced by the commissions from gross premiums. The appellate court supports the trial court's decision, stating the appellants' claim for offsets is untenable. The record shows no evidence that cab companies promised more than $50 per week to Shapiro from the Taxi Drivers' Emergency Fund. A contract between Exchange and the cab companies stated that Dickholtz would receive the commission, and prior to trial, appellants did not demand further payment for their services. Although a memorandum indicated Shapiro’s role as a claims consultant, evidence showed he only spent about six hours on claims discussions. Testimony indicated the $50 payment was made due to Shapiro's connection with Exchange, and there was no promise of additional payment. Therefore, the appellate court concludes that the appellants are not entitled to offsets, affirming the Circuit Court's judgments.