Heritage Christian Sch., Inc. v. Ing N. Am. Ins. Corp.

851 F.Supp.2d 1154

283 Ed. Law Rep. 135

HERITAGE CHRISTIAN SCHOOLS, INC., Plaintiff,

v.ING NORTH AMERICA INSURANCE CORPORATION, et al. Defendants.

No. 11–C–1067.

United States District Court, E.D. Wisconsin.

March 30, 2012.

John B. Tuffnell, Whyte Hirschboeck Dudek SC, Charles J. Crueger, Erin K. Dickinson, Hansen Riederer Dickinson & Crueger LLC, Milwaukee, WI, for Plaintiff.

Mary K. Braza, Zachary J. Corey, Bartholomew F. Reuter, Foley & Lardner LLP, Milwaukee, WI, for Defendants.

DECISION AND ORDER

LYNN ADELMAN, District Judge.

Plaintiff Heritage Christian Schools, Inc. (“Heritage”), a private school located in Brookfield, Wisconsin, has filed a lawsuit alleging various claims under both federal and state law against ING North America Insurance Corporation (“ING”) and Security Life of Denver Insurance Company (“Security Life”).¹ Before me now is the defendants' motion to dismiss several counts of the complaint for failure to state a claim on which relief may be granted. SeeFed.R.Civ.P. 12(b)(6).

I. BACKGROUND

The following facts are taken from the Third Amended Complaint, the allegations of which I accept as true for purposes of this motion.

Heritage was the victim of a fraudulent scheme perpetrated by Richard Incandela and his wife, Barbara Incandela. Between 2004 and 2007, Barbara Incandela was an agent authorized to sell insurance policies underwritten by Security Life and administered by ING. Although Richard Incandela was not licensed to sell insurance and was not formally an agent of Security Life, he also sold Security Life insurance products during that general time period. The Incandelas operated various business entities, including Solutions Enterprise of America, Inc. (“Solutions Enterprise”), and Building Value, LLC (“Building Value”).

In 2003, when Heritage was having financial problems, Richard Incandela appeared and proposed a plan for building an endowment for the school that involved purchasing insurance on the lives of various individuals associated with the school. Heritage was interested, and over the next four years it paid over $1.5 million to the Incandelas and their entities, thinking that this money was being used to pay premiums on policies issued by Security Life. In fact, the Incandelas used only about $500,000 of this money to pay premiums on actual insurance policies. They kept the rest for themselves and tricked Heritage by sending it invoices for premiums on non-existent policies. The Incandelas engaged in similar conduct with other small private schools around the country—convincing the schools that they could build an endowment by investing in life insurance policies and then selling the schools non-existent policies and keeping the purported premium payments for themselves. ING and Security Life were aware that the Incandelas were encouraging private schools to invest in life insurance policies as a way to build their endowments and that some schools were actually purchasing policies based on the Incandelas' recommendations. They were also aware that Richard Incandela was not licensed to sell insurance. However, ING and Security Life did not know that, in addition to collecting premiums on actual Security Life policies (and policies underwritten by other ING affiliates), the Incandelas were defrauding the schools by sending them invoices for policies that did not exist.

In April 2007, a school in South Carolina discovered the Incandelas' fraud, and a representative of the school notified Security Life's president, Donald Britton, of the fraud. (Apparently, the representative knew Britton personally and wanted to give him advance notice before taking other action.) Britton referred the matter to ING and Security Life's in-house counsel, and an internal investigation was conducted. By September 2007, the investigation encompassed the Incandelas' dealings with other schools around the country, including Heritage. On September 25, 2007, ING and Security Life sent Heritage a “quality audit” letter. The complaint does not describe the contents of this letter, but apparently it was part of the investigation into the Incandelas' activities. Heritage allowed Richard Incandela to prepare its response to the letter.

On November 16, 2007, ING and Security Life terminated their relationship with Barbara Incandela for cause and told Richard Incandela to stop holding himself out as an agent of ING and Security Life. On November 19, 2007, ING and Security Life sent Heritage a letter stating that Barbara Incandela was no longer an authorized agent of Security Life and that Richard Incandela was not and had never been an authorized agent of Security Life or any ING-affiliated company. The letter stated that a new agent had been appointed to service Heritage's policies. However, the letter did not state that Barbara Incandela had been terminated for cause or that ING and Security Life were investigating her and her husband for fraud. Heritage continued to work with Richard Incandela through the end of 2007 and the beginning of 2008.

Heritage discovered the Incandelas' fraud in April of 2008. At the beginning of that month, and over Richard Incandela's objection, Heritage hired a chief financial officer, Wendall Harris. As part of his investigation into the state of Heritage's finances, Harris contacted ING and Security Life about the status of Heritage's policies. By the end of the month, Harris had determined that Heritage likely was a victim of the Incandelas' fraud.

II. DISCUSSION

Heritage brings seven claims against ING and Security Life: (1) liability under the Racketeer Influenced and Corrupt Organizations Act (“RICO”); (2) liability under the Wisconsin Organized Crime Control Act (“WOCCA”); (3) fraud; (4) negligence; (5) insurance bad faith; (6) strict-responsibility misrepresentation; and (7) negligent misrepresentation. ING and Security Life move to dismiss the RICO, WOCCA, insurance bad faith, and two misrepresentation claims for failure to state a claim on which relief may be granted.

A. RICO and WOCCA

Because WOCCA was patterned after RICO, Wisconsin courts consider cases interpreting RICO to be persuasive authority as to the interpretation of WOCCA. See, e.g., State v. Mueller, 201 Wis.2d 121, 144, 549 N.W.2d 455 (Ct.App.1996). In the present case, the parties agree that the RICO and WOCCA claims stand or fall together and cite primarily cases decided under RICO. Therefore, I will discuss only RICO.

The purpose of RICO is to combat racketeering—i.e., a pattern of illegal activity carried out as part of an enterprise that is owned or controlled by those engagedin the illegal activity. See Jennings v. Auto Meter Prods., Inc., 495 F.3d 466, 472 (7th Cir.2007); Midwest Grinding Co., Inc. v. Spitz, 976 F.2d 1016, 1019 (7th Cir.1992); Black's Law Dictionary 1265–66 (7th ed. 1999) (definition of “racketeering”). To that end, Congress chose to supplement criminal enforcement of its provisions with a civil cause of action for persons whose business or property has been injured by such criminal activity. 18 U.S.C. § 1964(c). To encourage private enforcement, Congress provided civil RICO plaintiffs with the opportunity to recover treble damages, costs, and attorney's fees if they can successfully establish the elements of a RICO violation. Midwest Grinding, 976 F.2d at 1019. The elements of a RICO violation are “(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity.” Jennings, 495 F.3d at 472. A pattern of racketeering activity consists of at least two predicate acts of racketeering committed within a ten-year period. 18 U.S.C. § 1961(5). Predicate acts are acts indictable under a specified list of criminal laws, 18 U.S.C. § 1961(1)(B), including mail fraud under 18 U.S.C. § 1341, and wire fraud under 18 U.S.C. § 1343.

Heritage alleges that the Incandelas controlled the conduct of a RICO enterprise-their businesses, Building Value and Solutions Enterprise—through a pattern of wire and mail fraud. The wire and mail fraud involved communications relating to the non-existent insurance policies. The Incandelas are not defendants in this case, but Heritage claims that ING and Security Life are vicariously liable for their RICO violations. ING and Security Life move to dismiss these claims on the ground that, as a matter of law, they cannot be held vicariously liable under RICO.

Initially, I note that this case does not implicate the question of whether a corporation that is the “enterprise” (i.e., the conduit for the illegal activity) can also be a “person” that is liable under RICO. See D & S Auto Parts, Inc. v. Schwartz, 838 F.2d 964, 966–68 (7th Cir.1988); Liquid Air Corp. v. Rogers, 834 F.2d 1297, 1306–07 (7th Cir.1987); Haroco, Inc. v. Am. Nat'l Bank & Trust Co., 747 F.2d 384, 401–02 (7th Cir.1984). In the present case, the alleged enterprise comprises the Incandelas' business entities, Building Value and Solutions Enterprise, but not ING and Security Life, and so the special problems that arise when the corporation is the enterprise do not arise here.

I turn, then, to the question of whether ING and Security Life can be held liable under ordinary principles of agency law—the relevant principles being respondeat superior and apparent authority. Under respondeat superior, an employer is liable for the acts or omissions of an employee done within the scope of employment and in furtherance of the employer's goals. See, e.g., Makor Issues & Rights, Ltd. v. Tellabs, Inc., 513 F.3d 702, 707–08 (7th Cir.2008); Scottsdale Ins. Co. v. Subscription Plus, Inc., 299 F.3d 618, 621–22 (7th Cir.2002). When the employee does not act in furtherance of the employer's goals but is on a “frolic of his own,” the employer is not liable under respondeat superior. Tellabs, 513 F.3d at 708 (“deliberate wrongs by an employee are not imputed to his employer unless they are not only within the scope of his employment but in attempted furtherance of the employer's...