Heritage Christian Schools Inc v. ING North America Insurance Corporation et al

Filing 51

ORDER signed by Judge Lynn Adelman on 3/30/2012 granting in part and denying in part 29 Defendants' Motion to Dismiss for Failure to State a Claim. Heritage's RICO, WOCCA, and insurance-bad-faith claims are dismissed. Its claims for negligent misrepresentation and strict-responsibility misrepresentation remain. (cc: all counsel) (nts)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WISCONSIN

HERITAGE CHRISTIAN SCHOOLS, INC.,
Plaintiff,
v.

Case No. 11-C-1067

ING NORTH AM ERICA INSURANCE
CORPORATION, et al.
Defendants.

DECISION AND ORDER
Plaintiff Heritage Christian Schools, Inc. (“Heritage”), a private school located in
Brookfield, W isconsin, 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. See
Fed. 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.

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Heritage also named the president of Security Life, Donald Britton, as a defendant, but
in a separate order issued today I dismissed the claims against him for lack of personal
jurisdiction.

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.

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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, W endall
Harris. As part of his investigation into the state of Heritage’s finances, Harris contacted ING

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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 W isconsin
Organized Crime Control Act (“W OCCA”“); (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, W OCCA, insurance bad faith, and two
misrepresentation claims for failure to state a claim on which relief may be granted.
A.

RICO and WOCCA
Because W O CCA was patterned after RICO, W isconsin courts consider cases

interpreting RICO to be persuasive authority as to the interpretation of W OCCA. See, e.g.,
State v. Mueller, 201 W is.2d 121, 144 (Ct. App.1996). In the present case, the parties agree
that the RICO and W OCCA 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 engaged in 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

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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. T he 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

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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. Subscriptions Plus, Inc., 299 F.3d 618, 621–22 (7th Cir. 2002).
W hen 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 goals”);
Scottsdale Ins. Co., 299 F.3d at 622. However, even if respondeat superior does not apply
because the employee was not acting in furtherance of the employer’s goals, the employer may
be liable under apparent authority.

Under apparent authority, “[w]hen an agent who is

authorized to make a contract on his principal's behalf uses fraud to induce the contract, the
principal is liable even if the agent is acting solely to feather his own nest.” Ackerman v.
Northwestern Mut. Life Ins. Co., 172 F.3d 467, 471 (7th Cir. 1999); see also Am. Soc’y of
Mech. Eng’rs, Inc. v. Hydrolevel Corp., 456 U.S. 556, 565–70 (1982) (“a principal is liable for
an agent's fraud though the agent acts solely to benefit himself, if the agent acts with apparent
authority”). Apparent authority is designed to promote reliance on the agency relationship: it
benefits third parties because it protects them in their dealings with agents, and it benefits

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principals because third parties who have this protection will be more likely to deal with the
principal’s agents. See, e.g., Am. Soc’y of Mech. Eng’rs, Inc., 456 U.S. at 567.
In the present case, Heritage argues that ING and Security Life are liable for the
Incandelas’ RICO violations under respondeat superior. However, when the Incandelas sent
fake invoices to Heritage and stole the money that Heritage remitted, they were not acting to
further ING and Security Life’s goals. Rather, they were acting to further their own goals,
which were at odds with ING and Security Life’s. Heritage recognizes this, but it contends that
respondeat superior still applies because ING and Security Life benefitted in part from the
Incandelas’ overall scheme in the form of the approximately $500,000 in premiums that
Heritage paid in connection with actual policies. But this much of the “scheme” was not
unlawful, and no principle of agency law of which I am aware imputes to the principal liability
for unlawful acts that do not benefit the principal simply because the agent also engages in
similar, lawful acts that do. Heritage points out that the legitimate policies were not “suitable”
investments for Heritage and that Richard Incandela was not licensed to sell them, but these
facts are not relevant to the question of whether ING and Security Life are liable for the
Incandelas’ RICO violations, since selling “unsuitable” investments and selling insurance
without a license are not RICO predicate acts. Thus, ING and Security Life are not liable for
the Incandelas’ RICO violations under respondeat superior.
Heritage does not argue that ING and Security Life are liable for the Incandelas’ RICO
violations under apparent authority, but for good measure I note that apparent authority is not
a viable theory in the RICO context when the agent’s acts do not benefit the principal and were
not intended to do so. Now, apparent authority does make ING and Security Life liable for the

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Incandelas’ common-law fraud even though the fraud did not benefit ING and Security Life and
the Incandelas were on a frolic of their own, since the fraud was committed through use of the
apparent authority in which ING and Security Life had cloaked the Incandelas.

Indeed,

Heritage has sued ING and Security Life for common-law fraud, and they have not moved to
dismiss those counts of the complaint. However, although apparent authority can be used to
impute liability for common-law fraud, that does not mean that it can be used to impute liability
for the crimes of mail and wire fraud—i.e., the RICO predicate acts—when the agent’s acts
do not benefit the principal and were not intended to benefit the principal. This is because
corporations are criminally liable only when their agents act in behalf of the corporation. See,
e.g., W ayne R. LaFave, Criminal Law 747 (5th ed. 2010) (stating that it is “universally
accepted” that corporation is not criminally liable if agent’s acts are “undertaken solely to
advance the agent’s own interests or interests of parties other than the corporate employer”).
Thus, RICO liability under an apparent-authority theory when the agent’s acts do not benefit
the principal and were not intended to benefit the principal would not be consistent with
ordinary principles of agency law.
Accordingly, because ING and Security Life have not themselves violated RICO and are
not vicariously liable under RICO for the Incandelas’ violations, defendants’ motion to dismiss
the RICO and W OCCA counts of the complaint will be granted.
B.

Insurance Bad Faith
Heritage contends that Security Life and ING committed the tort of insurance bad faith

when they failed to inform Heritage of the results of their investigation into the Incandelas’
conduct. Heritage contends that had Security Life and ING informed them of those results,

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it would have discovered the Incandelas’ fraud sooner than it did. ING and Security Life move
to dismiss this claim on the ground that the alleged facts do not fit into any recognized claim
for insurance bad faith under W isconsin law.
W isconsin cases recognize three general categories of insurance bad-faith claims.
See, e.g., Roehl Transp., Inc. v. Liberty Mut. Ins. Co., 325 W is. 2d 56, 73–74 (2010). The
first comprises “third-party” bad-faith claims, which arise in the liability-insurance context when
the insurance company, which has the right to control the insured’s defense, acts in bad faith
and subjects the insured to potential liability by failing to settle a third party’s claim against the
insured for an amount within the policy limits. A variation on this kind of third-party claim
occurs when the insurer in bad faith exposes the insured to liability within the deductible
amount. The second general category comprises “first party” bad faith claims. In these
claims, the insurer unreasonably withholds payment on a claim that the policy clearly covers.
The third category involves cases in which a worker’s compensation carrier unreasonably
refuses to promptly pay an injured worker who is entitled to workers compensation benefits.
Heritage’s bad-faith claim does not fit into any of these categories. Heritage contends,
however, that these categories are not exhaustive and that new forms of insurance bad faith
can be recognized. Generally, Heritage is correct. The W isconsin Supreme Court has stated
that the existing W isconsin cases do not purport to catalogue all possible bad faith claims.
Roehl Transp., 325 W is. 2d at 75. However, Heritage must still demonstrate that recognizing
a cause of action for insurance bad faith under the facts alleged would be consistent with
existing insurance-bad-faith principles. See id. at 76 (“The common-law history of insurance
bad faith claims in this state requires the court to analyze the facts of the claim presented and

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determine whether the established principles of the tort of bad faith support recognizing the
claim presented as raising a valid cause of action.”). As explained below, Heritage has not
done that.
The fundamental problem is that ING and Security Life’s alleged bad-faith conduct did
not involve taking advantage of circumstances created by an insurance contract, which is
something that is present in all of the recognized kinds of bad-faith claims. In the third-party
context, the insurer takes advantage of its right to control the insured’s defense and essentially
engages in a form of “gambling with the insured’s money.” See Roehl Transp., 325 W is. 2d
at 78–80; R.C. W egman Constr. Co. v. Admiral Ins. Co., 629 F.3d 724, 725-26 (7th Cir. 2011).
In the first-party context, the insurer takes advantage of the fact that if it denies a claim that is
clearly covered by the policy, the worst that can happen under contract law is that it will be
made to pay the amount that it should have paid, plus interest. In the absence of bad-faith tort
remedies, the insured, who may not be made whole under contract law alone, might be coerced
into settling for less than what he or she is entitled to under the policy. See Randy Papetti,
Note, The Insurer’s Duty of Good Faith in the Context of Litigation, 60 Geo. W ash. L. Rev.
1931, 1936–37 (1992); New Appleman Insurance Bad Faith Litigation § 5.02[1] (2d ed. 2011)
(available on Lexis). In the worker’s compensation context, the insurer takes advantage of the
fact that worker’s compensation is the injured claimant’s only source for compensation. See
Kranzush v. Badger State Mut. Cas. Co., 103 W is. 2d 56, 65–66 (1981).
In the present case, ING and Security Life did not take advantage of any circumstances
created by the life insurance contracts that Heritage purchased. The alleged bad faith was
failing to tell Heritage that it might be a victim of the Incandelas’ fraud, and this had nothing to

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do with the administration of Heritage’s policies. There is simply nothing about the insurance
relationship that ING and Security Life exploited in order to obtain an undeserved benefit.
Thus, the policy underlying insurance bad-faith claims is not implicated in the present case.
Accordingly, Heritage does not have a viable claim for insurance bad faith.2
C.

M isrepresentation
Heritage asserts claims for strict-responsibility misrepresentation and negligent

misrepresentation. These claims are based on two letters that ING and Security Life sent to
Heritage: the September 27, 2007 “quality audit” letter, and the November 19, 2007 letter in
which ING and Security Life informed Heritage that Barbara Incandela was no longer an
authorized Security Life agent and that Richard Incandela never had been an authorized
Security Life agent. Heritage alleges that these letters were misleading because they did not
reveal the full extent of ING and Security Life’s knowledge of the Incandelas’ wrongdoing. ING
and Security Life move to dismiss these claims on the ground that the W isconsin Supreme
Court has

not recognized causes

of

action for negligent or strict-responsibility

misrepresentation based on “nondisclosure.” See Kaloti Enters., Inc. v. Kellogg Sales Co., 283
W is. 2d 555, 570 n.3 (2005) (“W e have never held that a claim for strict responsibility for
misrepresentation or negligent misrepresentation can arise from a failure to disclose.
Therefore, it remains an open question.”).

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This does not mean that Heritage has no viable claim based on ING and Security Life’s
failure to warn. Heritage brings a negligence claim against ING and Security Life alleging that
they breached the standard of care by, among other things, “failing to disclose the risk of [their]
agents’ fraud to Heritage.” (Third Amended Compl. ¶ 183, ECF No. 36.) ING and Security
Life have not moved to dismiss that claim.
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Heritage contends that its claims are not based on nondisclosure, and that therefore it
is irrelevant that the W isconsin Supreme Court has not recognized negligence and strictresponsibility misrepresentation claims based on nondisclosure. Essentially, Heritage makes
a distinction between claims involving “half-truths” and those involving nondisclosures. See
Randi W . v. Muroc Joint Unified Sch. Dist., 929 P.2d 582, 591–92 (Cal. 1997) (distinguishing
between “misleading half-truths” and “mere nondisclosure”). A half-truth is “a representation
stating the truth so far as it goes but which the maker knows or believes to be materially
misleading because of his failure to state additional or qualifying matter.”

Restatement

(Second) of T orts § 529 & cmt. a (1977). A misrepresentation involving a nondisclosure
occurs when the speaker remains silent in the face of a duty to speak. See Eberts v.
Goderstad, 569 F.3d 757, 766 n.8 (7th Cir. 2009).
ING and Security Life do not seem to dispute that Heritage’s misrepresentation claims
would be viable under W isconsin law if they were based on half-truths rather than
nondisclosure. However, they contend that Heritage’s claims are more properly characterized
as nondisclosure claims. I disagree. Heritage alleges that the affirmative statements made in
the September 27 and November 19 letters were misleading because they were incomplete.
Heritage has thus alleged that ING and Security Life uttered half-truths. Now, it may be that
the statements were not incomplete or that, even if they were, they were not misleading. But
ING and Security Life do not seek dismissal on those grounds. Therefore, the negligent and
strict-responsibility misrepresentation claims may proceed.

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III. CONCLUSION
For the reasons stated, IT IS ORDERED that defendants’ motion to dismiss is
GRANTED IN PART and DENIED IN PART. Heritage’s RICO, W OCCA, and insurance-badfaith claims are dismissed. Its claims for negligent misrepresentation and strict-responsibility
misrepresentation remain.
Dated at Milwaukee, W isconsin, this 30th day of March 2012.

s/ Lynn Adelman
LYNN ADELMAN
District Judge

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