Guarantee Trust Life Ins. Co. v. Kribbs, No. 1-16-0672, 2016 Ill. App. LEXIS 895 (Ill. App. Dec. 29, 2016).

An Illinois appeals court recently affirmed an order dismissing several claims as untimely. The dispute involved the alleged fraudulent transfer of funds from a reinsurer’s custodial account containing premiums paid by the cedent to the reinsurer’s principal’s personal account. 

The cedent originally sued the principal for unjust enrichment, conversion, constructive fraud, concert of action and civil conspiracy in 2006. Although the complaint alleged that the scheme required the assistance of the principal’s employees, the cedent did not depose them until 2012. The whole scheme then came to light: how the principal’s reinsurance company was formed by two former employees of the cedent, how they collected dividends from the cedent’s custodian account and how they paid commissions to the cedent’s employee who authorized the transfers. The cedent re-filed the action in 2013, joining two of its employees as co-defendants. The court, however, held that the five-year limitation period had elapsed. The cedent appealed, arguing that the limitation period did not start until 2012, when the depositions were taken. 

The Illinois appeals court rejected each of the cedent’s arguments. First, the court held that discovery rule did not apply because the cedent could have discovered the wrongful conduct of its employees through reasonable diligence. Second, the fraudulent concealment doctrine was also inapplicable because the cedent failed to assert any affirmative act of fraud by its employees. The late discovery was not excused by the alleged fiduciary breach of its employees. As a matter of law, the duty of employees is one of fidelity and loyalty, not one of candor and disclosure. In any case, the employees’ silence, held the court, did not justify the cedent’s failure to investigate the details of a scheme that it knew existed. Third, the equitable arguments could not be raised for the first time on appeal. They lacked merit anyway: the doctrine of laches was inapplicable because the action was for a money judgment; the doctrine of equitable estoppel could not be invoked because the employees did nothing to prevent the cedent from investigating; and the doctrine of equitable tolling required proof of extraordinary barriers, rather than negligence.

While this decision deals primarily with issues of discovery and computation of the limitations period, it is also interesting for its analysis of the responsibilities of cedants, reinsurers and their respective employees in a complex fraud case.