The opinion of the court was delivered by: NEALON
Plaintiff, Allstate Insurance Company (Allstate), had issued performance bonds and payment bonds on behalf of defendant, A. M. Pugh Associates, Inc. (Pugh Associates), for certain construction projects to be performed by Pugh Associates. Allstate contends that Andrew Newell, an Allstate employee, received monetary bribes in exchange for approving these bonds. Defendant Louis Pugh, Jr., both individually and on behalf of Pugh Associates, and National U.S. Constructors, Inc. and defendant Jeanne A. Pugh, Mr. Pugh's wife, prior to the issuance of the bonds, executed an agreement of indemnity in favor of Allstate. When Pugh Associates defaulted on certain projects covered by the bonds, Allstate was required to expend significant amounts not only to pay past claims of subcontractors and materialmen but also to complete these projects. In this action, Allstate, asserting diversity jurisdiction under 28 U.S.C. § 1332(c)(1) and also invoking the Racketeer Influenced Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961, et seq., seeks to recover compensatory damages of $4,034,657.78, consisting of payments of $1,005,616.73 on the performance bonds and $3,029,041.05 on the payment bonds. Liability is predicated on the indemnity agreement, on fraud and conspiracy to defraud, and on the provisions of RICO. Plaintiff also requests punitive damages on the fraud claim and treble damages under RICO against Pugh Associates and Louis Pugh, Jr. The claims against National U.S. Constructors, Inc. and Jeanne A. Pugh are bottomed solely on the indemnity agreement. After considerable discovery and several pretrial conferences, the case proceeded to trial without a jury on May 21, 1984. The trial lasted but one day as defendants Louis Pugh, Jr. and Jeanne A. Pugh did not appear. Their counsel, however, in recognition of an obligation to his clients for whom he had entered an appearance, appeared and offered a defense.
Plaintiff's factual assertions were largely undisputed including the amounts claimed under the indemnity agreement, although defense counsel argued against any finding of liability under the fraud and RICO counts because (a) there was no evidence in the record showing personal gain by defendants; (b) there was no showing that Allstate, through its agent, Andrew Newell, would not have written bonds for Pugh Associates even if there had been no bribes paid to him; and (c) four of the five bonds were written by Allstate before the first bribe to Newell. The findings of fact by the court follow.
1. Allstate is an Illinois corporation with its principal place of business in Northbrook, Illinois. Allstate is in the business of providing insurance coverage to both individuals and businesses throughout the United States. In addition to offering insurance coverage, Allstate has engaged in the business of offering contract bonds to persons, firms and corporations, including construction companies.
2. A.M. Pugh Associates, Inc., one of the defendants, is a New York Corporation with its principal place of business in Kingston, Pennsylvania.
3. Louis Pugh, Jr., one of the defendants, is a Pennsylvania citizen. His wife, Jeanne A. Pugh, also a defendant, was a Pennsylvania citizen when this action was instituted.
4. "Pugh Associates" was formed in 1976 by Louis Pugh, Jr. Prior thereto, Pugh was the owner of other general contracting companies, L. Pugh Constructors of Florida, Inc. and National U.S. Constructors, Inc.
6. In November, 1974, Pugh's company, National U.S. Constructors, Inc., entered into a subcontract with Alagia Masons (Alagia), pursuant to which Alagia was to perform the masonry work on the Harvey's Lake project. Shortly thereafter, Alagia declared bankruptcy and defaulted on its subcontract with Pugh's company. Pugh filed a claim against Alagia's performance bond and, in July 1975, Pugh received $275,000.00 from the United States Fidelity and Guaranty Company (USF & G), the surety for Alagia, whose bond had been procured with the help of Laffan. According to Pugh, the mastermind of this activity was Noel Laffan. After he received the money from USF & G, Pugh had a company known as Somerset Valley Construction Company complete the work of Alagia Masons. Before Alagia ceased operations, it entered into a subcontract with a corporation known as Heller Mechanical Contractors, a New York corporation formed by Morton Heller, another employee of Pugh; Cumberland Bay Leasing Company, a company owned by Pugh; and Somerset Valley Construction Company. After Alagia's demise, each made claim upon Alagia's payment bond and received $13,800.00, $2,400.00, and $50,000.00 respectively.
7. In September 1975, Pugh's company, National U.S. Constructors, Inc., began work on a sewerage treatment plant for the city of Hartford, Vermont. On that project, Pugh was bonded by the Maryland Casualty Company. After the project experienced financial difficulty, Pugh signed a subcontract for the mechanical portion of the work to Heller Mechanical Contractors, Inc. Morton Heller had again departed his employment with Pugh to mobilize this company. Another principal in Heller Mechanical was James Rittenhouse, Pugh's brother-in-law, who had also been employed by Pugh's firm before going to work for Heller Mechanical. The National U.S. Constructors-Heller Mechanical subcontract was let for an amount greater than the anticipated or actual cost of the work contemplated by that subcontract in order to get money out of National U.S. Constructors. The excess monies were collected by Heller and, subsequently, were circulated through Heller Mechanical Contractors, Inc. back to Pugh Associates. Heller Mechanical thereafter filed a substantial claim against Maryland Casualty Company based upon its payment bond on the ground that it was owed monies.
8. In addition to entering into a fraudulent subcontract with Heller, Pugh, knowing that the job was going bad, decided he had to do everything in his power to protect himself and his companies from default as claimed by the bonding company. On a construction project, a contractor such as Pugh employs a number of subcontractors and purchases materials or equipment from a number of vendors. Upon receipt of partial requisition payments from the owner, the contractor should disburse monies to its subcontractors in payment for their portion of the work and to vendors for the portion of the equipment supplied by those respective vendors.
9. Pugh's first known involvement with Allstate occurred some time in 1975 during a meeting in New York City at the offices of United Coverage, an insurance agency operated by individuals named Al Mack and Howard Meyer. Prior to the meeting, Pugh had posted a $40,000.00 certified check with the State of New York in lieu of posting a bid bond on a highway project known as the Saranac Lake Project. After being awarded the contract, Pugh approached Maryland Casualty Company about providing payment and performance bonds on the project. Maryland Casualty Company refused to write the bonds. Pugh then approached Noel Laffan, his bond agent, about obtaining bonds from other sources. Laffan told Pugh that bonds could be arranged if Pugh made a "payoff" in addition to the normal bond premium.
10. Based upon the statement of Laffan, Pugh had made a secret "under the table" payment of $20,000.00 in cash to Messrs. Mack and Meyer in order to guarantee the availability of a bond from Allstate. Kass, Pugh's accountant, understood from Pugh that it was to go to Robert Throckmorton, then national bond manager for Allstate. Pugh, however, did not know from personal knowledge whether any Allstate employee actually received any portion of that payment.
11. In attendance at the first meeting with Allstate were Throckmorton and Andrew Newell, then an employee of Allstate in its regional office in Huntington Station, New York. As of the date of that initial meeting, Pugh Associates had not yet been formed and Pugh was still operating under the corporate name of National U.S. Constructors, Inc. Pugh's purpose for that meeting was the procurement of a bid bond from Allstate on behalf of National U.S. Constructors, Inc., as principal, for the Saranac Lake project.
12. In 1976, A.M. Pugh Associates, Inc. was formed. Thereafter, a bond was issued by Allstate on behalf of Pugh Associates on the Saranac Lake project. Although the bid was submitted to National U.S. Constructors, Inc., it was awarded to A.M. Pugh.
13. Subsequent to that initial meeting, Newell became Pugh's liason with Allstate, thereafter handling the Pugh accounts.
14. On September 30, 1976, an Agreement of Indemnity in favor of Allstate was executed by Louis Pugh, Jr., both individually and on behalf of A.M. Pugh Associates, Inc. and by Mr. Pugh's wife, Jeanne A. Pugh. The Agreement was executed in consideration of the issuance by Allstate of an indeterminate number of performance bonds and payment bonds naming Pugh Associates as the principal. The Agreement provided in pertinent part:
INDEMNITY. The Principal and the Indemnitors shall at all times exonerate, indemnify and keep indemnified Allstate and hold it harmless from any and all liability for losses, cost, damages, attorneys' fees and expenses of whatever kind including, but not limited to, those which Allstate may sustain or incur by reason of having executed or procured the execution of said Bonds, or any renewal, continuation, extension or successor thereof, and all other Bonds heretofore or hereafter executed or procured for or at the request of the Principal, and which Allstate may sustain or incur in making any investigation, in defending or prosecuting any actions, suits or other proceedings which may be brought under or in connection therewith, or in recovering or attempting to recover salvage or any unpaid premiums for said Bonds, in obtaining or attempting to obtain release from liability, or in enforcing any of the covenants of this Agreement; it is further agreed that in any accounting which may be had between Allstate, the Principal and the Indemnitors, Allstate shall be entitled to charge for any disbursements made by Allstate in good faith in and about the matters herein contemplated by this Agreement or Indemnity, under the belief that it is or was liable for the sum or amounts so disbursed, or that it was necessary or expedient to make such disbursement to reduce, minimize or prevent any increase in the loss anticipated by and through Allstate's investigation, whether or not such liability, necessity or expediency existed, and that the vouchers or evidence of any such payments made by Allstate will be prima facie evidence of the fact and amount of the Principal's and the Indemnitor's liability to Allstate; the Principal and the Indemnitors agree to pay over, reimburse and make good to Allstate, its successors or assigns, all money which Allstate or its representatives shall pay, or cause to be paid or become liable to pay, by reason of the execution of said Bonds, and any renewal, continuance, extension or successor thereof, and all other Bonds heretofore or hereafter executed or produced for or at the request executed or produced for or at the request of the Principal; and such payment shall be made to Allstate as soon as it shall become liable therefor, whether Allstate shall have paid out such sum or any part thereof, or not.
RESERVE FOR LOSS. If for any reason Allstate shall deem it necessary to set up a reserve to cover any contingent claim, loss, costs, attorneys' fees, disbursements or expenses in connection with any of said Bonds by reason of default of the Principal, abandonment of contract, liens filed, unpaid and past due bills, dispute with the owner or obligee, or for any reason whatsoever, and regardless of any proceedings contemplated or taken by the Principal or the pendency of any appeal, the Principal and Indemnitors jointly and severally covenant and agree, immediately upon demand, to deposit with Allstate, in current funds, an amount sufficient to cover such reserve and any increase thereof such funds to be held by Allstate as collateral, in addition to the indemnity afforded by this instrument, with the right to use such funds or any part thereof, any time, in payment or compromise of any judgment, claim, loss, damage, attorneys' fees, and disbursement or other expenses; and if Allstate is required to enforce performance of this covenant by action at law or in equity, the costs, charges, and expense, including attorneys' fees, which it may thereby incur, shall be included in such action and paid by the Principal and the Indemnitors. (Demand shall be sufficient if sent by registered mail to the Principal and the Indemnitors at the address given herein or last known to Allstate, whether or not actually received.)
ALLSTATE OBTAINING DISCHARGE. That, Allstate may, at any time hereafter, without releasing or discharging the Principal and the Indemnitors from any claim, demand, action, costs or any other expense heretofore incurred or accrued, take such action as it might deem necessary or proper to obtain its release from any and all liability under the said Bonds, and the Principal and the Indemnitors further agree that they shall further secure and indemnify Allstate against any and all charges, liabilities and expenses of whatever nature which Allstate may sustain or incur or be put to in obtaining such release.
TAKEOVER. In the event of any breach, delay or default asserted by the Obligee in any of said Bonds or failure by Principal to perform such bonded contracts or to pay obligations incurred thereunder, or in the event of Principal's death, disappearance, conviction of a felony, imprisonment, incompetency, insolvency [sic], or bankruptcy, or the appointment of a receiver, assignment or for benefit of creditors or any action taken by or against the Principal under the National Bankruptcy Act or state insolvency laws, Allstate shall have the right, at its option, and is hereby authorized, but not required, to take possession of any part or all of the work under any contract covered by any said Bonds, and at the expense of the Indemnitors to complete or arrange for the completion of same and the Indemnitors shall promptly, demand, pay to Allstate all losses and expenses so incurred.
ASSIGNMENT. The Principal, the Indemnitors hereby consenting, will assign, transfer and convey to Allstate and does hereby assign, transfer and convey to Allstate, as collateral to secure the obligations in any and all of the paragraphs of this Agreement of Indemnity, and any other indebtedness and liabilities of the Principal and the Indemnitors to Allstate, whether heretofore or hereafter incurred, the assignment of this case of each contract to become effective as of the date of the ond covering such contract, but only in event of any abandonment, forfeiture or breach of any contracts referred to in the Bonds or of any breach of any such Bonds: (a) all of their rights under the contract, including their right, title and interest in and to, (1) all subcontracts let in connection therewith and such subcontractors' surety bonds, (2) all machinery, plant, equipment, tools and materials which shall be upon the site of the work or elsewhere for the purposes of the contract, including all materials ordered for the contract, and of any and all sums due or which may thereafter become due under such contract and all sums due or to become due on which the Principal or Indemnitors have an interest, and the Indemnitors and the Principal hereby authorize Allstate to endorse in the name of the Payee and to collect any check, draft, warrant or other instrument made or issued in payment of any such sum, deferred payment or retained percentages, and to disburse the proceeds thereof.
15. In 1978, Newell was transferred to Allstate's home office in Northbrook, Illinois, a community near Chicago, and in early 1979 was promoted to the position of Senior Bond Manager for Allstate, succeeding Robert Throckmorton. In this capacity, Newell had final decision-making authority regarding all surety bonds issued by Allstate, including those issued on behalf of Pugh. Upon Newell's promotion to the home office, Eugene Hessian, an Allstate employee in the Huntington Station office, was promoted to Newell's former position as the underwriter in charge of contract bonds in the Huntington Station office. Pugh dealt directly with Newell in the Allstate home office with regard to Pugh Associates' bonds.
16. From September, 1976 through the end of 1978, Pugh Associates received continued bonding from Allstate. Pugh Associates performed work in two principal geographical areas -- western Pennsylvania and the Norfolk-Newport News, Virginia area. In late 1978 or early 1979, Pugh Associates was experiencing severe financial difficulties as a result of several unprofitable projects then in progress. Eugene L. Kass (Kass), the accountant for Pugh Associates, advised Pugh that the ...