In the
United States Court of Appeals
For the Seventh Circuit

No. 00-3848

A.I. Credit Corporation,

Plaintiff-Appellant,

v.

Legion Insurance Co., et al.,

Defendants-Appellees.

Appeal from the United States District Court
for the Northern District of Indiana, Hammond Division.
No. 99 C 10--Allen Sharp, Judge.

Argued April 17, 2001--Decided September 12, 2001


  Before Fairchild, Cudahy, and Coffey,
Circuit Judges.

  Fairchild, Circuit Judge. A.I. Credit
Corporation is a premium finance company
that lends its clients money to pay
commercial insurance premiums. When one
of its clients, Monon Corporation, was
placed into involuntary bankruptcy
without repaying more than $2 million in
insurance financing debts, A.I. Credit
brought this fraud suit alleging
primarily that the individuals who
negotiated two Monon loans in 1996
conspired to defraud A.I. Credit by
misrepresenting the status of the
collateral and the intended use of the
loan proceeds./1 The district court
entered summary judgment against two of
the defendants (Monon’s insurance broker,
Peterson, and his wholly-owned
corporation) after they failed to respond
to A.I. Credit’s motion, but granted
summary judgment in favor of Monon’s
chief financial officer, Franklin, as
well as its insurers’ representative, Mc
Pherson, and two insurance companies and
a marketing company with which McPherson
is affiliated. A.I. Credit appeals from
the judgment for these defendants.
Because we conclude that genuine issues
of material fact exist, we vacate and
remand.

I.
  We recount the evidence before the court
in the light most favorable to A.I.
Credit, the non-moving party. A.I. Credit
had financed Monon’s workers’
compensation insurance premiums in 1994
and 1995. Although the financed policies
were underwritten by Legion Insurance
Company and Mutual Indemnity, Ltd., the
policy information necessary to make the
loans was obtained by A.I. Credit from
William McPherson, a producer at
Commonwealth Risk Services, Inc.
(Commonwealth is the marketing branch of
the parent company of Legion and Mutual;
we’ll refer to all three companies as
"the insurers.") McPherson was
responsible for generating business for
Legion and Mutual and was compensated
accordingly; Monon was among his five
most profitable accounts.

  In 1996, unknown to A.I. Credit, Monon
financed its workers’ compensation
insurance through a different company--
Anthem Premium Finance. Monon’s chief
financial officer, John Franklin, entered
a loan agreement with Anthem in March
1996. The agreement granted Anthem a
security interest in any "return
premiums" arising out of the policy--
refunds payable to Monon from the claims
reserve fund in which its premium
payments were deposited in the event its
actual losses were lower than projected.
April 1 letters from Monon’s Franklin and
the insurers’ McPherson confirmed
Anthem’s security interest in the
"available cash" in this fund.

  According to Monon’s controller, Miles
Holsworth, Monon was in serious financial
trouble around this time: a "huge order"
from a single customer, Consolidated
Freightways, Inc. (CFI), was "keeping
th[e] company alive." Monon owed money to
CFI, and CFI threatened to cancel its
order if Monon failed to pay promptly.
(Holsworth Dep. at 146-47.) According to
A.I. Credit’s theory, Monon, desperate
for cash, arranged a conference call to
negotiate another loan from A.I. Credit
under the pretense of financing the
workers’ compensation premiums that
Anthem already had financed. Holsworth
testified in his deposition that he,
along with Monon’s Franklin, the
insurers’ McPherson, and Monon’s
insurance broker, Michael Peterson,
participated in one or more conference
calls with an A.I. Credit representative
sometime in April 1996. Id. at 46-49,
133-36, 150, 225-29, 244-45, 292-93.
According to Holsworth, when the A.I.
Credit representative expressed concern
regarding collateral, Franklin "offered
up the Mutual Indemnity workers’ comp.
balance"--the same funds already pledged
to Anthem. Holsworth further testified
that, during the call, Peterson, the
broker, confirmed to the A.I. Credit
representative that "those monies could
be used to secure" the loan, and the
insurers’ McPherson "supported" the
proposal. Id. at 48, 228-29. Holsworth
could not recall with certainty the name
of the A.I. Credit representative
involved in the conference call, id. at
46, 225, but John Rago, A.I. Credit’s
vice president of credit, averred that he
participated in an April 1996 conference
call involving at least two of the
participants Monon’s Holsworth
identified: Franklin and Peterson. When
asked if Rago was the A.I. Credit
representative on the call, Holsworth
testified that he recognized Rago’s name
and confirmed that Rago "could" have been
the A.I. Credit representative. Id. at
226, 46.

  Shortly after the conference call, on
April 22, 1996, A.I. Credit entered a
written agreement to finance the premiums
on Monon’s Legion and Mutual policies,
secured by the return premiums and the
right to cancel the policies if Monon
defaulted on its payments. Had the loan
in fact been secured by the policies,
this provision would have provided A.I.
Credit with an effective collection
mechanism: Indiana law requires companies
like Monon to carry workers’ compensation
insurance, see Ind. Code sec. 22-3-2-
5(a); cancellation of the necessary
policy could force Monon to cease
operations. A.I. Credit wired the money--
$2,695,262.62--to the broker, Peterson,
on April 23. Peterson then faxed Monon’s
Holsworth a letter informing him that he
had used the bulk of the proceeds--
$2,675,000--to pay CFI. None of the money
was sent to Legion or Mutual.

  A.I. Credit entered a second written
loan agreement with Monon in May 1996,
purportedly to finance an "audit"
premium--an additional premium due based
on an audit that revealed Monon’s actual
payroll for the 1995-96 policy period
exceeded the estimates on which the
original premium was based. This
agreement, too, purportedly permitted
A.I. Credit to cancel the policy for
nonpayment. A.I. Credit again wired the
proceeds--$954,098--to Monon’s broker,
Peterson, and Peterson again wrote
Monon’s controller, Holsworth, this time
explaining that, although A.I. Credit was
"treat[ing]" the loan as financing for
"an additional premium to the Workers
Compensation policy," he had used the
loan proceeds to pay a debt Monon owed
Anthem. There was evidence that no audit
premium was ever due: the insurers’
McPherson testified that no such premium
was assessed, and Holsworth described the
purported audit as "the workers’
comp[ensation] audit that didn’t exist."
(Holsworth Dep. at 178.)

  Two A.I. Credit employees who
participated in the loan approval process
offered evidence that they relied on
Franklin’s and McPherson’s
representations. A.I. Credit vice
president Rago attested that A.I. Credit
would not have made either loan without
his recommendation, that he recommended
the April loan based on representations
made to him during the conference call to
the effect that the money was needed to
pay Monon’s 1996-97 premiums, and that he
would not have approved the loan had he
known Monon had obtained other financing.
Cindy Carroll, the manager of A.I.
Credit’s Boston branch, testified by
deposition that McPherson "[c]onfirm[ed]"
the amount of the fictitious audit
premium on which the May loan was based
(Carroll Dep. at 164), and later attested
in a supplemental affidavit that she
would have withheld her approval had she
known no such premium was due (Carroll
Aff. para. 9). Carroll also attested
that, had she discovered the Anthem
financing after A.I. Credit entered the
May loan agreement, she would immediately
have taken steps to collect the debt and
realize the collateral. Id.

  Anthem and A.I. Credit both notified
Legion that they had entered premium
finance contracts with Monon for the same
policy, and a Legion employee eventually
brought the matter to the attention of
the insurers’ McPherson in early June.
McPherson never consulted A.I. Credit,
however, and Monon was placed into
involuntary bankruptcy on September 25,
1996--still owing $2,657,144.42 to A.I.
Credit. Monon’s internal accounting
records show it had over $3 million in
available cash as late as the end of
June.

  A.I. Credit’s second amended complaint
alleges that Monon’s Franklin, the
insurers’ McPherson, and the broker,
Peterson, conspired to defraud A.I.
Credit. A.I. Credit also charges Franklin
and McPherson with fraud (both actual and
constructive) and McPherson with
professional negligence. The complaint
further alleges that Commonwealth,
Legion, and Mutual are liable for
McPherson’s torts because he acted as
their agent.

II.

  A.I. Credit’s conspiracy claim is based
on the theory that the broker, Peterson,
Monon’s Franklin, and the insurers’
McPherson acted in concert to defraud
A.I. Credit by convincing it to provide
financing that was essentially unsecured.
We think a jury could conclude that such
a conspiracy existed: McPherson made
crucial misrepresentations to A.I.
Credit, A.I. Credit forwarded the loan
proceeds to Monon’s broker, Peterson, and
Peterson applied the proceeds to Monon’s
debts rather than its insurance premiums.
The fact that Peterson used the loan
proceeds to pay Monon’s debts rather than
embezzling the funds or using them to pay
premiums as intended by A.I. Credit makes
patent that someone at Monon was involved
in the fraud; Franklin’s
misrepresentations to A.I. Credit suggest
that Franklin was that insider. This
sequence of coordinated acts is precisely
the sort of evidence upon which a reason
able jury could base a finding of
conspiracy, see, e.g., Moore v. Fletcher,
196 N.E.2d 422, 435 (Ind. Ct. App. 1964),
and thus hold Franklin and McPherson
responsible for Peterson’s acts (and
statements in furtherance of the
conspiracy), see, e.g., Baker v. State
Bank of Akron, 44 N.E.2d 257, 260 (Ind.
App. 1942), as well as each other’s.

  A.I. Credit premises its actual fraud
claim against Franklin and McPherson on
statements made to Rago and Carroll. To
prove "actual" fraud under Indiana law,
the defrauded party must establish that
it was injured as a result of its
justifiable reliance on a material
misrepresentation of fact and that the
misrepresentation was made with knowledge
of its falsity and in an effort to induce
reliance. See, e.g., Baxter v. I.S.T.A.
Ins. Trust, 749 N.E.2d 47, 52 (Ind. Ct.
App. 2001); Darst v. Ill. Farmers Ins.
Co., 716 N.E.2d 579, 581-82 (Ind. Ct.
App. 1999).

  Here, a reasonable jury might find
actual fraud by concluding that A.I.
Credit’s Rago relied on two separate mis
representations made during the
conference call: the implicit
misrepresentation that Monon was in need
of premium financing, and the explicit
misrepresentation that the loan Monon
sought could be secured with an interest
in the "Mutual Indemnity workers’ comp.
balance." Indeed, a jury might view the
very fact that A.I. Credit lent Monon
more than $2 million as evidence that
some misrepresentation regarding the
purpose of the loan was made, reasoning
that only the security provided by the
right to cancel a necessary insurance
policy would induce A.I. Credit to lend
such an amount. A jury might conclude
that A.I. Credit’s Rago relied on
Franklin’s proposal to collateralize the
loan and his concomitant implication that
the proposed collateral was unencumbered.
Given the evidence that Franklin
previously had signed a loan agreement
granting this very same security interest
to Anthem, a jury could further conclude
Franklin knew this implicit assertion was
false and made it in an effort to induce
A.I. Credit to make the loan. Similarly,
McPherson’s "confirmation" to A.I.
Credit’s Carroll of the amount of the
fictitious audit premium, given Carroll’s
testimony that she would have blocked or
cancelled the second loan had she known
no premium was due, permits a finding
that McPherson engaged in actual fraud as
well.

  Franklin’s only objection to this theory
is that A.I. Credit’s Rago had no right
to rely on anything he might have told
him. But Indiana law permits as much
reliance as is reasonable, see Wright v.
Pennamped, 657 N.E.2d 1223, 1231 (Ind.
Ct. App. 1995), and Franklin does not
explain how Rago’s reliance on his
representation that the collateral was
unencumbered was anything other than
reasonable. No evidence suggests that
Rago deliberately ignored facts known to
him, or even that Rago could have
discovered Anthem’s superior security
interest had he tried. On the contrary,
A.I. Credit asserted at oral argument
that the nature of the security interest
in question was such that it was forced
to rely on Monon’s assertions, and
nothing in the record contradicts this
assertion. Cf. Plymale v. Upright, 419
N.E.2d 756, 761 (Ind. Ct. App. 1981)
(reliance not reasonable where facts are
equally available to both parties). The
reasonableness of reliance is generally,
and in this case, a question for the
jury. See McWaters v. Parker, 995 F.2d
1366, 1374 (7th Cir. 1993) (collecting
Indiana cases).

  A.I. Credit’s constructive fraud claim
is premised on Franklin’s and McPherson’s
failures to disclose the Anthem
financing. Constructive fraud arises by
operation of law when one party violates
a duty existing by virtue of his
relationship with another party and gains
an unconscionable advantage as a result.
See, e.g., Wells v. Stone City Bank, 691
N.E.2d 1246, 1250-51 (Ind. Ct. App.
1998); Wright, 657 N.E.2d at 1232-33. A
reasonable jury might find this claim
supported by concluding that both Monon’s
Franklin and the insurers’ McPherson
possessed knowledge not available to A.I.
Credit--namely that another finance
company had already financed the premiums
and obtained a security interest in the
reserve fund--and that they both gained
an unjust advantage when they induced
A.I. Credit to make the loan by
concealing the Anthem financing: Franklin
obtained money his cash-strapped company
desperately needed, and McPherson
ingratiated himself with one of his most
profitable clients. A jury could further
find that this conduct violated a duty
that arose out of the parties’ borrower-
lender relationship. See, e.g., Wells,
691 N.E.2d at 1251 (constructive fraud
may arise from buyer-seller
relationship).

  In the alternative, A.I. Credit asserts
that McPherson acted negligently, if not
fraudulently, in failing to disclose the
Anthem financing to Rago and Carroll and
in "confirming" to Carroll the amount of
the fictitious audit premium. The
district court disposed of this claim by
relying on the economic loss rule, which
limits the recovery of "economic loss"--
profits lost due to a product’s failure
to perform as expected--to cases where a
product failure causes personal injury or
damage to other property. See Bamberger &
Feibleman v. Indianapolis Power & Light
Co., 665 N.E.2d 933, 938 (Ind. Ct. App.
1996). But A.I. Credit’s damages are in
no way the result of product failure; its
loss thus is not "economic" in the sense
of the rule. Indiana courts have
specifically explained that the rule does
not apply outside the product failure
context. See Runde v. Vigus Realty, Inc.,
617 N.E.2d 572, 575 (Ind. Ct. App. 1993)
("[The economic loss rule] appears to
pertain to a negligence action for
economic loss to a product caused by a
defect in the product . . . . We fail to
see any justification for expanding the
rule to preclude the recovery of economic
loss in other actions for negligence.").
See also Bamberger & Feibleman, 665
N.E.2d at 938 (noting reluctance to
extend economic loss rule to all
negligence actions). Thus, the economic
loss rule is inapplicable to this case.

  McPherson insists he cannot be liable
for negligence because A.I. Credit was
not a party to Monon’s insurance contract
with the MRM companies, and thus he owed
no duty to A.I. Credit. But this
observation is not conclusive, because
under Indiana law the duty of a
professional (like McPherson) runs to
third parties (like A.I. Credit) the pro
fessional knows will rely on the
information he provides. See Webb v.
Jarvis, 575 N.E.2d 992, 996-97 (Ind.
1991); Essex v. Ryan, 446 N.E.2d 368, 372
(Ind. Ct. App. 1983). Contrary to
McPherson’s assertions, the Indiana
Supreme Court has refused to limit this
exception to the privity requirement to
situations where the relying third party
risks physical injury. See Webb, 575
N.E.2d at 996 ("The imposition of a duty
should not be dependent upon the nature
of damages which flow as a result of its
breach."). We make no comment on the
merits of A.I. Credit’s negligence claim
other than to note that a duty may have
existed in these circumstances if Monon’s
insurance contract with Legion obligated
Legion to provide accurate policy
information to third-party finance
companies like A.I. Credit and McPherson
breached that duty by providing Rago or
Carroll with incorrect information. See
Essex, 446 N.E.2d at 370-71 (recognizing
claim for professional negligence based
on failure to skillfully discharge
contractual obligation). The district
court will be free to reexamine this
issue on remand. Although we have
discussed A.I. Credit’s four theories of
liability, we are mindful that findings
supporting one theory may moot others.

  Finally, A.I. Credit alleges that
Commonwealth, Legion, and Mutual are
liable for McPherson’s torts because he
acted as their agent. Agency may be
proved by the principal’s consent and
control of the agent and the agent’s
acquiescence, see, e.g., Woodworth v.
Estate of Yunker, 673 N.E.2d 825, 827
(Ind. Ct. App. 1996), and any actions by
a corporate agent within the scope of his
employment are attributable to the
corporation, see Mid-Continent Paper
Converters, Inc. v. Brady, Ware &
Schoenfeld, Inc., 715 N.E.2d 906, 909
(Ind. Ct. App. 1999). Here, a reasonable
jury could conclude that Commonwealth,
Legion, and Mutual consented to have
McPherson act on their behalf:
Commonwealth was McPherson’s employer,
Legion’s treasurer testified that
McPherson dealt with premium finance
companies, and Mutual’s president
confirmed that McPherson was Monon’s
"account executive." A reasonable jury
could further conclude that McPherson
acquiesced to the agency relationship and
that Legion and Mutual exerted control
over McPherson’s activities by retaining
the authority to reject any insurance
programs he structured using their
policies. Based on these facts, a jury
could find Commonwealth, Legion, and
Mutual liable for any torts McPherson
committed in the scope of his dealings
with A.I. Credit.

  The remainder of McPherson’s arguments,
which primarily concern the admissibility
of the evidence on which A.I. Credit
relied in opposing his motion for summary
judgment, do not undermine our
conclusions. McPherson notes that John
Rago of A.I. Credit testified in his
deposition that he never spoke with
McPherson, and suggests in a footnote
that A.I. Credit may not rely on
Holsworth’s testimony that McPherson
participated in the April conference call
"because Rago was A.I.’s Rule 30(b)(6)
witness." One sentence of the Rule
provides, "The persons so designated
shall testify as to matters known or
reasonably available to the
organization." In the light of that
sentence, McPherson apparently construes
the Rule as absolutely binding a
corporate party to its designee’s
recollection unless the corporation shows
that contrary information was not known
to it or was inaccessible. Nothing in the
advisory committee notes indicates that
the Rule goes so far. McPherson cites
Rainey v. American Forest & Paper Ass’n,
Inc., 26 F. Supp. 2d 82, 94 (D. D.C.
1998), in support, but two other district
courts have reached different conclusions
and we think theirs is the sounder view.
See Indus. Hard Chrome, Ltd. v. Hetran,
Inc., 92 F. Supp. 2d 786, 791 (N.D. Ill.
2000) ("testimony given at a Rule
30(b)(6) deposition is evidence which,
like any other deposition testimony, can
be contradicted and used for impeachment
purposes"); United States v. Taylor, 166
F.R.D. 356, 362 n.6 (M.D. N.C. 1996)
(testimony of Rule 30(b)(6) designee does
not bind corporation in sense of judicial
admission). Because Holsworth’s testimony
can be construed to mean that McPherson
did participate in a conference call with
Rago, the issue is one for the jury.

  McPherson also suggests that Holsworth’s
testimony about the conference call is
inadmissible because Holsworth did not
testify to a "foundation," which
McPherson insists entails specific
testimony regarding the names of the par
ticipants and the date of the
conversation. But no rule of evidence
requires a "foundation"; "foundation" is
simply a loose term for preliminary
questions designed to establish that
evidence is admissible. See Black’s Law
Dictionary 666 (7th ed. 1999). At trial,
it is sometimes considered an orderly
procedure to produce testimony that a
conversation occurred at a particular
time and place and between the witness
and someone else before the witness is
permitted to testify to the
conversation’s content. The Federal Rules
of Evidence provide that relevant
evidence is generally admissible, see
Fed. R. Evid. 402, and McPherson does not
contend that Holsworth’s testimony is
irrelevant. We find no reason--relevance
or otherwise--why the testimony should be
excluded. Though Holsworth’s testimony
regarding the identity of the A.I. Credit
representative and the date of the
conversation was inexact, it was specific
enough to demonstrate the conversation’s
occurrence and relevance. See Fed. R.
Evid. 401 (evidence is relevant if it
bears on the existence of any fact of
consequence to the determination of the
action).

  McPherson next argues that Cindy
Carroll’s affidavit is inadmissible
because it contradicts her earlier
deposition testimony, but the
"inconsistency" to which McPherson points
is nonexistent. Carroll stated in her
affidavit that when she spoke with
McPherson, he told her "nothing that
significantly deviated" from her
understanding of Monon’s insurance
program; McPherson insists this statement
is inconsistent with Carroll’s deposition
testimony that she could not recall
"specific sentences that were discussed"
during the call. These two statements are
plainly not inconsistent, and provide no
basis for excluding Carroll’s affidavit.
We need not address McPherson’s
objections to other evidence on which
A.I. Credit relies in its brief because
the evidence discussed above is
sufficient for A.I. Credit to withstand
summary judgment.

  Finally, McPherson asserts that A.I.
Credit’s failure to allege his
participation in the conference call in
its complaint violates Federal Rule of
Civil Procedure 9(b)’s requirement that
fraud be alleged with particularity.
Because both A.I. Credit and McPherson
squarely addressed this fraud theory at
the hearing on McPherson’s motion for
summary judgment, however, we conclude
that A.I. Credit’s second amended
complaint was constructively amended to
include this theory. See Whitaker v. T.J.
Snow Co., 151 F.3d 661, 663 (7th Cir.
1998); Walton v. Jennings Cmty. Hosp.,
Inc., 875 F.2d 1317, 1320 n.3 (7th Cir.
1989).

  For the foregoing reasons, the judgment
of the district court is Reversed and the
case REMANDED for further proceedings.

FOOTNOTE

/1 Jurisdiction is founded on diversity. The parties
agree that Indiana law controls all substantive
issues.
