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Fidelity & Deposit Company of v. Harold Stamateris

July 25, 2011

FIDELITY & DEPOSIT COMPANY OF MARYLAND, PLAINTIFF-APPELLANT,
v.
HAROLD STAMATERIS, HB ASSOCIATES, ESTATE OF WILLIAM D. EATON, JR., MARY JANE EATON, ENERNET, INC., LIGHT SOURCE ENERGY SERVICES, INC., ANANT PATEL, YOGINI PATEL, QAI ENGINEERING INC., OPTIMA, INC. A/K/A OPTIMA CO., ENERGY PLUS ASSOCIATES, INC., GIRISH PATEL A/K/A GARY PATEL, ENERGY REDUCTION ASSOCIATES A/K/A ENERGY REDUCTION, OSBOURNE MCINTOSH, MCINTOSH ELECTRICAL CONTRACTORS, INC., WICLIFF REID, SR., A/K/A WYCLIFFE REID, SR., QAI INSPECTION ASSOCIATES, A/K/A QA INSPECTION ASSOCIATES, WYCLIFFE O. REID, JR. A/K/A WICLIFF REID, JR., SWA ASSOCIATES, DWIGHT WILLIAMS, ONYX UTILITIES, ERIC BELL, ORBIT ELECTRICAL CONTRACTORS, LLC, CLAUDIUS BROWN, ALL SAFE ELECTRICAL CO., RONALD JOHNSON, R.G. ASSOCIATES, DEFENDANTS, AND HONEYWELL INTERNATIONAL INC., AND HONEYWELL DMC SERVICES, INC., DEFENDANTS-RESPONDENTS.



On appeal from Superior Court of New Jersey, Law Division, Morris County, Docket No. L-3703-07.

Per curiam.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Argued January 26, 2011

Before Judges Fuentes, Ashrafi and Nugent.

Plaintiff Fidelity & Deposit Company of Maryland ("Fidelity") brought this subrogation action to recover almost $10 million in crime insurance compensation it paid to Jersey Central Power and Light Company ("JCP&L"). Fidelity appeals from two April 9, 2010 orders denying its motion for summary judgment and granting summary judgment to defendant Honeywell International Inc. ("Honeywell"), which employed one of the main perpetrators of a massive fraudulent scheme against JCP&L. We affirm in part and reverse in part.

I.

The facts relevant to the issues on appeal are not in dispute. The New Jersey State Board of Public Utilities had established the New Jersey Smart Start Buildings Program to stimulate energy-efficient and renewable-energy technologies.

The program provided rebates to electricity customers who retrofitted commercial buildings to become more energy efficient. JCP&L and other utilities administered the program and charged a fee in customer bills to fund it.

In 1991, a predecessor company of Honeywell entered into a written contract with JCP&L to provide personnel to work on JCP&L's energy efficiency programs. When Honeywell acquired the predecessor company, it succeeded to the contract and later extended it through 2006. The parties on this appeal stipulated to the several documents that comprised the Honeywell-JCP&L contract.

Under the contract, Honeywell assigned employees to JCP&L to work on its energy programs in exchange for a fixed sum paid by JCP&L to Honeywell. The assigned employees worked exclusively for JCP&L, but Honeywell continued to pay their salaries and benefits. Article 10 of the contract documents stated:

It is agreed and understood that Contractor [Honeywell] shall employ for the services required hereunder persons known to it, who shall be trained, experienced, qualified and trusted employees. (Emphasis added.)

The right of final selection or replacement of the designated Honeywell employees remained with JCP&L.

In 1996, Honeywell designated defendant Anant Patel to work with JCP&L as a commercial program coordinator on its energy savings programs. Patel had been employed by Honeywell and its predecessor since 1985. He was "well-liked," "produced high quality work," and had a "very strong work ethic." Honeywell had no reason to distrust his honesty.

In 2001, Patel was assigned to work with the Smart Start Buildings Program. Among his duties was to inspect and verify claims for energy efficiency rebates in accordance with the program's guidelines. He was to ensure that rebates were properly due, and he was required to report any fraudulent claims to the top JCP&L manager for the program. During the five years that Patel worked with the Smart Start Buildings Program, he was supervised directly by defendant Harold Stamateris, a JCP&L employee. Stamateris's duties included approving rebate checks to be issued to customers or vendors.

In May 2001, Stamateris and an outside contractor, William Eaton, began to defraud the program, and Stamateris soon enlisted Patel to join their scheme. Over the next five years, Patel set up fraudulent companies to submit false or inflated invoices to JCP&L claiming they provided technical, consulting, or installation services to JCP&L's customers for energy efficiency savings. Patel's role was to approve the work shown on the invoices, and Stamateris's role to approve issuance of the rebate checks. In addition to setting up three fraudulent companies of his own to receive the rebate funds, Patel induced others to set up such companies but typically controlled their financial affairs himself. From the rebate funds, Patel kicked back money to a company owned by Stamateris.

In May 2006, JCP&L received an anonymous letter revealing the fraud. It conducted an internal audit and investigation, in the course of which both Stamateris and Patel admitted their roles in the fraud. Stamateris provided a spreadsheet with detailed information reconstructing the fraudulent transactions in which he participated. JCP&L's investigation revealed that the fraud involved more than 8,000 transactions, causing fraudulent payments estimated at $9.7 million.

In 2007, Stamateris and Patel pleaded guilty to crimes arising from the fraud. Stamateris was sentenced to ten years' imprisonment and ordered to pay restitution of $3.7 million. Patel was sentenced to fifteen years' imprisonment and ordered to pay restitution of $1.4 million.

In January 2008, JCP&L paid $10,639,050.16 "to reimburse the State of New Jersey with interest for monies taken fraudulently from the New Jersey Clean Energy Program." Earlier, JCP&L had submitted a claim and proof of loss on a crime insurance policy issued by Fidelity seeking reimbursement of the amount owed to the State. After adjustments, JCP&L's claim consisted of $9,658,814.12 in stolen funds, $900,000 in interest owed, and $109,300.87 for attorney's fees. Fidelity paid JCP&L $9,408,814.12, representing the full amount of the theft minus the $250,000 policy deductible. Later, Fidelity paid additional amounts to settle JCP&L's claims for interest and attorney's fees. In total, Fidelity paid to JCP&L $9,994,114.99 in insurance proceeds.

In exchange for these payments, JCP&L assigned to Fidelity all its rights against those responsible for its losses. As of December 9, 2009, Fidelity had recovered about half of what it had paid, including ...


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