United States: Fraudster And Victim Both Fail To Shift Loss

Last Updated: October 10 2017
Article by Stephen M. Proctor

Anyone faced with a claim or a loss will look for someone else to pay the claim or bear the loss. In an interesting decision from the 7th Circuit Court of Appeals, Judge Easterbrook declined to do so in three cases. The losses were caused by fraud and, ironically, both the perpetrator of the fraud and the victim failed in their efforts to shift their loss. (Daniel J. Ratajczak, Jr., et al., v. Beazley Solutions Limited and Land O'Lakes, Inc. and First Mercury Insurance Company, et. al. v. Daniel J. Ratajczak, Jr., et. al., 7th Circuit Court of Appeals, No. 16-3418, August 31, 2017)

Daniel J., Scott A., and Angela Ratajczak ("Ratajczaks") ran an apparently successful business called Packerland Whey Products, Inc. Packerland purportedly manufactured protein supplement from whey (the watery part of milk remaining after the removal of curds). But the Ratajczaks were not honest. They intentionally used deceitful methods to increase their profits by adding urea to adulterate the protein supplement. Protein levels are extrapolated by measuring nitrogen. By adding urea, rich in nitrogen and used in fertilizers, the protein level would read higher than it actually was. Since urea is cheaper than whey, Packerland saved money and increased its profits. The Ratajczaks were not caught before they were able to sell their business to Packerland Whey Intermediary Holding Co. in May, 2012 for apparently a substantial amount of money. The Ratajczaks continued as employees and, as employees, continued their fraudulent activity.

Things unraveled for the Ratajczaks soon after they sold their business. In November or December 2012, the buyer learned what they had been doing. The Ratajczaks were fired and litigation began. In December, 2012, the Ratajczaks settled for $10 million.

One of Packerland's customers was Land O'Lakes. Land O'Lakes unknowingly purchased the adulterated whey starting in 2006. Although Land O'Lakes developed suspicions about the quality of the whey they were purchasing, they accepted the excuses put forth by the Ratajczaks. But late in 2012, Land O'Lakes stopped buying whey from Packerland and filed suit, claiming a) breach of contract, b) fraud, and c) violation of the Racketeer Influenced and Corrupt Organizations Act (RICO), a claim that could allow Land O'Lakes to claim triple damages and attorneys' fees. Although not stated in the decision, it appears that Land O'Lakes settled its breach of contract claim with Packerland. Land O'Lakes dropped the fraud claim. So Land O'Lakes was left with its RICO claim against the Ratajczaks. This claim had potential insurance coverage that Land O'Lakes tried to tap into.

There were two other claims that Judge Easterbrook had to deal with. In both claims, the Ratajczaks brazenly tried to shift their losses to their insurance carriers.

Claim 1: Land O'Lakes RICO Claim Against the Ratajczaks and Their Insurers

Recall that Land O'Lakes settled their breach of contract claim, apparently against Packerland. But Land O'Lakes wasn't done. It also had its RICO claim against the Ratajczaks which could entitle it to triple damages and attorneys' fees. So a lot was at stake.

The district court granted summary judgment for the insurers and the Ratajczaks, finding that Land O'Lakes failed to prove damages. Judge Easterbrook agreed.

As usual, Judge Easterbrook did not hold back on his view of the claims. He described eight different kinds of damages that Land O'Lakes might have suffered, but apparently did not even assert. For example, it could have claimed lost profits, losses from claims from customers purchasing the adulterated protein, recall expenses, or expenses incurred in investigating Packerland's products. Another way to measure the loss was for Land O'Lakes to purchase retroactive insurance to cover future claims against Land O'Lakes arising from Packerland's fraud. But Land O'Lakes failed to do this or even obtain a quote. Instead of itemizing its damages, Land O'Lakes offered what Judge Easterbrook scathingly referred to as "lawyers' talk."

Perhaps Land O'Lakes was made whole through the settlement on its breach of contract claim and Judge Easterbrook viewed the RICO claim as premature or even as an effort by Land O'Lakes to win a windfall from its misfortune. In any case, Land O'Lakes was stuck with the settlement it had already recovered and lost on its RICO claim.

Claim 2: Ratajczaks Claim Against Packerland's Insurers

Packerland had several insurance policies under which the Ratajczaks were additional insureds. But the insurance companies refused to defend or indemnify the Ratajczaks. The insurance policies covered "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." But the Ratajczaks' fraudulent adulteration of Packerland's whey protein concentrate could hardly be described as an "accident." Noted Judge Easterbrook, "Neither the behavior nor the consequence can be called an accident." So the Ratajczaks efforts to shift their loss to Packerland's insurance carrier was not successful.

Claim 3: Ratajczaks Claim Against the Representations and Warranties Insurer

The final claim was the Ratajczaks' claim against the representations and warranties insurer, Beazley Solutions, in the sale of their business. As background, it has become increasingly common to use representations and warranties insurance (R&W insurance) in merger and acquisition transactions. R&W insurance has many advantages to both an acquirer and a seller of a business. The acquirer has more viable recourse against an insurance company for breaches of representations and warranties compared to recourse against a seller, which may have already disposed of the proceeds, or to recourse to an escrow account that involves cumbersome procedures to actually obtain any funds. The seller can have assurance that the proceeds from the sale are secure and can limit or avoid placing any of the proceeds in an escrow account. However, as with any insurance policies, there are limits, requirements to make a claim, and notice procedures. So R&W insurance has some limitations.

The Ratajczaks used Beazley Solutions to procure R&W insurance in the sale of their business. But, in the end, it provided no benefit to the Ratajczaks.

As noted, in November or December, 2012, only 6 months after the sale of the business, the buyer learned of the Ratajczaks' fraud. Events moved quickly and the Ratajczaks agreed to pay $10 million to the buyer in December, 2012. They then tried to recoup their loss from Beazley Solutions, the insurer. The policy had a $10 million limit with a $1.5 million deductible.

One problem faced by the Ratajczaks was the same one faced in Claim 2. Their loss was not caused by accident or negligence, but by plain fraud. The insurance policy did not cover fraud.

The district court also concluded, and Judge Easterbrook agreed, that even if there was a breach of warranty subject to coverage, the terms of the policy and the agreement would have capped the damages at $1.5 million, matching the deductible that the Ratajczaks would be responsible for anyway.

There was still another reason why Beazley Solutions avoided coverage. It appears that the $10 million settlement and the $10 million limit of coverage was not a coincidence – the Ratajczaks seemed to have assumed the insurance company would step up. But this was a delusion. As explained in the opinion, the insurance company did not receive proper notice of the claim or the settlement. The Ratajczaks notified Beazley Solutions of the claim after the close of business on December 24, 2012. Unstated by the court, but obvious, this was literally the night before Christmas. The settlement was signed on December 28, 2012, after Beazley Solutions asked for more information on the settlement, but before the Ratajczaks bothered to respond. Said Judge Easterbrook, "By cutting Beazley out of the negotiations, the Ratajczaks prevented it from taking steps vital for self-protection."

The Ratajczaks claimed that Wisconsin law requires the insurer to show prejudice to avoid a claim based on inadequate notice. Judge Easterbrook said prejudice could probably be presumed in this situation, but it didn't matter. The policy was controlled by New York law, which permits insurers to insist on controlling settlements.

Facing a loss or claim, it is natural to look for someone else to bear the loss or cover the claim. In fact, insurance is made for this purpose. But these three claims illustrate the difficulties of shifting losses. Land O'Lakes, a victim of fraud, received some recovery although less than it hoped. For the Ratajczaks, the perpetrators of the fraud, Judge Easterbrook and his colleagues on the 7th Circuit, made sure they got what they deserved and did not get what they didn't deserve.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions