Federal Court Dismisses Coverage Case Because of Pending State Court Case

EVANSTON INSURANCE COMPANY v. RESIDENTIAL PRIVATE CARE, LLC, Dist. Court, ED Michigan 2012 - Google Scholar:

The district court in Michigan has dismissed a declaratory judgment action filed by an insurance company alleging that there was no coverage for an incident.  The underlying state court case alleged that an employee of Residential Private care stole money and jewelry from a patient.

The court explained the requirements as follows:

"In determining whether it is proper for a district court to exercise subject matter jurisdiction over a declaratory judgment request, the Sixth Circuit applies the five factors enumerated in Grand Trunk W. R.R. Co. v. Consol. Rail Co., 746 F.2d 323, 326 (6th Cir. 1984). The five factors are:

(1) whether the declaratory action would settle the controversy;

(2) whether the declaratory action would serve a useful purpose in clarifying the legal relations in issue;

(3) whether the declaratory remedy is being used merely for the purpose of "procedural fencing" or "to provide an arena for a race for res judicata;"

(4) whether the use of a declaratory action would increase friction between our federal and state courts and improperly encroach on state jurisdiction; and

(5) whether there is an alternative remedy which is better or more effective.

Id.

With respect to the fourth factor — whether the use of a declaratory action would increase friction between our federal and state courts — courts are to consider three additional sub-factors:

(1) whether the underlying factual issues are important to an informed resolution of the case;

(2) whether the state trial court is in a better position to evaluate those factual issues than is the federal court; and

(3) whether there is a close nexus between the underlying factual and legal issues and state law and/or public policy, or whether federal common law or statutory law dictates a resolution of the declaratory judgment action.

Scottsdale Ins. Co. v. Roumph, 211 F.3d 964, 968 (6th Cir. 2000); see alsoTravelers Indem. Co. v. Bowling Green Professional Associates, PLC, 495 F.3d 266, 271 (6th Cir. 2007).^[2]"

^{The court held that the federal court case would cause friction with the state court an impermissibly encroach on that court's jurisdiction.}

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Trade Secrets Claim Rejected Where Company Did Not Protect Trade Secrets

FAIL SAFE LLC v. SMITH CORPORATION, No. 11–1354., March 29, 2012 - US 7th Circuit | FindLaw:

The Seventh Circuit affirmed the district court's rejection by summary judgment of certain trade secret claims.  The district court found that the plaintiff had failed to take reasonable measures to protect its trade secrets and had, in fact, voluntarily disclosed those secrets to the Defendant corporation.  The Seventh Circuit affirmed.

The Seventh Circuit summarized its decision as follows:

"This case is about whether a plaintiff can sustain a trade secret or unjust enrichment claim when that plaintiff fails to take any protective measures to safeguard its proprietary information. Business relationships do not always develop under formulaic circumstances. But where one company fails to take any protective steps to shield its proprietary information, it cannot then expect the law to protect it when the relationship sours. For this reason, we affirm."


Comment: these are words to live by for small businesses trying to protect trade secrets.


Edward X. Clinton, Jr.

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Contract Law - District Court Rejects Contract Claim Based on Duty of Good Faith

Lansing v. Carroll, Dist. Court, ND Illinois 2012 - Google Scholar:

In a dispute between business partners, one partner accepted the other's offer to sell his interest in the partnership.  The district court rejected the claim on the ground that it was an attempt to use the duty of good faith to create a new contract term.

Lansing and Carroll were partners.  They had a buy-sell agreement under which either could make a demand to be bought out by the other.

Lansing offered to sell his interest in the LLC The key fact is that the defendant, Carroll, accepted Lansing's offer to sell his interest in a partnership, but never completed the purchase.  As such, Lansing argued that Carroll had forfeited his shares and that he had the right to purchase Carroll's interest in the LLC.

The district court sets forth the facts as follows:

"On November 1, 2010, Lansing sent a letter to Carroll pursuant to § 6.7(2)(a) of the Operating Agreement in which he offered to either buy Carroll's interests in the Westminster Funds, or to sell to Carroll his own interests, for $14,045,000, less Carroll's unmet or future capital obligations. On November 26, 2010, Carroll responded with a letter in which he accepted Lansing's offer to sell. He also deposited 5% of the sales price into escrow, and set the closing for March 29, 2011. However, Carroll never showed up to the closing and never consummated the purchase. After the sale fell through, Lansing twice demanded that Carroll release the $702,250 in escrowed funds to him, but Carroll has not done so."

Illinois law concerning the duty of good faith is as follows:

Under Illinois law, a duty of good faith and fair dealing is implied in every contract. See Reserve at Woodstock, LLC v. City of Woodstock, 958 N.E.2d 1100, 1112-13 (Ill. App. Ct. 2011). "Its purpose is to ensure that parties do not take advantage of each other in a way that could not have been contemplated at the time the contract was drafted or do anything that will destroy the other party's right to receive the benefit of the contract." Gore v. Indiana Ins. Co., 876 N.E.2d 156, 161 (Ill. App. Ct. 2007). The duty requires "a party vested with contractual discretion to exercise it reasonably, and not arbitrarily, capriciously, or in a manner inconsistent with the reasonable expectations of the parties."Seip v. Rogers Raw Materials Fund, L.P., 948 N.E.2d 628, 637 (Ill. App. Ct. 2011). However, the duty is "not an independent source of duties for the parties to a contract, and is `used as a construction aid in determining the intent of the parties where an instrument is susceptible of two conflicting constructions.'" Id. (quoting Fox v. Heimann, 872 N.E.2d 126, 134 (Ill. App. Ct. 2007)).


...

As discussed above, the duty of good faith and fair dealing is not an independent source of duties for parties. See Fox, 872 N.E.2d at 134. Therefore, it cannot be used to create additional contractual terms. See LaSalle Bank Nat'l Ass'n v. Moran Foods, Inc., 477 F. Supp. 2d 932, 938-39 (N.D. Ill. 2007). Yet Lansing attempts to do just that by interpreting the Operating Agreement to give him the right to purchase Carroll's shares in the event that Carroll accepted an offer to purchase Lansing's shares but failed to do so within the 120-day deadline. The explicit terms of the contract do not give him that right, and he may not use the duty of good faith and fair dealing to create such a right. Rather, as the Operating Agreement contemplates, any failure to complete an agreed-upon transaction within 120 days results in a breach of contract, and that is where Lansing must look to for any remedies he is owed.

Accordingly, based upon the terms of the Operating Agreement and the allegations of the First Amended Complaint, the duty of good faith and fair dealing is inapplicable to Carroll's acceptance of Lansing's offer to sell, and does not nullify Carroll's acceptance.

Comment: this opinion contains a thoughtful discussion of the duty of good faith and limits of that duty.   It is a classic effort to use litigation to complete a business divorce.  The duty of good faith is often mentioned in complaints, but it rarely proves decisive in litigation.

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Coverage Lawsuit Against State Farm for Breach of Contract - Summary Judgment Denied

Pina v. State Farm Fire and Casualty Company, Dist. Court, WD Kentucky 2012 - Google Scholar:

This is an all too common occurrence.  Someone buys an insurance policy that insures their personal property.  They then lose that property in a fire.  The insurance company denies coverage, fights the litigation and moves for summary judgment.  Here State Farm refused coverage to the insureds who were gradually moving their property out of their old house to their new house.

The Court explained:  "The fire occurred only thirteen (13) days after Plaintiffs started moving property to their newly acquired principal residence in Louisville. Therefore, we conclude that the limitation provision was not applicable and Plaintiffs were entitled to full reimbursement for the damage to their personal property resulting from the October 11, 2008 fire. Defendant's motion for summary judgment on Plaintiffs' breach of contract claim will thus be denied."

Here the district court denied the motion for summary judgment.


Edward X. Clinton, Jr.

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Plaintiffs Who Sue Storage Company State A Claim For Fraud Under Illinois Law

Hausen v. PS ILLINOIS TRUST, Dist. Court, ND Illinois 2012 - Google Scholar:

The plaintiffs are citizens of Spain who spend part of each year working in Evanston, Illinois as guest lecturers at Northwestern University.  When they were about to return to Spain, they stored their property with the defendant storage company and informed the defendant to contact them by email.  However, the plaintiffs never signed a storage agreement and, thus, had no breach of contract claim.

After an unsuccessful attempt to charge their credit card, the storage company did not inform plaintiffs of the problem, but, instead, sold their belongings to cover the storage bill.

The district court sets forth the events as alleged in the complaint:

"At the same time that plaintiffs signed the rental agreement for the storage unit, they also authorized PS to automatically charge Blazquez's credit card every month to pay for it. On February 2, 2011, PS unsuccessfully attempted to charge Blazquez's card. Plaintiffs allege that any subsequent attempt to charge the credit card would have been successful, but PS did not try again after its first attempt was unsuccessful. PS did not e-mail plaintiffs to tell them of the payment problem as it had promised. Instead, PS sold all of plaintiffs' property to recover the $572 that PS claimed it was owed because of nonpayment in March.

PS Illinois never gave Hausen and Blazquez any notice of the nonpayment or the sale of their property. In late April, plaintiffs noticed that PS had not charged their credit card recently and called to find out why. A PS employee told them of the sale. Plaintiffs requested documents and records related to the nonpayment and sale, but PS has refused to provide any. In addition, PS has not told plaintiffs the amount it received from the sale of their property and has not delivered to them any amount it received in excess of $572."

The Court denied the motion to dismiss the fraud claims on the ground that the plaintiffs could reasonably rely on the  statements of the strorage company:

"At the same time that plaintiffs signed the rental agreement for the storage unit, they also authorized PS to automatically charge Blazquez's credit card every month to pay for it. On February 2, 2011, PS unsuccessfully attempted to charge Blazquez's card. Plaintiffs allege that any subsequent attempt to charge the credit card would have been successful, but PS did not try again after its first attempt was unsuccessful. PS did not e-mail plaintiffs to tell them of the payment problem as it had promised. Instead, PS sold all of plaintiffs' property to recover the $572 that PS claimed it was owed because of nonpayment in March.

PS Illinois never gave Hausen and Blazquez any notice of the nonpayment or the sale of their property. In late April, plaintiffs noticed that PS had not charged their credit card recently and called to find out why. A PS employee told them of the sale. Plaintiffs requested documents and records related to the nonpayment and sale, but PS has refused to provide any. In addition, PS has not told plaintiffs the amount it received from the sale of their property and has not delivered to them any amount it received in excess of $572."

Edward X. Clinton, Jr.

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Shareholder Derivative Action Dismissed Because Plaintiff Failed To Make A Demand on the Board of Directors

IN RE HURON CONSULTING GROUP, INC. v. HURON CONSULTING GROUP, INC., Ill: Appellate Court, 1st Dist., 2nd Div. 2012 - Google Scholar:


This case arises under Delaware law.  Plaintiff, Brian Hacias, brought a derivative action purportedly on behalf of Huron Consulting against its directors.  Because the corporation was a Delaware corporation, Delaware law applies.


A derivative action is a lawsuit brought by a shareholder on behalf of the corporation against an alleged corporate wrongdoer.  The shareholder is attempting to stand in the shoes of the corporation.


Under Delaware law, the plaintiff shareholder who brings a derivative action must make a demand on the board of directors or allege what is known as demand futility.  In plain English, the plaintiff must tell the Board of Directors about the alleged wrongdoing and tell the Board to pursue it.


In some circumstances, demand is excused.  This usually occurs where the directors are not disinterested, such as where the directors are themselves the alleged wrongdoers.  Delaware law allows the plaintiff to allege that the directors could not be expected to sue themselves for wrongdoing.


Under the Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984) standard, "demand will be excused if the derivative complaint pleads particularized facts creating a reasonable doubt that (1) the directors are disinterested and independent or (2) the challenged transaction was otherwise a product of a valid exercise of business judgment."  The Aronson standard applies to specific decisions of the Board of Directors.


Where the Board of Directors did not make a decision regarding the issues in the lawsuit, another standard applies.  Under Delaware law, "demand is excused only where 'the particularized factual allegations create a reasonable doubt that, [at] the time the complaint was filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand.'" (quoting Braddock v. Zimmerman, 906 A.2d 776 (Del. 2006).


Here the court found that the plaintiff had not adequately alleged demand futility under either test and dismissed the case.  In essence, plaintiff failed to allege that any one of the directors was "interested."  Instead, according to the court, plaintiff made conclusory allegations which were insufficient to state a claim.


The Appellate Court affirmed the dismissal of the Complaint.


Edward X. Clinton, Jr.

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Manufacturer's Fraud Claim Against Walgreens Dismissed Under Rule 9(b)

IMAGENETIX, INC. v. Walgreen Co., Dist. Court, ND Illinois 2012 - Google Scholar:

The plaintiff is a manufacturing company that sold goods to Walgreens.  Plaintiff participated in a Walgreens coupon program under which those who purchased its product would receive a coupon.  After the program ended Walgreens sent Plaintiff an invoice for rebates totaling $640,000.

Plaintiff claimed that Walgreens engaged in fraud by charging it for rebates that were not valid.

Federal Rule of Civil Procedure 9(b) requires a heightened state of pleading for fraud claims.  The court explained:

"Allegations of fraud are subject to a heightened pleading requirement. Rule 9(b) requires that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." The heightened pleading therefore requires a complaint alleging fraud to contain more substance to survive a motion to dismiss as compared to a Rule 12(b)(6) motion based on another cause of action. See Ackerman v. Nw. Mutual Life Ins. Co., 172 F.3d 467, 469 (7th Cir. 1999) (stating that Rule 9(b) forces "the plaintiff to do more than the usual investigation before filing his complaint"). A satisfactory fraud pleading must include "the who, what, when, where, and how: the first paragraph of any newspaper story." DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir. 1990)."

As the court noted, the plaintiff claimed that it grew suspicious of Walgreens' rebate claim.  Therefore, according to the Court there was no reliance and no fraud.  The Court explained as follows:

"The motion to dismiss the fraud claim is granted. To prove common law fraud, Plaintiff must plead the following elements: (1) a false statement of material fact; (2) defendant's knowledge that the statement was false; (3) defendant's intent that the statement induce the plaintiff to act; (4) plaintiff's reliance upon the truth of the statement; and (5) plaintiff's damages resulting from reliance on the statement. Tricontinental Indus. v. PricewaterhouseCoopers, LLP, 475 F.3d 824, 841 (7th Cir. 2007) (citing Connick v. Suzuki Motor Co., Ltd., 675 N.E.2d 584, 591 (Ill. 1996)). As described above, the elements must be described with particularity.

The first, second, and third elements here are well-pled. Plaintiff has provided sufficient specifics about what statements were false: namely, the billing statements from Walgreens to Plaintiff. These statements, according to Plaintiff, essentially inflated the redemption rate in order to prompt Plaintiff to overpay for the Register Rewards and Easy Saver programs. The second and third elements can be pled generally under Rule 9(b), and the complaint quite clearly alleges knowledge of the falsity and intent to induce.

Where the complaint falls flat is on reliance and damages. I take reliance first. As to the Register Rewards program, Paragraphs 14 and 15 illustrate the point. Paragraph 14 reads as follows:

Following the week of the promotion, Walgreens represented to Imagenetix that it issued approximately 54,000 Register Rewards coupons related to the purchase of Celadrin and that 52,039 of those coupons were redeemed by customers. The redemption rate of over 95 percent was excessively high, especially considering the relatively short expiration period (i.e., two weeks) for each Register Rewards coupon. Walgreens billed Imagenetix $533,000 for coupons purportedly redeemed, plus $188,000 for scan down charges and a co-op charge related to the Register Rewards program.

It is this representation by Walgreens that Imagenetix claims was false. Even if true, however, Paragraph 15 not only fails to specify reliance, it comes close to pleading Plaintiff out of court on that element:

Because of the extremely high redemption rate for its Register Rewards promotion, Imagenetix audited the program. Imagenetix analyzed the purportedly redeemed coupons that were sent to Imagenetix by Walgreens' coupon processor, NCH Marketing Services, Inc. ("NCH"). Each Register Rewards coupon has a fourteen-digit code with the store number, lane number, and the date and time the coupon was printed. Imagenetix's audit revealed wide-spread fraud by Walgreens.

The most likely interpretation of this paragraph is that Imagenetix was suspicious of Walgreens' alleged misrepresentation, and sought to check out Walgreens' claims for reimbursement. If so, Plaintiff did not rely on Walgreens' representations — false or otherwise — and thus could not prove common law fraud.^[1]

But I must interpret the complaint in Plaintiff's favor and there is one interpretation that could save Plaintiff's case. This interpretation is that Plaintiff in fact paid Walgreens the full amount Walgreens had fraudulently demanded, and audited the program shortly after. If that is what Plaintiff is trying to say, then reliance may be present and the fraud complaint might plausibly be plead. I note that this interpretation only saves Plaintiff from a "with prejudice" dismissal.^[2]The claim of fraud is dismissed because the fourth element is not plead with sufficient particularity, but Plaintiff may attempt to amend the complaint to more clearly and specifically plead the reliance element.

The fifth element, damages from the reliance, is also far too vague to meet the strictures of Rule 9. Regarding the alleged damages, the complaint says two things. First, in Paragraph 23, regarding the Easy Saver program, the complaint says: "[o]n information and belief, Walgreens charged Imagenetix an amount in excess of the payments received by consumers." This statement is problematic for two reasons. One, it is vague as to whether Walgreens simply presented a bill or whether Imagenetix actually paid the bill. If only the former, then Imagenetix did not rely on the statements and was not damaged. If the latter, more particularity is required. This is because allegations made "on information and belief" are inappropriate in the fraud context, unless the relevant facts are not accessible to the plaintiff and the plaintiff provides grounds for his suspicions. Pirelli Armstrong Tire Corp. Retiree Med. Benefits Tr. v. Walgreen Co., 631 F.3d 436, 442-43 (7th Cir. 2011). The exception to the general rule does not apply here, because any payments Plaintiff has made would obviously be known to them.

The second statement regarding damages is as follows: "[a]s a result of Walgreens' misconduct related to the Register Rewards, Easy Saver, and other programs, Imagenetix and other manufacturers have overpaid Walgreens." It is entirely unclear what Plaintiff paid, when it paid, and under which of the programs. Rule 9 commands that Plaintiff provide more detail about how much it paid and when it paid those amounts pursuant to which programs. Plaintiff must also show in its pleading how its reliance on Walgreens' false statements led to the payments.

The fraud allegations are dismissed for failure to plead sufficient particularities under Rule 9. For the reasons stated above, the dismissal is without prejudice."

The court gave Imaginetix leave to amend the complaint.

Comment: Obviously, the lesson here is that under the new pleading standards set forth in recent U.S. Supreme Court decisions. plaintiffs must provide much more detail than previously.  The old days of federal notice pleading are long gone.  Fact pleading, which has long been the practice in the state courts, is now slowly becoming the accepted federal practice.

Edward X. Clinton, Jr.

www.clintonlaw.net

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