Indy Skyline Photo Spat At Heart Of 7th Circuit’s Gloss on Affirmative Defenses, Res Judicata and Fed. Pleading Amendments – Bell v. Taylor (Part I)

Litigation over pictures of the Indianapolis skyline form the backdrop for the Seventh Circuit’s recent examination of the elements of a proper affirmative defense under Federal pleading rules and the concept of ‘finality’ for res judicata purposes in Bell v. Taylor.

There, several small businesses infringed plaintiff’s copyrights in two photographs of downtown Indianapolis: one taken at night, the other in daytime.  The defendants – an insurance company, a realtor, and a computer repair firm – all used at least one the plaintiff’s photos on company websites.  When the plaintiff couldn’t prove damages, the District Court granted summary judgment for the defendants and later dismissed a second lawsuit filed by the plaintiff against one of the defendants based on the same facts.  The plaintiff appealed.

The Seventh Circuit affirmed summary judgment of the first lawsuit and dismissal of the second action on both procedural and substantive grounds.

Turning to the claims against the computer company defendant, the court noted that the defendant denied using the plaintiff’s daytime photo.  The defendant used only the nighttime photo.  The plaintiff argued that the defendant failed to comply with Rule 8(b) by not asserting facts to support its denial that it used plaintiff’s daytime photo.

Rejecting this argument, the court noted that a proper affirmative defense limits or excuses a defendant’s liability even where the plaintiff establishes a prima facie case.  If the facts that underlie an affirmative defense are proven true, they will defeat the plaintiff’s claim even if all of the complaint allegations are true.  A defendant’s contesting a plaintiff’s factual allegation is not an affirmative defense.  It is instead a simple denial.  Since the computer defendant denied it used the daytime photo, there was no affirmative matter involved and the defendant didn’t have to comply with Rule 8’s pleading requirements.

The Seventh Circuit also affirmed the denial of the plaintiff’s attempt to amend his complaint several months after pleadings closed.  In Federal court, the right to amend pleadings is broad but not absolute.  Where allowing an amendment would result in undue delay or prejudice to the opposing party, a court has discretion to refuse a request to amend a complaint.  FRCP 15(a)(2).  Here, the Court agreed with the lower court that the plaintiff showed a lack of diligence by waiting until well after the amending pleadings deadline passed.  The plaintiff’s failure to timely seek leave to amend its complaint supported the court’s denial of its motion.

The Court also affirmed the District Court’s dismissal of the plaintiff’s second lawsuit on res judicata grounds.  When the District Court entered summary judgment for defendants on plaintiff’s copyright and state law claims (conversion, unfair competition), plaintiff’s equitable relief claims (declaratory judgment and injunctive relief) were pending.  Because of this, the summary judgment order wasn’t final for purposes of appeal.  (Plaintiff could only appeal final orders – and until the court disposed of the equitable claims, the summary judgment order wasn’t final and appealable.)

Still, finality for res judicata purposes is different from appellate finality.  An order can be final and have preclusive effect under res judicata or collateral estoppel even where other claims remain.  This was the case here as plaintiff’s sole claim against the computer company defendant was for copyright infringement.  The pending equitable claims were directed to other defendants.  So the District Court’s summary judgment order on plaintiff’s copyright infringement claims was final as to the computer defendant.  This finality triggered res judicata and barred the plaintiff’s second lawsuit on the same facts.

Afterwords:

The case’s academic value lies in its thorough summary of the pleading requirements for affirmative defenses and the factors guiding a court when determining whether to permit amendments to pleadings.  The case also stresses that finality for appeal purposes is not the same as for res judicata or collateral estoppel.  If an order disposes of a plaintiff’s claims against one but not all defendants, the order is still final as to that defendant and the plaintiff will be precluded from later filing a second lawsuit against that earlier victorious defendant.

Bank Escapes Liability Where It Accepts Two-Party Check With Only One Indorsement – IL ND

BBCN Bank v. Sterling Fire Restoration, Ltd., 2016 WL 691784 zeroes in on some signature commercial litigation issues – namely, (i) the required showings to win a motion for judgment on the pleadings and summary judgment in Federal court, (ii) the scope of a general release, and (iii) the parameters of the UCC section governing joint payee or “two-party” checks.

The plaintiff – who was assigned a cause of action by a fire restoration company (the “Assignor”) that did repair work on a commercial structure – sued two bank defendants under the Uniform Commercial Code (UCC) for accepting a two party check (the “Check”) where only one payee indorsed it. The Assignor was a payee on the Check but never indorsed it before the banks accepted and paid out on it.

The banks moved for summary judgment on the plaintiff’s UCC claims on the basis that the Assignor previously released all of its claims to the Check proceeds in a prior lawsuit.  The Assignor in turn moved for judgment on the pleadings on the banks’ third-party action which sought indemnification from the Assignor for any damages assessed against the banks in the current lawsuit.

Result: Bank defendants’ motions for summary judgment granted; Assignor’s judgment on the pleadings motion (on the banks’ third-party indemnification claims) denied.

Rules/Reasons:

FRCP 12(c) governs motions for judgment on the pleadings.  A party can move for judgment on the pleadings after the complaint and answer have been filed.  When deciding a motion for judgment on the pleadings, the Court considers only the contents of the filed pleadings – including the complaint, answer, and complaint exhibits.  Like a summary judgment motion, a motion for judgment on the pleadings should be granted only if there are no genuine issues of material fact to be resolved at trial.

FRCP 56 governs summary judgment motions.  A party opposing a summary judgment must “pierce” (go beyond) the pleadings and point to evidence in the record (depositions, discovery responses, etc.) that creates a genuine factual dispute that must be decided after a trial on the merits.

UCC section 3-110 applies to checks with multiple payees.  It provides that if an instrument is jointly payable to 2 or more persons (not “alternatively”), it can only be negotiated, discharged or enforced by all of the payees.  810 ILCS 5/3-110(d).

Here, since both payees did not sign the Check, the banks plainly violated section 3-110 by accepting and paying it.  The Check was payable to two parties and only one signed it.

The banks still escaped liability though since the Assignor (the restoration company) previously released its claims to the Check proceeds against the bank.  In Illinois, a general release bars all claims a signing party (the releasor) has actual knowledge of or that he could have discovered upon reasonable inquiry.

Here, the Assignor’s prior release of the bank defendants bound the plaintiff since an assignee cannot acquire any greater rights to something than its assignor has.

Since the plaintiff’s claim against the banks were previously released by the Assignor, the plaintiff could not pursue its Check claims against the banks. As a consequence, summary judgment entered for the banks.

The Assignor’s motion for judgment on the pleadings against the banks third-party claims was denied due to the presence of factual disputes.  Since the court could not tell whether the Assignor misrepresented that it had assigned its claim to the Check by looking only at the banks’ third-party complaint and the Assignor’s answer, there were disputed facts that could only be decided after a trial.

Take-aways:

  • Motions for judgment on the pleadings and summary judgment motions will be denied if there is a genuine factual dispute for trial;
  • A summary judgment opponent (respondent) must produce evidence (not simply allegations in pleadings) to show that there are disputed facts that can only be decided on a full trial on the merits;
  • The right remedy for a UCC 3-110 violation is a conversion action under UCC section 3-420;
  • In sophisticated commercial transactions, a broadly-worded release will be enforced as written.

 

Supplemental Jurisdiction Quick-Hits : A Case Note

Southern OceanOcean Tomo v. Barney, (http://docs.justia.com/cases/federal/district-courts/illinois/ilndce/1:2012cv08450/275661/76) states the governing supplemental jurisdiction rules in a business battle over the rights to a patent valuation system.

The defendant, the developer of the system, was a member of the plaintiff financial services firm (an LLC) for several years when the relationship broke down over various issues.  Citing the company’s intolerable conditions, the defendant left with a company laptop.

The plaintiff filed a state court suit under various claims including the Computer Fraud and Abuse Act (CFAA) and the defendant removed the case to Federal court.  There, the defendant counterclaimed for breach of contract and other state law business tort claims in addition to his own CFAA claim against the plaintiff.

Plaintiff moved to dismiss the state law claims on the basis that the court lacked supplemental jurisdiction over them.

Ruling: Motion denied.  Defendant can proceed on his state law counterclaims.

Reasons:

Supplemental jurisdiction principles are codified at 28 U.S.C. 1367.  This section provides that in any case where a Federal court has original jurisdiction, the Federal court has “supplemental jurisdiction” over related state law claims.

Supplemental jurisdiction is proper where the state law claims are so related to the Federal ones that they form part of the same cause of action and stem from a common nucleus of operative fact.  Even a “loose factual connection” between the state and Federal claims will generally provide a predicate for supplemental jurisdiction.

A district court can decline supplemental jurisdiction where: (1) the claim raises a novel or complex issue of State law, (2) the state law claims substantially predominates over the Federal claims; (3) the Federal court has dismissed all claims over which it has original jurisdiction, or (4) exceptional circumstances or other compelling reasons exist for declining jurisdiction.  

The defendant’s Counterclaims alleged that plaintiff violated the LLC operating agreement by withholding profits from the plaintiff and a separate shareholder agreement.  The defendant also alleged a tortious interference with contract claim against the plaintiff.
Defendant’s lone Federal claim was the CFAA one – premised on the allegation that plaintiff was trying to reverse engineer defendant’s patent system, repackage it and sell it to third parties.
Denying the plaintiff’s motion to dismiss, the Northern District found that the defendants state law counterclaims were factually connected to the plaintiff’s Federal CFAA claim. The Court held that, at bottom, Plaintiff’s counterclaims were premised on allegations that Plaintiff engaged in a lengthy fraudulent scheme to steal defendant’s patent ratings system.
And while allowing that defendant’s state law counterclaims (breach of contract, tortious interference, misappropriation) involved a broader set of facts (than plaintiff’s CFAA count), they still derived from the same operative facts that were the foundation of the plaintiff’s claims.

The Court noted that defendant’s counterclaim allegations of plaintiff’s lengthy pattern of duplicitous conduct related directly to defendant’s claim that the plaintiff was trying to pilfer defendant’s patent ratings system.  This pattern of conduct was relevant both to plaintiff’s Federal computer fraud claims and to defendant’s state law counterclaim counts.

Since plaintiff’s motive (was it really trying to reverse engineer and steal the ratings system?) was key to the parties’ state and Federal claims , the Court found they were factually linked and supplemental jurisdiction was proper.

Afterword:

Ocean Tomo provides a succinct summary of supplemental jurisdiction rules.  As long as the state law claims are temporally related and at least loosely factually connected to the Federal claims, a Federal court can – but doesn’t have to – retain jurisdiction over state law claims that normally couldn’t be filed in Federal courts.