Paul Porvaznik – Business Litigator – Page 33 – Case Notes and Summaries of Recent Cases (State and Federal Courts

Discovery Rule Can’t Save Trustee’s Fraud Suit – No ‘Continuing’ Violation Where Insurance Rep Misstates Premium Amount – IL Court

Gensberg v. Guardian, 2017 IL App (1st) 153443-U, examines the discovery rule in the context of common law and consumer fraud as well as when the “continuing wrong” doctrine can extend a statute of limitations.

Plaintiffs bought life insurance from agent in 1991 based in part on the agent’s representation that premiums would “vanish” in 2003 (for a description of vanishing premiums scenario, see here). When the premium bills didn’t stop in 2003, plaintiff complained and the agent informed it that premiums would cease in 2006.

Plaintiff complained again in 2006 when it continued receiving premium bills. This time, the agent informed plaintiff the premium end date would be 2013. It was also in this 2006 conversation that the agent, for the first time, informed plaintiff that whether premiums would vanish is dependent on the policy dividend interest rate remaining constant.

When the premiums still hadn’t stopped by 2013, plaintiff had seen (or heard enough) and sued the next year. In its common law and consumer fraud counts, plaintiff alleged it was defrauded by the insurance agent and lured into paying premiums for multiple years as a result of the agent’s misstatements.

The Court dismissed the plaintiffs’ suit on the grounds that plaintiff’s fraud claims were time barred under the five-year and three-year statutes of limitation for common law and statutory fraud.

Held: Dismissal Affirmed.

Rules/reasons:

The statute of limitations for common law fraud and consumer fraud is five years and three years, respectively. 735 ILCS 5/13-205, 805 ILCS 505/10a(e). Here, plaintiff sued in 2014. So normally, its fraud claims had to have accrued in 2009 (common law fraud) and 2011 (consumer fraud) at the earliest for the claims to be timely. But the plaintiff claimed it didn’t learn it was injured until 2013 under the discovery rule.

The discovery rule, which can forestall the start of the limitations period, posits that the statute doesn’t begin to run until a party knows or reasonably should know (1) of an injury and that (2) the injury was wrongfully caused. ‘Wrongfully caused’ under the discovery rule means there is enough facts for a reasonable person would be put on inquiry notice that he/she may have a cause of action. The party relying on the discovery rule to file suit after a statute of limitations runs has the burden of proving the date of discovery. (¶ 23)

The plaintiff alleged that it wasn’t until 2013 that it first learned that defendant misrepresented the vanishing date for the insurance premiums.
The Court rejected this argument based on the allegations of the plaintiff’s complaint. It held that the plaintiff knew or should have known it was injured no later than 2006 when the agent failed to adhere to his second promised deadline (the first was in 2003 – the original premium end date) for premiums to cease.

Plaintiff stated it complained to the insurance agent in 2003 and again in 2006 that it shouldn’t be continuing to get billed. The court found that the agent’s failure to comply with multiple promised deadlines for premiums to stop should have put plaintiff on notice that he was injured in 2003 at the earliest and 2006 at the latest. Since plaintiff didn’t sue until 2014 – eight years later – both fraud claims were filed too late.

Grasping at a proverbial straw, the plaintiff argued its suit was saved by the “continuing violation” rule. This rule can revive a time-barred claim where a tort involves repeated harmful behavior. In such a case, the statute of limitations doesn’t run until (1) the date of the last injury or (2) when the harmful acts stop. But, where there is a single overt act which happens to spawn repetitive damages, the limitations period is measured from the date of the overt act. (¶ 26).

The court in this case found there was but a single harmful event – the agent’s failure to disclose, until 2006, that whether premiums would ultimately vanish was contingent on dividend interest rates remaining static. As a result, plaintiff knew or should have known it was harmed in 2006 and could not take advantage of the continuing violation rule to lengthen its time to sue.

Take-aways:

1/ Fraud claims are subject to a five-year (common law fraud) and three-year (consumer fraud) limitations period;

2/ The discovery rule can extend the time to sue but will not apply where a reasonable person is put on inquiry notice that he may have suffered an actionable wrong;

3/ “Continuing wrong” doctrine doesn’t govern where there is a single harmful event that has ongoing ramifications. The plaintiff’s time to sue will be measured from the date of the tortious occurrence and not from when damages happen to end.

No Fraud, No Problem – Unjust Enrichment Enough of ‘Hook’ For Constructive Trust – IL 4th Dist.

Tummelson v. White, a 2015 4th District appellate case, considers the inconvenient topic of what rights a former cohabitant has to funds he contributed to a home after he gets ousted from it by an ex-.

The parties lived together for several years in two different homes and paid mortgage and household expenses from a joint account which each party periodically funded. When the couple broke up and plaintiff was kicked out of the (second) house, he sued to recover damages for equity from the sale of the first home and to recoup mortgage payments and a down payment he made on the second home. The trial court entered judgment for the plaintiff after an evidentiary hearing and assessed a constructive trust on about $17,000 of the equity gained from the sale of the first home. Defendant appealed.

In partially affirming the trial court, the Fourth District examines the nature of the constructive trust remedy, the legal status of joint checking account funds, and whether fiduciary duties apply to live-in partners.

Two essential elements of a constructive trust include (1) an identifiable property to serve as the basis (or “thing”) for the constructive trust, and (2) possession of that property by the person to be deemed the “constructive trustee.”

A constructive trust can generally apply in one of two situations: where there is actual fraud or where a fiduciary abuses his authority over a more vulnerable counterpart. The fiduciary relationship question itself distils to whether there is a fiduciary relationship (1) as a matter of law, or (2) as a matter of fact. A “matter of fact” fiduciary relationship applies where one reposes special trust and confidence in another, who, as a result of the trust and confidence, is able to gain a position of dominance and influence over the weaker party.

Critically, though, the superiority and influence must result specifically from the plaintiff’s trust and confidence placed in the defendant. It isn’t enough to say one party has influence over another in a vacuum.

The Court rejected plaintiff’s argument that defendant stood in a dominant position because the homes were titled in defendant’s name who could kick plaintiff out at any time. The Court found that a licensor’s (here, the defendant) control over a licensee (plaintiff) wasn’t the kind of control required to establish a fiduciary-in-fact relationship. Since there was no evidence that the defendant ever influenced the plaintiff to do anything involving the homes against his will (plaintiff paid the mortgage and household bills voluntarily), there was no abuse of fiduciary relationship.

Still, the Court affirmed the constructive trust finding. While fraud and breach of fiduciary duty are the usual constructive trust grounds, the device also applies to remedy unjust enrichment. That is, even though there is no wrongdoing a court can still impose a constructive trust to avoid unjust enrichment.

Citing secondary authority (American Law Institute and Restatement (Third) of Restitution), the Court noted that an established basis for unjust enrichment is where one party to a relationship resembling marriage makes tangible uncompensated contributions in the form of property or services and the other party enjoys the benefits of those contributions. In such a case, the person making the contributions has a restitution claim for the value of the property or services if and when the relationship fails.

The court disagreed that the plaintiff’s mortgage and home expense payments from the couple’s joint account were ‘contributions’ that could support an unjust enrichment finding. This is because under the law money deposited to a joint account is presumed a gift from one account “tenant” to the other.

Once plaintiff deposited funds into the joint account from which the mortgages were paid, those funds were no longer “plaintiff’s money.” Instead, the money deposited into the account became a gift to the defendant – the other account holder. As a result, no constructive trust could attach to plaintiff’s mortgage payments on the two homes.

The Court did agree with the trial court that the plaintiff should be able to recoup some of the money he put into the homes. It attached a constructive trust on the plaintiff’s $7,000 down payment towards the second home’s purchase price.

Afterwords:

This case provides a useful summary of the factors involved in assessing fiduciary relationships and the constructive trust remedy. This court squarely held that actual wrongdoing is not required and all that’s necessary is unjust enrichment for a court to impose a constructive trust. Another key lesson is that deposits to a joint bank account are deemed gifts from one party to the other and that household expenses paid out of a joint account likely won’t be deemed a recoverable contribution by only one of the joint account holders.

Defendant Doesn’t Abandon Counterclaim By Failing to Replead It In Response to Amended Complaint – Ohio Fed. Court

I recently faced this procedural quandary: Plaintiff (that’s us) filed a complaint. Defendant responded by filing an answer and counterclaim. After receiving court leave, and before responding to the counterclaim, we amended the complaint. Defendant answered the amended complaint and filed affirmative defenses but did not replead its counterclaim.

Defendant later threatened to default us if we didn’t answer its prior counterclaim. I argued that the earlier counterclaim was extinguished by the amended complaint since the defendant didn’t file a counterclaim to it. The defendant thought otherwise. Ultimately, to avoid spending time and money on a collateral issue, I answered the counterclaim – even though I don’t think I had to.

My research revealed a definite split of authority on the issue. Some courts hold that an amended pleading supersedes not only the original complaint (that’s obvious) but also an earlier counterclaim to the superseded complaint. Others take the opposite tack and find that a counterclaim is separate from the answer and that even where a complaint is withdrawn and amended, the prior counterclaim still remains and must be answered.

Mathews v. Ohio Public Employees Retirement System, 2014 WL 4748472 reflects a court weighing the facts of a given case in deciding whether a defendant must replead its counterclaim or can stand on the one it previously filed.

The plaintiffs sued alleging their disability retirement benefits were wrongly denied. The pension fund defendant filed an answer and counterclaim to recover overpaid benefits. The plaintiff later filed an Amended Complaint to which the defendant answered but did not re-assert a counterclaim. Plaintiff moved for judgment on the pleadings based on the absence of a counterclaim with defendant’s answer to the amended pleading. The defendant then moved for leave to file a counterclaim to the Amended Complaint. Plaintiff opposed the motion.

Siding with the defendant, the Ohio Federal court looked to the interplay between Federal Rules 13 and 15 and noted that “courts are divided” on whether a party must replead a counterclaim in response to an amended complaint.

Federal Rule 13 requires a pleading to state compulsory counterclaims and allows it to allege permissive counterclaims.

Federal Rule 15(a)(3) provides that, “[u]nless the court orders otherwise, any required response to an amended pleading must be made within the time remaining to respond to the original pleading or within 14 days after service of the amended pleading, whichever is later.”

Some courts interpret this to mean that a defendant must replead a counterclaim in response to an amended complaint or it abandons or waives the right to pursue the counterclaim* while others do not require a defendant to replead a counterclaim with its response to an amended complaint.**

Still, a third line of cases decides the question on a case-by-case basis: it considers whether plaintiff received notice of the counterclaim, whether the defendant pursued the counterclaim and whether plaintiff will suffer unfair prejudice if the prior counterclaim proceeds.

The Court ultimately followed the latter case authorities; it weighed the equities to decide whether the defendant abandoned its counterclaim. In allowing the defendant to file a counterclaim to the plaintiff’s Amended Complaint, the Court noted that Plaintiff had been on notice for several months that defendant intended to pursue its counterclaim and even replied to the counterclaim.

The Court also cited Plaintiff’s failure to establish prejudice if the Defendant was allowed to file a counterclaim. The Court rejected plaintiff’s judicial economy argument by noting that discovery was already closed when plaintiff moved for judgment on the pleadings and the proposed amended answer and counterclaim injected no new facts to the previously filed counterclaim.

Afterwords: When a complaint is amended it is treated as abandoned. However, if a defendant filed a counterclaim along with its answer to the abandoned complaint, there is case authority (not just in Ohio but in other states, too) for the proposition that the counterclaim is not extinguished and the plaintiff still must answer it.

Mathews and cases like it demonstrate that the safe procedural play is for a defendant to replead its counterclaim with its answer to an amended pleading. Otherwise, the defendant may have to defend against a claim that it waived its counterclaim by not refiling it in response to the amended pleading.

* Gen. Mills, Inc. v. Kraft Foods Global, Inc., 487 F.3d 1368, 1376–77 (Fed.Cir.2007); Bremer Bank, Nat’l Ass’n, 2009 U.S. Dist. LEXIS 21055, at *40–41, 2009 WL 702009 Nat’l Mut. Cas. Ins. Co. v. Snider, 996 F.Supp.2d 1173, 1180 n. 8 (M.D.Ala.2014)

** Performance Sales & Mktg. LLC v. Lowe’s Cos., No. 5:07–cv–00140, 2013 U.S. Dist. LEXIS 117835, at *9 n. 2, 2013 WL 4494687 (W.D.N.C. Aug. 20, 2013); Ground Zero Museum Workshop v. Wilson, 813 F.Supp.2d 678, 705–06 (D.Md. Aug.24, 2011)

*** Davis v. Beard, 2014 U.S. Dist. LEXIS 30461, at *12–13, 2014 WL 916947 (E.D.Mo. Mar. 10, 2014) Hitachi Med. Sys. Am., Inc. v. Horizon Med. Grp., 2008 WL 5723531 (N.D.Ohio 2008) ; AVKO Educ. Research Found. v. Morrow, 2013 U.S. Dist. LEXIS 49463, at *30, 2013 WL 1395824 (E.D.Mich. Apr. 5, 2013); Cairo Marine Serv. v. Homeland Ins. Co., No. 4:09CV1492, 2010 U.S. Dist. LEXIS 117365, at *3–4, 2010 WL 4614693 (E.D.Mo. Nov. 4, 2010)

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