Seventh Circuit Court of Appeals Commentary : In Their Opinion : Lawyer & Attorney Michael E. Rigney : Kelley Drye & Warren Law Firm

CHICAGO TITLE LAND TRUST COMPANY v. POTASH CORPORATION OF SASKATCHEWAN SALES LIMITED (December 27, 2011)

Potash Corporation of Saskatchewan Sales Limited signed a 10-year lease with Chicago Title Land Trust Co. in 1995 for space in a Skokie, Illinois office building. Several years later, Potash wanted significantly more space in the same building and so advised Chicago Title. When Chicago Title could not provide the space, Potash exercised what it thought was a contractual option to cancel. Chicago Title interpreted the lease differently and brought suit in state court against Potash and its parent for breach of lease. After years of litigation, Potash prevailed. While that suit was pending, Chicago Title brought a fraud suit against Potash's CEO and General Counsel. The suit was originally dismissed without prejudice with leave to re-plead but, after 2 1/2 years without repleading, was dismissed with prejudice. Undaunted, Chicago Title filed suit in federal court against Potash and its parent, again alleging breach of lease and fraud. Judge Bucklo (N.D. Ill.) dismissed on res judicata grounds, citing both state court cases.

In their opinion, Seventh Circuit Judges Manion, Williams, and Tinder affirmed. The Court applied Illinois res judicata law because the earlier cases were in state court. Illinois requires a final judgment on the merits in the earlier case and the same cause of action and parties. Applying that test, the Court agreed with the district court that the state court suit against the individuals barred the current suit. It was dismissed with prejudice for failure to state a claim, which is the equivalent of adjudication on the merits. The two cases plead the same cause of action under Illinois' transactional test, even though they plead different theories, because they arise from the same group of operative facts. Finally, the cases involve the same parties. As corporate officers, the CEO and General Counsel are in privity with Potash and are considered the same parties. The Court recognized that Chicago Title did not bring a breach of lease claim against the individual defendants and possibly could not have, since individuals are generally not liable on a corporation's lease. But that does not change the result. Chicago Title had one cause of action arising out of the same set of operative facts. It was its decision to split the cause of action and it must live with the consequences.

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ANDERSON v. GULF STREAM COACH (November 3, 2011)

Jeff and Liz Anderson had a 2008 Crescendo RV manufactured by Gulf Stream. They liked the vehicle but wanted to upgrade to a more powerful version for their tour of the Western United States. They contacted Mike Apple at Royal Gorge, a Gulf Stream dealer. He suggested a 2009 Tourmaster. The Anderson's, with Apple, examined the vehicle and consulted Gulf Stream's website. The website indicated that the vehicle came with a standard 425-hp engine. In fact, the vehicle at issue had only a 360-hp engine. Assuming the RV had the larger engine, the Anderson's purchased it "as is" and accepted delivery in September 2008. After only a few uses, they discovered numerous significant problems. They returned the RV to Royal Gorge. During the repair process, Apple discovered the presence of the smaller engine, although the original paperwork had correctly identified the engine’s horsepower. The Anderson's went back and forth with Apple and Gulf Stream. Finally, in April 2009, the Anderson's brought suit for breach of express warranty, breach of the implied warranty of merchantability, Magnuson-Moss Warranty Act violations, Indiana’s Deceptive Consumer Sales Act violations, and fraud. Magistrate Judge Nuechterlein (N.D. Ind.) granted summary judgment to the defendants on all counts. The Anderson's appeal.

In their opinion, Circuit Judges Bauer, Flaum, and Williams affirmed in part and reversed in part. The Court first addressed the Magnuson-Moss Warranty Act claim, which was based on the state law warranty claims. The statute provides a federal cause of action for failure to comply with a warranty. The statute requires, however, notice and a reasonable opportunity to cure. Although the district court concluded that the Anderson's did not give a reasonable opportunity to cure, the Court disagreed, when the record was viewed in the light most favorable to the Anderson's. Thus, summary judgment on the state law expressed warranty claim and related MMWA claim was improper. The Court reached the same conclusion with respect to the Anderson's state law implied warranty claim and its related MMWA claim. Again, the district court relied on its conclusion that the Anderson's failed to provide an opportunity to cure, with which the Court disagreed. The Court turned to the Indiana Deceptive Consumer Sales Act claim. That claim was based on the fact that the Tourmaster was designated a 2009 model but was manufactured to fulfill an order for 2008 model. The FTC is responsible for enforcing model year designation requirements. Under those requirements, although an RV manufacturer may use an older chassis on a newer model, or even the same chassis on different model years, it cannot do as it did here – use a 2007 chassis on a vehicle that is completed during the 2008 model year and call it a 2009. The district court erred in concluding that it could. But the Court also concluded that there were issues of material fact with respect to this claim because the Anderson's allegedly received documents with the RV that accurately identified the 360-hp engine. Summary judgment is therefore not appropriate for either party. Finally, the Court concluded that there was no evidence in the record of intent to deceive and affirmed summary judgment on the fraud claim.

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YANNACOPOLOUS v. GENERAL DYNAMICS (July 26, 2011)

In the early 1980s, General Dynamics had a consulting agreement with Dimitri Yannacopolous under which Yannacopolous helped a subsidiary market telephone equipment in Greece. The agreement was terminated in 1983. In 1987, General Dynamics agreed to sell Greece several fighter planes plus parts and services. The sale was conducted under the auspices of the United States' Foreign Military Financing program. Under that program, Greece purchased the planes from General Dynamics directly but with funds loaned to it by the United States government. When Yannacopolous learned of the sale, he demanded a commission. General Dynamics refused. Yannacopolous brought suit against General Dynamics and lost. Relying on information he obtained, at least in part, from discovery in that suit, he filed a False Claims Act complaint against General Dynamics. Judge Gettleman (N.D. Ill.) granted summary judgment to General Dynamics. Yannacopolous appeals.

In their opinion, Seven Circuit Judges Bauer, Sykes, and Hamilton affirmed. Under the False Claims Act, it is illegal to present to the United States a false or fraudulent claim for payment, to make a false statement material to a false claim, or to use a false record to conceal an obligation to pay. Individuals (known as "relators") are authorized to initiate civil suits under the Act on behalf of the United States and receive, in return, a percentage of any funds recovered. The elements of the claim are that: a) the defendants made a statement for the purpose of receiving money from the government, b) the statement was false, and c) the defendant knew the statement was false. Yannacopolous alleges several separate claims under the Act. He claimed that General Dynamics (or, in the case of d) below, Lockheed): a) lied about funds used to capitalize a Greek business development company, b) failed to disclose the deletion of the Economic Price Adjustment clause from the draft contract, c) made misrepresentations regarding spare parts purchases, and d) made misrepresentations in contract amendments. The Court considered each claim in turn. First, the Court rejected Yannacopolous's argument that General Dynamics breached the contract by charging to it its costs of establishing the Greek business development company. It did not violate the representation that "material" was of U.S. origin since the investment in the development company was not "material." Furthermore, there was nothing in the contract itself that prohibited these costs from being charged to the contract. In fact, it appeared that General Dynamics’ conduct was consistent with the contract. Yannacopolous also claimed that General Dynamics falsely certified compliance with respect to the business development company costs. Again, the Court rejected that claim, in part, because it related only to "material." It did concede that one certification neglected to explicitly refer to the contract. The Court concluded that no reasonable juror could find the omission material, since General Dynamics had recently submitted the contract for review. Second, the Court rejected Yannacopolous's argument with respect to the Economic Price Adjustment Clause deletion. The draft contract contained such a clause. It reduced the contract price because of the economic benefit General Dynamics was going to receive from advance payments. Greece agreed to delete the clause, however, in exchange for General Dynamics' agreement to deliver the planes on an accelerated schedule. Before General Dynamics submitted any invoices, it sent a letter to the government explaining that the clause was no longer applicable. Even if General Dynamics failed to comply with paragraph 10 of the Certification Agreement that required notification of any changes in the clause, the deletion of the clause was immaterial. Third, the Court rejected Yannacopolous's argument with respect to spare parts. Under the contract, $70 million was allocated for spare parts, including hardware and services. The services element was not subject to change but the hardware portion of the charge was understood to be an estimate, subject to recalculation at the end of the contract period. General Dynamics continued to submit invoices including spare parts charges after Greece decided to purchase some spare parts outside the contract. The contract required an "appropriate" adjustment to the spare parts price before the March 1987 payment. Yannacopolous maintained that General Dynamics’ failure to reduce the parts price after knowing of Greece's decision was a false statement. In order to prevail, Yannacopolous had to present evidence that General Dynamics knew that the initial estimate was incorrect and that Greece would not order $70 million in spare parts over the life of the contract. Yannacopolous did not produce evidence that General Dynamics could have known that Greece's decision to buy some spare parts elsewhere would lead to a conclusion that it would not purchase $70 million of spare parts from General Dynamics over the following decade. Next, the Court rejected Yannacopolous's interpretation of the contract with respect to the depot program and concluded there were no false invoices. Finally, Lockheed assumed all of General Dynamics' rights and obligations under the program in 1993 and entered into two contract modifications with Greece. Yannacopolous claims both are "reverse" false claims. The Court concluded that Yannacopolous did not present evidence that either modification was objectively false. 

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SCHREIBER FOODS v. LEI WANG (July 5, 2011)

Cade Wang lives in China and operates Mature Sky, a trading company. Wang’s cousin, Lei Wang, operates an automotive supply company in Chicago. When Cade was looking for a dairy products supplier in the United States, he approached Lei. Lei, in turn, approached Schreiber Foods. Mature Sky placed a small order for whey protein concentrate -- the transaction was a success. A few months later, Lei Wang negotiated a much larger order -- a $600,000 order for D70, an ingredient in infant formula. Without telling anyone, Schreiber substituted RMW-2 (which it claims is materially identical) for the D70. The end customer refused to accept the product or pay for it. Schreiber did not pursue either the end customer or Mature Sky. Instead, it filed suit against Lei Wang. Schreiber alleged that Wang fraudulently represented that the end customer had promised to buy the product from Mature Sky. Judge Griesbach (E.D. Wis.) granted summary judgment to Wang on the ground that the claim was barred by the economic-loss doctrine. Schreiber appeals.

In their opinion, Judges Posner, Kanne, and Hamilton affirmed. Under the economic-loss doctrine, a plaintiff cannot pursue a tort remedy when he has a contract and an adequate remedy under contract law. Some states do not apply the doctrine where, as here, there are fraud allegations. Wisconsin's fraud exception, however, is very narrow. It requires that the fraud be extraneous to the contract. Here, the alleged fraud is "interwoven" with the contract. The Court noted that the circumstances (two foreign companies with which Schreiber was not familiar, an automobile parts supplier intermediary, the product substitution) required Schreiber to deal with these uncertainties through the contract. The Court also rejected Schreiber's contention that its claim fell within the sale of services exception to the economic-loss doctrine. The Court noted that Wisconsin applies that exception only when the contract is predominantly one for the sale of services, which this is not.

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HO v. TAFLOVE (June 6, 2011)

In 1998, Professor Seng-Tiong Ho was an engineering professor at Northwestern University. It was then that he first formulated his "4-level 2-electron atomic model.” He was working with graduate student Chang at the time. Several years later, Chang started working for Professor Allen Taflove, another engineering professor at the University. Graduate student Huang began working with Ho and his Model. Some Model research results were mentioned in a 2001 paper and later included in Huang's master’s thesis. In 2003 and 2004, Taflove and Chang wrote a paper and an article describing the Model and its applications. Ho and Huang brought an action against Taflove and Chang alleging violations of the Copyright Act. They also included in their complaint allegations of conversion, fraud, and misappropriation of trade secrets. Judge Bucklo (N.D. Ill.) granted summary judgment to the defendants on all counts. Ho and Huang appeal.

In their opinion, Circuit Judges Ripple and Hamilton and District Judge Murphy affirmed. The Court first addressed the copyright infringement claim. At issue in the case is the Copyright Act exception for ideas. The Court found that the Model was an idea. The whole purpose of the Model was to replicate reality. The plaintiffs did not create something, they merely discovered something. The Court conceded that a description of a scientific idea may be protected under copyright principles, but noted the plaintiffs failed to adequately support that argument. The Court turned to the state law claims and first considered preemption. The Copyright Act preempts state claims if the work at issue is in a tangible form and if the right at issue is "equivalent" to a § 106 right. The 106 rights are "reproduction, adaptation, publication, performance, and display." Preemption applies even if the material is not protected by copyright. The Court found the tangible form element satisfied and addressed the § 106 element with respect to each cause of action. It found the conversion count preempted because it was based on the alleged publication, a § 106 right. It found the fraud count preempted as well. Although fraud claims are frequently not preempted because they contain elements different from infringement, the fraud alleged here is that the works were published without attribution. Publication is a § 106 right. The Court found the trade secret misappropriation claim not preempted because the claim contained elements of secrecy and confidentiality that are not contained in the Copyright Act. The plaintiffs could not prevail on that claim, however, because they did not maintain the secrecy of the Model. Plaintiffs intentionally released the information in the conference paper and Huang’s thesis. They can no longer succeed on a trade secret claim.

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COLE v. COMMISSIONER OF INTERNAL REVENUE (March 28, 2011)

Scott Cole is a licensed attorney in Indiana, specializing in business law and tax consulting. Beginning in the 1990s, Scott and his brother, also an attorney, created what the court referred to as a "web of corporate and partnership entities serving dubious purposes." In 2001, Scott's law practice had a banner year. He received $1.2 million that year from one client alone. But when Scott and his wife Jennifer filed their joint tax return for 2001, they reported only about $100,000 total income. The IRS conducted an audit. The Coles kept very few records, requiring the IRS to reconstruct their earnings indirectly. They used both the "specific items" and "bank deposits" methods. The former looks for specific amounts of unreported income and the latter assumes that money in a taxpayer's account is income. The IRS ultimately concluded that the Coles underreported their income by over $2.5 million. They assessed a deficiency of over $500,000 and imposed a fraud penalty of over $400,000. The Coles petitioned the Tax Court for relief. The Tax Court found against the Coles and assessed the same deficiency and fraud penalty calculated by the IRS. The court found that: a) the IRS was justified in its indirect income reconstruction because of the Coles’ failure to maintain adequate records, b) the indirect reconstruction was reasonable, and c) there was "clear and convincing" evidence of fraud. The Coles appeal.

In their opinion, Judges Kanne, Tinder, and Hamilton affirmed. The Court first noted that the Coles waived most of the issues they raised in their 71-page brief because they failed to adequately develop the arguments. The Court identified two issues (of 15 total) that the Coles adequately developed -- whether the Tax Court was wrong in a finding that they omitted income and whether the Tax Court was wrong in finding fraud. On the first issue, the Coles have a heavy burden. An IRS deficiency assessment is entitled to a presumption of correctness and the Court's review of the Tax Court's findings of fact is under a clearly erroneous standard. The Court concluded that the Coles failed to overcome the presumption and failed to show any clear error. On the fraud issue, the Coles have a somewhat lighter burden. Although the clearly erroneous standard still governs the Court's review, there is no presumption of fraud. Instead, the IRS must prove fraud by "clear and convincing evidence." In order to meet that burden, the IRS must show that the taxpayer had specific intent to evade the tax. The IRS can show that intent with circumstantial evidence. The Supreme Court and other courts have identified certain "badges of fraud" that can be used in making a circumstantial case: a double set of books, false entries, destruction of records, covering up income, understatement, failure to file, filing late, co-mingling assets, and failing to keep adequate records. Courts also are allowed to consider a taxpayer's education and intelligence. Here, the Tax Court relied on the Coles’ education and intelligence (Scott is a lawyer, Jennifer is an accountant), their income understatement, their elaborate corporate structures, their failure to maintain adequate records, the co-mingling of business and personal assets, and their concealing of assets. The Court found no clear error in the Tax Court's fraud finding.

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REEVES v. DAVIS (March 14, 2011)

Linda Reeves hired Gerald Davis to help her with some home renovations. Although he represented himself to be licensed and insured, he was not. After she paid him almost $60,000, Davis left the job incomplete. A state court entered judgment in Reeves' favor, concluding that Davis violated the Indiana Home Improvements Contracts Act. The court specifically found that Davis committed a "deceptive act" under the statute. The court also made a factual finding that the contract covered the construction of a porch, although it did so by concluding that the contract lacked specificity and that any uncertainty should be resolved against Davis. Before Reeves collected any money, Davis petitioned for bankruptcy. Reeves filed an action asserting that the debt was non-dischargeable under § 523(a)(2)(A), which does not discharge a debt that is obtained by "false pretenses, a false representation, or actual fraud." The bankruptcy court rejected her collateral estoppel argument, held its own trial, found that the contract may not have included a porch, concluded that Davis did not have the requisite § 523 fraudulent intent, and ruled the debt discharged. Judge Magnus-Stinson (S.D. Ind.) affirmed. Reeves appeals.

In their opinion, Circuit Judges Flaum and Williams and District Judge Herndon affirmed. The Court stated that § 523 requires, among other things, a showing that Davis possessed an intent to deceive. Reeves argued that the state court's factual finding that the contract included the porch coupled with Davis' admission that he never intended to build one established that intent. The Court agreed with Reeves on the first point and concluded that the bankruptcy court should have deferred to the state court’s factual finding. But the state court did not make a finding regarding his intent. The Court noted that his own testimony that he never intended to build a porch must be taken in context with his testimony that he did not believe the contract called for one. The bankruptcy court did not clearly err when it concluded that Davis did not possess fraudulent intent.

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BALTAZAR v. WARDEN (February 18, 2011)

Advanced Healthcare Associates hired chiropractor Kelly Baltazar in 2007. Within a very short period of time, Baltazar concluded that the AHA staff regularly submitted inflated bills to the federal government. Baltazar resigned and filed suit under the False Claims Act. Judge Norgle (N.D. Ill.) dismissed the suit on the ground that the allegations were based on already public disclosures. The court based its conclusion on several federal government reports that established "prevalent fraud" by chiropractors. Baltazar appeals.

In their opinion, Chief Judge Easterbrook and Judges Kanne and Wood reversed and remanded. The Court conceded that there had been numerous allegations of fraud with respect to chiropractors. In fact, the report relied upon by the district court concluded that over half of the claims reviewed for that particular study were inflated. But Baltazar's allegations were not based on the study or the report. They were based on her personal knowledge of the practices of AHA. In concluding that Baltazar could proceed with her suit, the Court noted that no appellate court has held that a report of widespread fraud in a particular industry forecloses a False Claims Act suit against every member of the industry.

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PIRELLI ARMSTRONG TIRE CORPORATION RETIREE MEDICAL BENEFITS TRUST v. WALGREEN COMPANY (January 21, 2011)

Pirelli Armstrong Tire Corporation Retiree Medical Benefits Trust uses a Pharmacy Benefit Manager (PBM) to administer its relationships with pharmacies that the Trust's members use to fill prescriptions and that the Trust then reimburses for amounts in excess of the members’ co-pays. The PBM sets the maximum reimbursable price for the most frequently used prescriptions. Reimbursement for less popular medications is the average wholesale price, set by the manufacturers. The average wholesale price is almost always more than if the price had been set by a PBM. In the case of two particular drugs, Ranitidine and Fluoxetine, one form of the drug (i.e., capsule versus tablet) was on the controlled price list and the other was governed by the average wholesale price. It is illegal in Illinois for a pharmacy to dispense a drug in a form other than that which was prescribed. The Trust brought suit against Walgreens, alleging that the pharmacy filled members' prescriptions for those two drugs in the form that provided them the greatest reimbursement, regardless of which form was prescribed. The complaint cited several grounds for the Trust's belief that Walgreens committed this fraud: a) a preliminary review of its own reimbursement data that showed 12 members had prescriptions filled at Walgreens with the more expensive form of one of the drugs, and that three of those 12 members had apparently the same prescriptions filled at other pharmacies with the less expensive form of the drug, b) the allegations of a 2003 whistleblower suit that alleged that Walgreens filled prescriptions for the drugs with the more expensive form, and c) the data collected by a different PBM that compared Walgreens’ choice of drug form with other pharmacies and concluded that Walgreens’ rate of filling prescriptions with the higher priced drugs was overwhelmingly greater. The suit was originally brought as a class action and encompassed prescriptions in 35 states. It scope was narrowed, however to Illinois only and the Illinois Consumer Fraud and Deceptive Business Practices Act. The Trust also included an unjust enrichment claim under Illinois law. Judge Kendall (N.D. Ill.) granted Walgreens' motion to dismiss on the grounds that the Trust failed to adequately plead fraud and that it failed to allege that it had been injured. The Trust appeals.

In their opinion, Judges Flaum, Manion, and Tinder affirmed. The Illinois Act does make it unlawful to use fraud in trade or commerce. But it also is governed by the heightened fraud pleading requirements of the federal rules. The general rule is that a plaintiff cannot satisfy that heightened standard with allegations "on information and belief." Although the plaintiff does not use those words, the allegations fit the concept. There is an exception to that general rule where the plaintiff has no access to the facts constituting the fraud and where he adequately provides the grounds for his suspicions. The Court considered the support cited in the complaint in that light. First, it gave little weight to the allegations of the whistleblower suit. Allegations in other lawsuits are typically given little weight, particularly here, when those allegations themselves, for the most part, are made on information and belief. Second, the Court afforded little weight to the data set collected by the other PBM. Although that data does support a belief that a third party payor was injured, it does little to support the Trust, particularly since it is based on a different set of reimbursement data. The Trust had available its own reimbursement data. Third, the Court turned to that reimbursement data and found it wanting as well. There is not much data to begin with and the Court wondered why the Trust's pre-filing inquiry could not have resulted in a more robust data set. The suspicious examples themselves were few. In a universe of thousands of members and thousands of pharmacies nationwide, 12 erroneous prescriptions is not evidence of fraud. The Trust simply did not provide enough data and context to meet the heightened standard. Although the Trust may be correct that the small subset of members who had their prescriptions filled differently at Walgreens and other pharmacies is "suspiciously consistent" with fraud, it is not enough to satisfy the fraud pleading requirement. The district court was correct in dismissing the statutory count. Finally, the Court concluded that the district court was correct in dismissing the unjust enrichment claim. In Illinois, an unjust enrichment claim is not a separate cause of action but an equitable remedy. The Trust pleads its unjust enrichment claim on the same facts as it pleads its statutory claim. Those allegations of fraud are governed by the same pleading standard and must be dismissed for the same reason.

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ESTATE OF DOROTHY DAVIS v. WELLS FARGO BANK (January 12, 2011)

In 1999, Dorothy Davis lived in a single-family home in Kankakee, Illinois. She was a widow, she was elderly, and she was African-American. A man approached her and offered to make some repairs to her home – and get a new home loan to pay for them. She ended up borrowing almost $90,000 from Mortgage Express and paying over $30,000 in settlement charges. She sued Mortgage Express. A jury found (apparently in Mortgage Express’ absence) in her favor. The court entered judgment for over $135,000 – a judgment she has since been unable to collect. Before Mortgage Express went out of business, it transferred her loan. The loan is now held by Wells Fargo Bank and serviced by Litton Loan Servicing. Wells Fargo and Litton have continued their attempts to collect on the loan. They proposed a modification, demanded payment, and pursued a foreclosure action. Davis, and now her estate, sued Wells Fargo and Litton. She asserted fraud and unconscionability claims under state law, race discrimination claims under both the Fair Housing Act and the Equal Credit Opportunity Act, and a claim for violating the Home Ownership and Equity Protection Act. Judge Aspen (N.D. Ill.) dismissed all of the claims except the FHA claim, on which he granted summary judgment to the defendants. The Estate appeals.

In their opinion, Seventh Circuit Judges Evans, Sykes, and Hamilton affirmed. The Estate’s biggest problem lies in the statutes of limitations, which vary from one to five years. There are only three acts that occurred within even the longest of those periods that could support the Estate's claims: Litton's modification proposal, Wells Fargo's failure to tell Davis that it had acquired the mortgage, and Litton's payoff demand. The Court addressed each of the claims in that light. With respect to unconscionability, the allegations must relate to the formation of the contract. None of the allegations within the limitations periods do so -- the claim was properly dismissed. With respect to fraud, a plaintiff must show reliance. The only possible allegation within the limitations period relating to fraud is Wells Fargo's failure to advise Davis of the loan transfer. Assuming that could amount to a fraudulent omission, Davis never alleged that she relied on it -- the claim was properly dismissed. With respect to the Home Ownership and Equity Protection Act, that statute requires lenders to make certain disclosures in connection with a loan. None of the allegations within the limitations period trigger the disclosure requirements -- the claim was properly dismissed. With respect to the Equal Credit Opportunity Act, the Court stated that that Act prohibits race discrimination against an "applicant," which is further defined as a person who receives an "extension of credit." The Court concluded that Litton's offer to modify the loan, which occurred within the limitations period, was an "extension of credit." Davis further alleged that the offer was racially discriminatory. The Court therefore concluded that the claim should have survived a motion to dismiss. The Court nevertheless affirmed the district court. It found that the defendants would have prevailed on summary judgment for the same reason they did on the FHA claim. Davis simply failed to put forth evidence of discrimination. Finally, the Court considered that FHA claim, the only claim that survived a motion to dismiss in the district court. Davis was given the opportunity, on summary judgment, to come forward with evidence that the defendants discriminated against her on the basis of race. Again, she was limited to conduct occurring within the limitations period. That "evidence" consisted of a) two unsigned and undated affidavits, which the court struck because they did not comply with the rules, b) the declarations of two former Wells Fargo employees, which the court struck because Davis never disclosed the declarants during discovery, and c) Davis' testimony that she believed she was the victim of race discrimination. Davis waived any complaint regarding the affidavits or declarations because she failed to raise any meaningful opposition to the district court’s reasoning on appeal. Her unsubstantiated personal beliefs are simply insufficient to support her claim.

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GREENBERGER v. GEICO GENERAL INSURANCE CO. (January 10, 2011

The day after Stephen Greenberger got into a car accident, a GEICO insurance adjuster inspected his car and gave him a check for over $3200. Greenberger kept the money but never repaired the car. A few months later, in connection with the possible sale of the car, a mechanic estimated that the damage was closer to $5000. Greenberger eventually donated the car to charity. He brought suit against GEICO for breach of contract, fraud, and violation of the Illinois Consumer Fraud and Deceptive Practices Act. His claim is that GEICO purposely understates the value of necessary repairs in its estimates. Although he filed the action as a class action, the court never ruled on class certification. Judge Manning (N.D. Ill) dismissed the statutory fraud claim and granted summary judgment to GEICO on the contract and common law fraud claims. Greenberger appeals.

In their opinion, Seventh Circuit Chief Judge Easterbrook and Circuit Judges Kanne and Sykes affirmed. First, the Court concluded that the breach of contract claim was foreclosed by the Illinois Supreme Court's decision in Avery. That case stands for the proposition that a physical examination of the insured's automobile is necessary to prevail on a claim that one's insurer breached its promise to restore the automobile to its prior condition. Although Avery dealt with an insurer's practice of not using original equipment manufacturer parts, the principle is the same. The Court rejected Greenberger's attempts to distinguish Avery on the ground that he had an actual higher estimate. It also rejected his theory that GEICO failed to meet industry standards. With respect to the former, a higher estimate cannot establish the fact of a breach, although it may be admissible, supporting evidence. With respect to the latter, the Court noted that GEICO's promise was not to repair according to any industry standard. The Court also noted that Greenberger could not prove damages without the automobile. Second, the Court affirmed the district court's dismissal of the statutory fraud claim. The Act prohibits unfair and deceptive practices but does not apply to every simple contract dispute. Again, Avery controls. It held that a deceptive practice must include more than simply a promise and a breach. Here, Greenberger has only that. Finally, the Court addressed the common law fraud claim. That claim fails for the same reason the statutory fraud claim fails. Greenberger cannot identify a fraudulent act other than the breach. The Court noted that the claim also fails to the extent it alleges fraudulent concealment. Fraudulent concealment requires a fiduciary relationship. Insurers are generally not fiduciaries and Greenberger has not alleged with any specificity any reason why they should be considered so here.

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FUSION CAPITAL FUND II v. HAM (August 2, 2010)

In 2004, Sutura, Inc. was a privately-held medical device manufacturer in search of new equity capital. Millenium Holding Group was an insolvent publicly-held company with no business and few assets. The companies entered into a merger agreement under which Sutura was to merge into the Millenium shell followed by a name change of the shell back to Sutura (known as "going public by the back door"). Fusion Capital Fund II agreed to provide equity capital for the new enterprise. Fusion agreed with Millennium to invest $15 million, conditioned on the consummation of the merger. When the merger was not consummated by October of 2004, Fusion withdrew. Sutura terminated the merger agreement. Millennium brought suit against Fusion in Nevada for tortious interference with the merger agreement. Fusion prevailed. Fusion then brought suit in Illinois for its attorney's fees in defending the Nevada suit. Fusion added as defendants Richard Ham and Carla Aufdenkamp, Millennium's sole board members and majority shareholders. Judge Shadur (N.D. Ill.) found for Fusion and awarded $1.2 million. He also found the shareholders personally liable. Ham and Aufdenkamp appeal.

In their opinion, Chief Judge Easterbrook and Judges Posner and Kanne reversed. Under Nevada law, a shareholder or director is not liable for a debt of the corporation unless it acts as its alter ego. The statutory alter ego test has three parts: a) the person must influence and govern the corporation (Ham and Aufdenkamp concede this point), b) there must be a unity of interest (the Court found this point amply supported), and c) adherence to the corporate fiction would "sanction fraud or promote a manifest injustice." It is on this third point that the Court found error in the district court's analysis. There was no fraud. As the Court put it, Fusion always knew that Millennium was a "husk without any corn inside." In fact, it was Millennium's financial position that made the merger attractive. The more advisable course of action for Fusion would have been to get a personal guarantee from the shareholders -- and they did not even ask for one. The district court relied on the questionable financial maneuverings between Millennium and Ham and Aufdenkamp. But none of that made any difference to Fusion.

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SWANSON v. CITIBANK (July 30, 2010)

Gloria Swanson, an African-American, brought suit against Citibank and its appraiser alleging violations of the Fair Housing Act and common law fraud. She alleged the following facts: She applied for a home equity loan at a local Citibank branch. She became suspicious that the bank was trying to discourage African-American applications when a bank representative told her she had to be accompanied by her husband (a joint owner of the property). She was also told that Citibank's loan standards were stricter than those of a competing bank which had already denied her a loan. Nevertheless, she returned the following day and completed the application process. Based in large part on Swanson's statement that the home was worth $270,000, Citibank conditionally approved a $50,000 loan. However, when an independent appraiser retained by Citibank appraised the home at only $170,000, Citibank rejected the application. Swanson later ordered her own appraisal, which came in at $240,000. Judge Zagel (N.D. Ill.) granted defendants' motions to dismiss. Swanson appeals.

In their opinion, Chief Judge Easterbrook and Judges Posner (dissenting in part) and Wood affirmed in part and reversed in part. The dismissal gave the Court the opportunity to review the pleading standards in light of the recent Supreme Court decisions in Twombly, Erickson, and Iqbal. First, the Court noted that none of the decisions questioned the validity of Rule 8's requirement of a "short and plain statement of the claim." Nevertheless, Twombly and Iqbal referred to a "plausibility" requirement. The Court viewed that requirement as one in which a court asks if whether it could happen, not whether it did happen. Applying those principles to Swanson's allegations against Citibank, the Court concluded that her bare-bone allegations of the type of discrimination, the discriminator, and the setting of the discrimination were sufficient to state a Fair Housing Act claim. Her fraud claim, however, implicated the "state with peculiarity" requirement of Rule 9(b) and an actual damages pleading requirement. Since Swanson did not plead any damages, her fraud claim was properly dismissed. Applying the principles to Swanson's claims against the appraiser, the Court again concluded that her bare-bone allegations that the appraiser understated the value of her home because of her race stated a claim under the Fair Housing Act. The Court affirmed the dismissal of the fraud claims for the same reason as it did those against Citibank.

Judge Posner agreed with the majority's treatment of the fraud claims but dissented from their treatment of the housing discrimination claims. He believed that the complaint set out an "obvious alternative explanation" for the actions of both the bank and the appraiser. With respect to the bank, Judge Posner cited the economic downturn, the fact that Swanson had already been denied a loan by another bank, and the fact that the appraisal suggested any loan would be undersecured. With respect to the appraiser, he noted the inexact nature of the business and the fact that errors are frequently made. Iqbal teaches us that if there is an "obvious alternative" to the invidious discrimination alleged by the plaintiff, the discrimination alternative is not a plausible one.

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OJEDA v. GOLDBERG (March 25, 2010)

Gail and Ronald Goldberg were in the business of making high risk loans. They made such a loan in the amount of $600,000 to Ernest and Beverly Ojeda. The Ojedas provided stock valued at $800,000 as collateral. The original loan agreement was executed in August of 1998, with an original maturity date of October of 1998. The maturity date was extended many times, and the Ojedas continued to pay monthly interest until January of 2006. In late 1999, the company whose stock secured the original loan executed a reverse stock split, significantly reducing the number of shares and value of the collateral. At the time of one of the loan extensions in late 2001, two entities owned by the Ojedas, both of which owned McDonald's restaurants, guaranteed the note. Another maturity date came and went – and the Ojedas continued to make the monthly interest payments. In 2004, the Ojedas sold their interest in the McDonald's restaurants and used the proceeds to pay off creditors and to buy a pizza franchise. The Ojedas ultimately defaulted on the note in January of 2006, the pizza franchise failed a month later, and the Ojedas entered bankruptcy. In the bankruptcy proceeding, the Goldbergs asserted that the Ojedas’ liability on the $600,000 loan should be non-dischargeable pursuant to 11 U.S.C. § 523(a)(2)(A). The bankruptcy court concluded that the Goldberg's were not justified in relying either on the value of the stock or the ownership in the restaurants and further concluded that, if there was reliance, the only amount excluded from discharge would be attorney's fees and unpaid interest. The district court reversed, concluding that reliance on the restaurant ownership was justified and that the entire amount was excepted from discharge. The Ojedas appeal.

In their opinion, Judges Kanne, Rovner, and Williams affirmed. The Court first set forth the elements of a discharge exception under § 523(a)(2)(A): a debtor’s false representation, the debtor's knowledge of the falsity or reckless disregard for the truth, an intent to deceive, and justifiable reliance. The first three elements were not seriously contested. With respect to justifiable reliance, the Court noted that it is a lower standard than reasonable reliance, and only requires that one not rely "blindly" on a false representation if the falsity would have been obvious upon cursory investigation. Applying that test, the Court found no clear error in the bankruptcy court's determination that the Goldberg's reliance on the stock shares was not justified. Ronald Goldberg was an experienced businessman and he was aware of the company's troubles. He therefore should have made inquiry before continuing to extend the note. The Court found error, however, in the bankruptcy court's conclusion that the Goldberg's reliance on the Ojeda’s restaurant ownership was not justifiable. The Court concluded that the Goldbergs had no information that would have alerted them to the sale of the restaurants. Even though the restaurants did not secure the debt, the companies that owned the restaurants did guarantee the note. The sale of the restaurants materially affected each company's ability to perform as guarantors. Next, the Court concluded that the fraudulently induced forbearance fit within the definition of an "extension" or "renewal" of credit under § 523. Finally, the Court addressed the issue of the extent to which the forbearance was obtained by false pretenses. The test is whether the creditor: a) had collection remedies at the time of the false representation, b) did not take advantage of the remedies because of the false representation, and c) the remedies lost value during the extension period. The Court concluded that the Goldbergs met the test since the Ojedas had significant assets in 2004 that no longer existed at the time of default. Since the Goldberg's forbearance applied to the entire debt, the Court concluded that the entire debt was excepted from discharge, notwithstanding that the original loan involved no deception.

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REGER DEVELOPMENT v. NATIONAL CITY BANK (January 20, 2010)

Reger Development is an Illinois real estate development company. In 2007, the company opened a $750,000 line of credit with National City Bank. The company signed a promissory note and provided the personal guarantee of its principal, Kevin Reger. In several places, the note makes reference to the fact that it is payable "on demand." The company made its payments in a timely manner for the first year. Nevertheless, the bank asked it to pay down $125,000 of principal. Reger did so. A month later, the bank advised Reger that it was reducing the amount of the line of credit and also wanted to restructure some of the principal and secure it with a mortgage. The bank told Reger that it was possible that they would demand payment of the entire amount if he did not agree to the modifications. Reger brought suit, alleging breach of contract and fraud. The district court dismissed the case for failure to state a claim. Reger appeals.

In their opinion, Judges Flaum, Williams, and Sykes affirmed. The Court noted that Illinois law generally implies a covenant of good faith and fair dealing in a contract. It does not apply, however, to demand notes. Reger argued that general references to due dates and default provisions in the note were inconsistent with a demand instrument. The Court noted the repeated and explicit references in the instrument to National City's right to demand payment at any time. The note is clearly and unambiguously a demand note, concluded the Court. Since it is a demand instrument, the bank's insistence on modifications did not amount to a breach. With respect to the fraud count, the Court focused on the intent element. It stated that Reger must establish that the bank intended to and did induce him. In order to meet that element, Reger asked the court to infer that the bank intentionally drafted ambiguous documents so as to mislead him. The Court had already considered the ambiguity of the document with respect to the breach of contract claim. Not only had it not found it ambiguous, it found it rather straightforward. Reger failed to allege the element of intent with the particularity necessary in a fraud count -- the dismissal of that count is affirmed.

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NIGHTINGALE HOME HEALTHCARE v. ANODYNE THERAPY (December 21, 2009)

Anodyne Therapy manufactures and sells infrared lamps designed to improve circulation. The FDA approved it for that purpose. But Anodyne allegedly marketed the lamps as a treatment for peripheral neuropathy, which the FDA never approved. Nightingale purchased several of the lamps. The FDA sent Anodyne a warning letter about their marketing claims. Several months later, Nightingale stopped using the lamps, returned them to Anodyne with a demand for a refund, but then replaced them with almost identical devices. Nightingale brought a fraud case in state court. Anodyne removed the case to federal court on diversity jurisdiction grounds. Nightingale then added a federal Lanham Act claim. The court granted summary judgment to Anodyne on the Lanham Act claim, and later granted summary judgment to Anodyne on the fraud claim. The court relied on a contractual disclaimer of warranties as well as Nightingale’s failure to establish proof of damages. Nightingale appeals.

In their opinion, Judges Posner, Kanne and Rovner affirmed. On the merits, the Court disagreed with the warranty holding. It concluded that the only contractual limitation of liability related to a breach of warranty claim – not, as here, a fraud claim. The Court agreed with the district court, however, on the damages holding. Nightingale replaced the lamps with a virtually identical product. Both products served the same purpose, performed comparably and carried similar FDA approvals. The replacement of the lamps did not result in any damage to Nightingale.

The lack of any damage not only doomed the case on the merits – it showed that the jurisdictional threshold for diversity jurisdiction was not met. Ordinarily, the Court concluded, the lack of a good faith basis for meeting the threshold would result in a case being dismissed for lack of jurisdiction, even at a late stage of the case. Here, however, the fact that Nightingale added a federal claim after removal brought the case within the court’s federal question jurisdiction. The state claims were covered by supplemental jurisdiction. Even though the federal claim was later dismissed, the court had discretion to retain the state claims.

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CRICHTON v. GOLDEN RULE INSURANCE COMPANY (August 5, 2009)

For almost ten years, John Crichton purchased group health insurance from Golden Rule Insurance Co. He did so as a member of the Federation of American Consumers and Travelers ("Federation"). He filed a class action in 2002, alleging violations of the Illinois Consumer Fraud and Deceptive Business Practices Act ("ICFA"), class allegations under other states’ consumer fraud statutes, RICO and common law fraud. The basis of each of the claims was that Golden Rule failed to disclose, when it sold its insurance, that renewal premiums escalated dramatically. The district court dismissed the claims for failure to state a cause of action. Crichton appeals.

In their opinion, Judges Kanne, Evans and Sykes affirmed. With respect to the ICFA count, the Court relied on the Illinois Supreme Court's decision in Avery. Avery held that a non-resident of Illinois did not have a cause of action under the ICFA unless the transaction at issue occurred primarily and substantially in Illinois. Crichton lives in Florida and Golden Rule has its principal place of business in Indiana. Golden Rule is incorporated in Illinois and maintains an office in Illinois but that is not enough to support an ICFA claim. The Court also agreed with the district court that, to the extent Crichton was asserting a claim under Florida's statute, it failed because Florida does not allow suits against insurers. The Court then held that an element of the common law claim of fraudulent concealment was a duty to disclose. No such duty existed on the part of Golden Rule, either through its relationship with Crichton or its partial disclosures. Finally, the Court concluded that the RICO claim was properly dismissed. A RICO claim must identify the "enterprise." Crichton simply describes the marketing relationship between Golden Rule and the Federation. That relationship is insufficient to amount to an enterprise on which a RICO claim can be based. 

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SMITH v. DUFFEY (August 3, 2009)

Jack Smith sold his company and its intellectual property to Dade Behring, Inc. He received, as part of the consideration, options to purchase 20,000 shares of Dade Behring stock. He soon left the employ of the company. He agreed to accept $1.4 million in cash, while retaining his options. A few months later, the company entered bankruptcy. Smith's options were extinguished as part of its reorganization. Smith sued several officers of the company, alleging that they had a duty to disclose at the time of this termination agreement the fact that the company would soon enter bankruptcy. The district court dismissed his fraud claim for failure to state a cause of action. Smith appeals.

In their opinion, Judges Cudahy, Posner and Kanne affirmed. The Court stated that when the fraud alleged is the failure to disclose something, the plaintiff must establish the presence of a duty. A duty can arise in a fiduciary relationship. In the absence of relationship, it can arise when silence would be misleading because of some other statement made by the defendant. Here, the Court concluded that the defendants did not say anything that lulled Smith into thinking the company was doing well. In fact, the Court noted that the defendants advised Smith that the company was in trouble and was seeking an "exit strategy." The Court concluded that Smith's claim was without merit.

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TRADE FINANCE PARTNERS, LLC v. AAR CORP. (July 16, 2009)

Trade Finance Partners ("TFP") is, in essence, a broker that arranges business relationships for its clients. It charges a fee on any business it secures. AAR, an aviation support company, was a TFP client. The companies began working together in late 2004, and entered into a contract in January 2005. The contract allowed TFP to secure business from any "target accounts" which were identified by AAR in a written Request for Information ("RFI"). Just prior to and separate from its relationship with TFP, AAR responded to a Northwest Airlines Request for Proposal for an aircraft maintenance and repair contract. TFP alleges that AAR identified Northwest as a target account, even though they did not complete an RFI. Northwest and TFP did communicate in early 2005. In February, Northwest reissued its Request for Proposal and AAR updated its submission, all without the knowledge or involvement of TFP. Northwest selected AAR for the maintenance contract. TFP filed suit, alleging that its efforts caused Northwest to award the contract to AAR. The district court granted summary judgment to AAR. TFP appeals.

In their opinion, Judges Kanne, Wood and Sykes affirmed. The Court rejected each link in TFP's argument chain: a) the initial overtures between TFP and Northwest related only to a landing gear proposal and are not relevant to the maintenance contract inquiry, b) the record does not support TFP's assertion that there was a “barrier” of some sort between Northwest and AAR before its intervention, c) the record evidence does support the conclusion that Northwest rejected TFP's business model and independently awarded the maintenance contract to AAR, and d) the record does not support TFP's claims that it was responsible for Northwest's visit to AAR's facility or that the visit was relevant to the award of the contract. The Court conceded that it must construe the evidence and its inferences in TFP's favor -- but it found nothing but speculation. The Court also rejected TFP's claims that AAR's failure to complete an RFI was a breach of the contract, that AAR's intention not to fulfill its promise constituted fraud, or that it could recover in quantum meruit.

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CONSUMER PRODUCTS RESEARCH & DESIGN v. JENSEN (July 16, 2009)

Consumer Products Research & Design ("CPRD") holds a patent for a wireless smoke detector. CPRD entered into contracts with two companies owned, respectively, by a father and his son. One company, owned by the father, agreed to develop and market the product. The other, owned by the son, was responsible for its manufacturing. Unhappy with of the relationship, CPRD filed a complaint alleging fraudulent inducement and breach of contract. A jury awarded over $700,000 in damages. Defendants appeal.

In their opinion, Judges Cudahy, Flaum and Rovner affirmed. The Court rejected the defendants’ first argument, that the evidence was insufficient to support the verdict, because none of the defendants filed a motion for judgment as a matter of law after the verdict. The defendants did move for judgment as a matter of law under Rule 50 (a) after the liability phase of the bifurcated trial. The Court held, however, that a party's failure to comply with Rule 50 (b) after the verdict forfeits any claim on appeal challenging the sufficiency of the evidence. The Court also rejected defendants’ jury instruction argument. The defendants accepted the jury instructions without complaint in the court below and forfeited their objection. 

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UNITED STATES v. ROLLS-ROYCE CORPORATION (June 30, 2009)

Curtis Lusby was an engineer at Rolls-Royce Corp. He became suspicious that the company was falsely certifying that one of its aircraft engines met government specifications so he informed his superiors. He claims that the company fired him for doing so. He brought suit under the False Claims Act, alleging that the company punished him for preparing to bring an action under the statute. The parties jointly dismissed the suit in 2003. However, two months earlier, Lusby had filed a qui tam action under seal. The court dismissed the action for failure to plead fraud with particularity and because of the claim preclusion effect of the earlier lawsuit. Lusby appeals.

In their opinion, Chief Judge Easterbrook and Judges Posner and Wood affirmed in part and reversed in part. The Court first addressed claim preclusion. It noted its 2007 decision in Cole. In Cole, the Court held that a person who did not prevail on a Title VII claim cannot later bring both a personal and qui tam claim under the False Claims Act. Here, however, Lusby disputes one of the elements of claim preclusion -- that the cases involve the same parties (Cole conceded the issue). The Court noted that the United States is not an actual party to a qui tam suit unless it intervenes. It is, however, the real party in interest. In addition, the Court identified several procedural requirements for qui tam litigation that would make it very difficult to bring a personal claim in the same suit. The Court concluded that the resolution of an employee's personal suit does not preclude a later qui tam suit. With respect to the particularity issue, the Court stated that the complaint contained quite specific allegations of fraud. It rejected Rolls-Royce's argument that a specific allegation of the details of the invoices was required. The Court did affirmed the lower court with respect to Lusby's allegations that Rolls-Royce committed fraud during the earlier settlement negotiations.

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IN RE: GOLDBLATT'S BARGAIN STORES (March 18, 2009)

Before its bankruptcy, Goldblatt's operated six stores in the Chicago area. In January 2003, Great American Group agreed to buy the inventory at two of the stores at a deep discount. Shortly thereafter, Great American agreed to do the same with the inventory at the other four stores. Both sales were contingent on the independent appraisal of the inventories. Both sales were approved by LaSalle Bank, Goldblatt's principal creditor. Before the sales, Great American learned that inventory purchased for $450,000 had been moved from the four stores to the two stores. Great American did not advise the Bank of that fact. The independent appraisal of the first sale confirmed that the inventory was worth at least as much as it had been represented. The appraisal of the inventory from the four other stores, however, indicated that the inventory was worth at least $2 million less than Goldblatt's had estimated. The results of the second appraisal entitled Great American to a refund of approximately $1 million from Goldblatt's. LaSalle Bank, although required by contract to pay, refused to do so. The bankruptcy court, after a trial, concluded that Great American was legally obligated to disclose the movement of the inventory to LaSalle. The court concluded, however, that LaSalle would not have acted any differently had it known and that LaSalle had not shown that it incurred any loss from the movement. On appeal, the district court reversed. The district court agreed that Great American owed a duty of disclosure to LaSalle. However, it held that the fraud excused LaSalle Bank from any obligation to perform. Great American appeals.

In their opinion, Chief Judge Easterbrook and Judges Sykes and Tinder reversed. The Court agreed that a victim of fraud is typically entitled to rescission. Here, however, LaSalle does not seek rescission. It simply wants to be excused from having to pay the deficiency based on the overestimation of the second inventory. Before LaSalle is entitled to a remedy, it must establish reliance and injury. The Court agreed with the bankruptcy judge that LaSalle had not proven neither reliance nor loss.

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SECURITIES AND EXCHANGE COMM. v. KOENIG (February 26, 2009)

James Koenig was the Chief Financial Officer of Waste Management, Inc. In the early 1990s, after years of acceptable growth, the company’s financial performance began to suffer. Koenig devised several accounting strategies that made the company appear more profitable than it was. Koenig resigned in January of 1997. In October of 1997, the company disclosed in a press release that its financial statements were inaccurate and unreliable. The SEC filed a complaint against Koenig in March of 2002. At trial, the jury found that his accounting strategies were fraudulent. The court imposed a $2.1 million civil penalty, ordered the disgorgement of almost $1 million in bonuses, imposed $1.2 million in pretax interest, and enjoined Koenig from serving as a director of a public company. Koenig appeals.

In their opinion, Chief Judge Easterbrook and Judges Manion and Wood affirmed in part, reversed in part and remanded. The Court first addressed Koenig's statute of limitations argument. Although recognizing that the statute is five years and that more than five years passed between Koenig's resignation and the filing of the complaint, the Court rejected Koenig's argument. Instead, the Court noted that there has long been a special rule for statutes of limitations in fraud cases. A victim of fraud has the full statutory time to file, beginning from the date the wrong came to light or would have with due diligence. Since Koenig's accounting misdeeds were not public until the company issued its press release and Koenig never claimed that the SEC could have known earlier, the complaint was timely. The Court then addressed several trial management objections. It concluded that the lower court did not err in allowing the SEC to put on evidence of the motives of the company's new management. Although originally denying the SEC's motion in limine, the lower court admitted motive evidence after Koenig "opened the door." The court had warned Koenig that it would allow the evidence if Koenig made motive at issue. Second, the Court approved of the trial court’s practice of allowing the jurors to submit questions for witnesses and found no abuse of discretion. Third, the Court found no violation of the discovery or notice rules in the SEC's calling as its witness Koenig’s own expert, whom he did not call. Koenig also complains that the $2.1 million penalty was greater than allowed by the statute. The statute limits a penalty to no greater than the greater of $100,000 or the defendant’s pecuniary gain. The court included pre-judgment interest in its calculation of pecuniary gain. The Court approved of this formula. It held that pecuniary gain is the amount the defendant obtained as a result of his fraudulent accounting practices plus any return he could have made by investing that sum, until its disgorgement. The Court did disagree with the district court's computation of Koenig's bonuses. The company awards bonuses based on increases in the company's earnings over the prior year. Based upon the testimony of the SEC's expert, the Court concluded that the company’s corrected earnings increased from 1991 - 1992. The Court remanded for a recalculation of Koenig’s bonuses and, if necessary, a recalculation of the penalties.

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