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

STANARD v. NYGREN (September 19, 2011)

H. Michael Stanard and his wife built an outdoor amphitheater on property they owned in rural McHenry County, Illinois. For years, they hosted public events there, including a 40th anniversery tribute to Woodstock  in 2009. They brought suit against the Sheriff of McHenry County and 22 of his deputies, as well as the County itself, alleging that Sheriff Nygren forced them to use County deputies for security at these events at inflated rates. The original complaint contained 28 counts, asserting, among others, §§ 1983 and 1985 claims, RICO claims, and state law claims. The complaint made no effort to identify which defendants were guilty of what conduct. The defendants moved to dismiss the complaint pursuant to Rule 12(b)(6). After missing numerous deadlines to respond, the plaintiffs finally responded almost six months late. Judge Kapala (N.D. Ill.) granted the motion. He dismissed several frivolous counts with prejudice and dismissed others without prejudice, giving plaintiffs' attorney an opportunity to be plead more concisely. Again, plaintiffs missed deadlines before filing a motion for leave to file an amended complaint. Very few of the original complaint's deficiencies were corrected. Even some specific concerns addressed by the district court in its original ruling were ignored. The court denied the motion but gave plaintiffs yet another chance. Again, plaintiffs filed an amended complaint without correcting the complaint’s fundamental deficiencies. The district court dismissed the federal claims with prejudice. Plaintiffs appeal.

In their opinion, Seventh Circuit Judges Manion, Rovner, and Sykes affirmed. The Court first noted that plaintiffs' counsel's inability to meet deadlines spilled over into the Seventh Circuit. Notwithstanding three extensions, the brief was filed late and without a proper jurisdictional statement. The Court turned to the merits. It noted that the Rules 8 and 10 pleading requirements are meant to ensure that a complaint puts the defendant on notice of the claims against him. When a complaint is unintelligible and lacks the coherence and organization to put a defendant on notice, dismissal is an appropriate remedy. The Court concluded that the Stanard’s complaint was just that. It cited the numerous sentences in excess of 100 words, the lack of any cohesive core allegation against the defendants, the numerous conclusory allegations, and the grammatical errors, just to name a few. Plaintiffs were given two opportunities, with specific instructions, to correct these deficiencies and failed to do so. Although leave to amend a complaint is normally allowed, the district court did not abuse its discretion in dismissing the complaint under these circumstances. In addition to affirming the dismissal, the Court ordered plaintiffs' counsel to show cause why he should not be disciplined and ordered the clerk to forward a copy of its opinion to the Attorney Registration and Disciplinary Commission of Illinois.

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R.G. WEGMAN CONSTRUCTION CO. v. ADMIRAL INSURANCE CO. (January 14, 2011)

Brian Budrik suffered serious injuries in a fall at a construction site where he was working. He brought a negligence action against several parties, including R.G. Wegman Construction Company, which managed the site. Wegman was an additional insured on a $1 million policy with Admiral Insurance Company. Wegman also had an excess policy with a $10 million limit. Wegman tendered the case to Admiral, which accepted and controlled the defense. According to Wegman, Admiral knew fairly early on that Budrik's injuries were quite serious, and knew that there was a significant possibility that the ultimate loss would exceed the policy limits, and yet failed to advise Wegman of that risk. Wegman claims that it did not appreciate the risk until right before trial. It advised its excess carrier immediately but the carrier refused coverage because of the late notice. Budrik prevailed at trial and the court entered a judgment in excess of $2 million against Wegman. Wegman filed suit against Admiral, alleging that it breached its duty of good faith. Judge Zagel (N.D. Ill.) dismissed the complaint. Wegman appeals.

In their opinion, Chief Judge Easterbrook and Judges Posner and Tinder reversed and remanded. The Court first had to deal with a jurisdictional issue. After Admiral removed the case to federal court, Wegman amended its complaint to add Budrik as a defendant. Since Budrik and Wegman are both Illinois citizens, the federal court may not have had diversity jurisdiction. But the Court noted that Wegman sought no relief against Budrik. Since there was no basis for adding him, and he is not necessary to resolve the case, the Court dismissed him and proceeded to the merits. The Court noted that a defendant with insurance coverage frequently has no interest in the litigation. If there is no reason to believe that the outcome will exceed the policy limits, only the insurer has a financial stake in the case. In those cases, it makes sense for the insurer to control the defense, to retain competent counsel, and to stay informed of the progress of the litigation. But here, accepting the allegations as true, Admiral learned early on that the outcome could exceed the $1 million policy limit. This fact created a conflict of interest between Admiral and Wegman. The existence of the conflict of interest requires the insurer to notify the insured. Admiral was duty bound to advise Wegman so that Wegman could take whatever steps were necessary to protect its own interest. Of course, the Court emphasized that it was relying only on the pleadings and that Wegman would still have to prove its allegations.

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GBUREK v. LITTON LOAN SERVICING (July 27, 2010)

Camille Gburek’s mortgage was serviced by Litton Loan Servicing. As of December 2007, Gburek was in default. She received two letters that month, one from Litton and one from Titanium Solutions on behalf of Litton. Neither letter demanded payment. The Litton letter offered to "discuss foreclosure alternatives" and "help preserve your homeownership." It requested financial information to help it consider its options. The Titanium Solutions letter also requested personal financial information and also offered to assist Gburek to find a way to avoid foreclosure. Gburek filed a class action under the Fair Debt Collection Practices Act. She alleges that each of the communications to her, as well as the communication between Litton and Titanium Solutions, violated the Act. Judge Shadur (N.D. Ill.) dismissed the complaint for failure to state a claim, concluding that the communications were not made "in connection with the collection of any debt" as required by the Act. Gburek appeals.

In their opinion, Judges Bauer, Flaum, and Sykes reversed and remanded. The Court noted that there are two threshold requirements for the FDCPA to apply. The first, that the defendant is a "debt collector," is conceded. The second, whether the communication at issue was "made in connection with the collection of any debt," is the issue on appeal. The Court looked to three of its prior decisions for guidance -- Bailey, Horkey, and Ruth. Bailey concluded that a communication was not "made in connection" because the debtor was not in default, any threats contained in the letter were prospective, and the communication contained no payment demand. The lack of payment demand was simply one factor in the analysis. Horkey concluded that the act did apply, even without an explicit demand for payment, when the reason for the communication was to induce the debtor to settle the debt. Finally, Ruth concluded that the Act applied to a privacy notice that was sent with a collection letter. The Court focused on the relationship between the parties and the fact that the communications were sent together. Thus, the Court emphasized that there is no bright line rule with respect to a demand requirement. Several factors are relevant in the analysis -- whether there is an explicit payment demand, the purpose and context of the communications, and the relationship between the parties. The Court applied the principles to each of the three communications at issue to determine whether the allegations were sufficient to survive the motion to dismiss. With respect to each of the letters sent to Gburek, the Court found that their context and content brought them within the Act. Gburek was in default and both letters sought financial information and her cooperation in discussing alternatives to foreclosure. The communication between Litton and Titanium Solutions is likewise "made in connection." It is clear that Litton engaged Titanium Solutions for the sole purpose of assisting it in collecting the debt. The Court declined to address any of the substantive issues with respect to the alleged violations in that they were not adequately developed on appeal.

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GEORGE v. NATIONAL COLLEGIATE ATHLETIC ASSOCIATION (July 16, 2010)

The National Collegiate Athletic Association (NCAA) sponsors annual championship tournaments in several sports, including men's basketball. The NCAA uses a ticket distribution system for many of those tournaments. For example, in the 2009 men's basketball championship tournament, a person who wanted tickets to the final games of the tournament was required to submit an application, advance the cost of any tickets desired, and include a $6.00 nonrefundable fee. The NCAA selected the "winners" at random. It returned to the others the amount advanced for the tickets. It kept the fees from all entries. Several non-winning applicants brought a class action against the NCAA. They allege that the distribution system is a lottery in violation of Indiana law. The complaint also includes claims for unjust enrichment, civil conspiracy, monies had, and violations of the Indiana Deceptive Consumer Sales Act. Judge Lawrence (S.D. Ind.) dismissed the complaint with prejudice. Plaintiffs appeal.

In their opinion, Circuit Judges Cudahy (dissenting) and Kanne and District Judge Darrah reversed and remanded. The Court looked to Indiana law for the elements of a prohibited lottery. There are three: a prize, an element of chance, and consideration. The Court concluded that plaintiffs had sufficiently alleged each of the three elements. In the process, the Court distinguished Lesher, an Indiana court of appeals case. Lesher held that a professional football season ticket distribution scheme did not constitute an unlawful lottery. Here, the prize element is met by the allegation that the tickets are actually more valuable than their face price, an allegation made but not established on summary judgment in Lesher. The chance element is obvious from the random drawing aspect of the distribution scheme. The Court rejected, at this motion to dismiss stage, the NCAA's argument that there may be times when no chance is involved (for example, if the demand for tickets does not exceed the supply). The consideration element is supplied by the allegation that the NCAA keeps the handling fee for every entry. The Court rejected the NCAA's argument that the "bona fide business transactions" exception to the Indiana gambling statute applied. It concluded both that the ticket distribution scheme was not a "bona fide business transaction" and that, in any event, the exception only applies to gambling, not to lotteries. Finally, the Court addressed the principle of in pari delicto. The Lesher court noted that it would have used the concept to dismiss the lottery count, concluding that the plaintiffs were equally at fault for participating in the scheme. Here, the Court first noted that the Lesher statements were dicta but then concluded that the complaint's allegations were that the plaintiffs participated unwittingly. Since all of the counts of the plaintiffs' complaint incorporated and relied on the lottery count, the Court reversed as to all counts.

Judge Cudahy dissented. He concluded that the case was fundamentally indistinguishable from Lesher. He cited several reasons for affirming the district court: a) that the nonrefundable nature of the fee (the primary Lesher distinction) did not elevate the scheme to a lottery, b) that the in pari delicto logic of Lesher was persuasive and should be applied to the plaintiffs, c) that the fact that scarce tickets might command a resale price higher than face price is irrelevant, and d) that the NCAA's conduct fell within the "bona fide business transaction" exception.

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