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

IN RE: IFC CREDIT CORP. (December 5, 2011)

Northbrook Bank & Trust had a fraud suit pending against IFC Credit Corporation when IFC declared bankruptcy on July 27, 2009. The Chapter 7 petition filed on that day was signed by IFC's non-lawyer president. IFC filed an amended petition -- signed by a lawyer -- the following day. The Bank refiled its complaint in the bankruptcy proceeding. The Bank and the trustee settled a preference dispute conditioned on a finding of jurisdiction. The bankruptcy court had rejected the Bank's argument that the bankruptcy proceeding was void because the original petition was not signed by a lawyer. Judge Manning (N.D. Ill.) agreed. The Bank appeals.

In their opinion, Seventh Circuit Judges Bauer, Posner, and Wood affirmed. The Court recognized the rule (and the practical reasons behind) that corporations are not permitted to represent themselves. But that does not make it an element of subject matter jurisdiction. The Supreme Court in recent years has limited the number of rules that actually involve subject matter jurisdiction. Subject matter jurisdiction is all about the competence of a court to decide case, not about the conduct of the parties in those cases. After considering the potential consequences, the Court concluded that the rule against pro se corporate litigants was not jurisdictional. Of course, the bankruptcy court could have dismissed the petition had it discovered the error before it had been corrected. Here, IFC amended the petition pursuant to Bankruptcy Rule 1009(a). Although that rule does not address relations back, the Court concluded that a bankruptcy court could allow the petition to relate back to the original filing.

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CLEARY v. PHILIP MORRIS INC. (August 25, 2011)

A class-action complaint brought against Philip Morris in 1998, and later amended, sought disgorgement of profits under an unjust enrichment theory, alleging that Philip Morris concealed facts about the dangers of cigarettes in its marketing and advertising. The complaint alleged three classes: an "addiction" class consisting of Illinois residents who purchased cigarettes between 1953 in 1965, a "youth marketing" class consisting of Illinois residents who first purchased cigarettes as minors, and a "lights" class consisting of Illinois residents who purchased Marlboro Lights. The class plaintiffs withdrew the "lights" class allegations because of another similar pending case. That "lights" case was ultimately unsuccessful in Illinois state court but a 2008 United States Supreme Court case breathed new life into the theory. The class plaintiffs therefore amended their complaint again, reinserting a "lights" class claim. The amended complaint added as defendants other companies who manufactured light cigarettes, including Lorillard Tobacco Company, and also added allegations regarding other brands of light cigarettes manufactured by Philip Morris. Lorillard removed the case to federal court under the Class Action Fairness Act. The district court rejected plaintiffs request to remand on the grounds that the new "lights" claim did not relate back to the original complaint, then dismissed Lorillard on statute of limitations grounds, and then again rejected a request to remand on the ground that Lorillard, the reason for the removal, was no longer a defendant. Later, the district court dismissed as time-barred all claims against the other non-Philip Morris defendants and limited the claims against Phillip Morris to the original Marlboro Lights claims. Ultimately, Judge Kennelly (N.D. Ill.) dismissed the unjust enrichment claims as a matter of law. The class appeals.

In their opinion, Seventh Circuit Judges Cudahy, Manion, and Hamilton affirmed. Before turning to the merits of the unjust enrichment claim, the Court briefly addressed the district court's refusal to remand after the Lorillard dismissal and its limitation of the "lights" claim to Marlboro Lights. With respect to the former, the Court stated that jurisdiction under CAFA is determined at the time of removal. Therefore, Lorillard's dismissal after removal did not affect the court's jurisdiction. With respect to the latter, the Court noted that an amendment relates back to an earlier complaint only when it arises out of the same occurrence. Here, the expansion of the allegations to include other Phillip Morris light cigarette brands would add additional class members and encompass numerous additional transactions. The additional allegations, therefore, do not arise out of the same occurrence and do not relate back. Turning to the unjust enrichment allegations, the Court recognized some tension in Illinois law as to whether unjust enrichment is an independent cause of action or must be tied to a separate claim. It ultimately decided that it did not have to resolve the tension, given its conclusion that the class allegations did not state a cause of action. An unjust enrichment claim must allege defendant's unjust retention of a benefit to the plaintiffs detriment and that the retention was unjust. The only detriment plaintiffs allege, however, is a violation of their right to be informed of the actual dangers and risks inherent in cigarettes. Under plaintiffs' theory, the class would include consumers for whom that alleged violation was not a detriment -- the consumers who would have acted no differently had they known the truth. Without any allegations of harm or that they would have acted differently, the class allegations cannot support a claim of unjust enrichment.

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JOSEPH v. ELAN MOTORSPORTS TECHNOLOGIES RACING CORP. (March 14, 2011)

Timothy Wardrop had a written employment agreement with Elan Motorsports Technologies, Inc. ("Inc."). Several years ago, he filed a complaint alleging a breach of the agreement. Unfortunately, he named as the only defendant Elan Motorsports Technologies Racing Corp. ("Corp."), Inc.'s parent. Eventually, Wardrop discovered his mistake and asked for leave to file an amended complaint naming Corp. He also asked that the amendment relate back to the filing of the complaint since the statute of limitations had long run. Judge McKinney (S.D. Ind.) concluded that the amendment could not relate back and dismissed the case. Wardrop appeals.

In their opinion, Circuit Judges Posner and Wood and District Judge Adelman reversed and remanded. The Court first pointed out the district court's procedural error after it concluded that the amendment would not relate back. Instead of dismissing the case, the court should have allowed the amendment under Rule 15(a)(2) and then entered judgment both for the original defendant (since it was not a party to the contract) and the added defendant (because the statute of limitations had run). But the Court identified a more fundamental error. The district court erred when it concluded that the amendment did not relate back. Its error, however, was understandable since the Supreme Court decided Krupski after the district court’s decision. Before Krupski, the Court's jurisprudence focused on what the plaintiff knew or should have known. Here, Wardrop's almost six-year delay in discovering his mistake was inexcusable. But the Supreme Court has now held that a district court makes only two inquiries: whether the defendant sought to be added to the complaint knew or should have known that it was the intended target of the litigation, and whether the plaintiff's delay has prejudiced the new defendant. A plaintiff's carelessness may still be relevant, but only to the prejudice prong of the test. That test is satisfied here. Inc. knew from the moment of service that Wardrop intended to sue the firm with whom he had employment contract -- and that was Inc. And any harm that Inc. has suffered is the direct result of its own failure to advise Wardrop of his mistake. The Court did comment that the amended complaint contained both additional legal theories and legal claims. A complaint need not allege legal theories so the inclusion of additional ones does not affect its relation back. That may not be true with respect to the new claim (quantum meruit). But the Court left it up to the district court to consider that issue in the first instance.

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MARSHALL v. H&R BLOCK TAX SERVICES, INC. (April 30, 2009)

Suit was filed in state court against a defendant class of companies. The defendant class consisted of H&R Block Tax Services, Inc. ("TSI") and its affiliates or franchisees. The suit, brought on behalf of a plaintiff class, alleged violations of the Illinois Consumer Fraud Act. The state court certified the defendant class and originally three plaintiff classes, including people in all 50 states and the District of Columbia. On TSI's motion, the court decertified the defendant class but refused to decertify the plaintiff class, although it did narrow it to residents of only 13 states. TSI removed the case pursuant to the Class Action Fairness Act (CAFA), on the theory that the decertification of the defendant class occurred after CAFA’s effective date and increased TSI’s potential liability. The district court remanded the case to state court. TSI requested leave to appeal, which the Court granted.

In their opinion, Chief Judge Easterbrook and Judges Posner and Tinder reversed. A case that was filed before the effective date of CAFA may still become removable if a court's ruling after its effective date increases a defendant's potential liability and does not "relate back" to the original claim. The Court first explored whether the decertification increased TSI's potential liability. On the pleadings, the Court concluded that TSI's potential liability may well have increased. Before decertification, it was not liable for the unlawful acts of all class members simply because it was a corporate affiliate, or because it was a class representative. Similarly, although the original complaint alleged joint and several liability, the complaint included three other defendants. The Court could not determine whether the plaintiffs sought to hold TSI liable for all the affiliates. The Court concluded that the plaintiffs may well be attempting to hold TSI liable for the acts of all the affiliates after decertification, which would appear to increase TSI's liability. With respect to whether the change "relates back" to the original complaint, the Court looked to whether the original complaint provided sufficient notice of the scope of the claim such that the defendant should not be surprised by the increased scope. Relying on its own conclusion that TSI's original liability was significantly less than it was facing after the ruling, the Court concluded that it did not relate back.

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