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

KOLBE & KOLBE HEALTH & WELFARE BENEFIT PLAN v. THE MEDICAL COLLEGE OF WISCONSIN, INC. (September 2, 2011)

Scott Gurzynski worked for the Kolbe & Kolbe Millwork Co. and participated in its welfare benefit plan. His daughter K.G. was born in 2007. Although he submitted an enrollment change to the Plan in mid-2007, it was incomplete. For example, he neglected to indicate whether K.G. lived with him and whether he claimed her as a tax exemption. It was not until late November that he admitted that she did not live with him and that he was not claiming her as an exemption. The Plan requested additional information without success. It eventually denied enrollment status to K.G. in June 2008. Meanwhile, K.G. had received over $1.5 million in medical care from the Medical College of Wisconsin and the Children's Hospital of Wisconsin, all paid for by the Plan. After its decision denying K.G. enrollment status, the Plan asked the Medical College and the Children's Hospital to refund the money the Plan had paid. They refused. In a second amended complaint, the Plan seeks recovery under three theories: a) ERISA § 502(a)(3) equitable relief, b) unjust enrichment under federal common law, and c) breach of contract. Judge Crabb (W.D. Wis.) dismissed each of the claims and awarded attorneys fees to the defendants. The Plan appeals.

In their opinion, Seventh Circuit Judges Flaum and Williams and District Chief Judge Herndon affirmed in part and reversed and remanded in part. The Court addressed each theory in turn. ERISA § 502(a)(3) allows a Plan fiduciary to bring an equitable claim to enforce a term of the Plan. Here, the Plan seeks to enforce the Plan's overpayment provision. Under that provision, the Plan is entitled to seek recovery of payments it has made in error. However, the Plan limits that right to recovery from a "Covered Person." Although that term is not defined in the Plan, it is clear that neither the defendants, who provided the medical services, nor K.G., who was denied enrollment in the Plan, is a "Covered Person." The ERISA count was properly dismissed. In fact, in addressing the unjust enrichment count, the Court noted that ERISA had nothing to do with the case. K.G. was never covered by the Plan -- there is no need to interpret ERISA or the Plan. Therefore, there is also no ERISA unjust enrichment claim. The Court turned to the state law breach of contract claims. First, it concluded that the claims were not preempted by ERISA since the claims do not relate to the terms of the Plan. Instead, they relate to the contracts between the Plan and the defendants. The Court therefore remanded the state law claims to the district court, with the comment that the normal practice would be to decline to exercise supplemental jurisdiction over the claims. With respect to attorney's fees, the Court stated that the basic question, after the prevailing party's showing of some degree of success on the merits, is whether the losing party's position was substantially justified or merely harassment. The district court had concluded that the ERISA and state law claims were not substantially justified. The Court concluded that that was an abuse of discretion. It found all of plaintiffs claims to be substantially justified and taken in good faith – and reversed the fee award.

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MUSCARELLO v. OGLE COUNTY BOARD OF COMMISSIONERS (June 24, 2010)

Ogle County, Illinois joined the "green" movement in 2003 by amending its zoning ordinances to allow for the construction of windmills. Baileyville Wind Farms received the first special use permit for 40 windmills in 2005. The county also adopted a plan to protect residential, but not non-residential, property owners in the event of any diminution of property value. Patricia Muscarello owns nonresidential property adjacent to the proposed windfarm and has opposed its siting from the beginning. Unsuccessful in her attempts to block the project locally, Muscarello brought suit. She brought constitutional claims (unlawful taking, due process, equal protection), common law claims (trespass, nuisance), and state law claims (declaratory judgment, administrative review, writ of certiorari, unlawful taking, due process, equal protection, injunctive relief). She named over forty defendants, including Ogle County and related entities and individuals, the parties to the administrative proceedings, and Baileyville and its corporate parents. Judge Kapala (N.D. Ill) dismissed all the federal and common law claims as either unripe or for failure to state a claim. He then declined to exercise supplemental jurisdiction over the state law claims. He also denied a request by Baileyville to stay administrative proceedings regarding the expiration of the special use permit. Both parties appeal.

In their opinion, Judges Bauer, Wood, and Williams affirmed. The Court first addressed the three federal constitutional claims. The takings claim alleged no physical taking but relied on the “regulatory taking” concept. Under that concept, the permit must render her land useless for her to prevail. That is not the case here. Alternatively, the Court noted that Muscarello’s takings claim fails also because she failed to exhaust available state remedies. The Court rejected her equal protection claim that addressed the differential treatment afforded to residential and nonresidential landowners. Not only was it also unripe because of her failure to exhaust, the Court concluded that it would meet the deferential "rational basis" test. With respect to the due process claim, the Court concluded that Muscarello had no protectable property interest in the lifting of restrictions on adjacent property. The Court next addressed the state common-law claims, for which Muscarello asserted diversity jurisdiction. The district court never resolved the jurisdictional question, dismissing instead on ripeness grounds. On appeal, the Court considered both issues. The Court applied its citizenship analysis and concluded that Muscarello established diversity jurisdiction. On the merits, however, the Court agreed with the district court that Illinois law requires an invasion for both a trespass and nuisance. Since the windmills have not yet been built, there is no invasion -- and no trespass or nuisance. Finally, the Court considered the several state claims for which Muscarello asserted supplemental jurisdiction. It found no abuse of discretion for the dismissal of those claims. However, since it had just established that diversity jurisdiction did exist, it questioned whether the district court should have kept these claims under diversity jurisdiction. Although a plaintiff has the burden of establishing the court’s jurisdiction, a district court should rarely dismiss when jurisdiction in fact exists but was improperly pleaded. Here, the plaintiff had been given several opportunities to properly plead jurisdiction -- and she failed to do so. The Court decided not to do it for her. Finally, the Court found no abuse of discretion in the district court's denial of Baileyville’s requested stay.

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IN RE: REPOSITORY TECHNOLOGIES, INC. (April 12, 2010)

Repository Technologies, Inc. ("RTI") was a software supplier. When it needed additional financing, William Nelson, a minority shareholder, offered to help. He eventually loaned almost $2 million to RTI. Once he sent a notice of default, however, RTI filed for Chapter 11 reorganization. In the bankruptcy proceeding, RTI attempted, unsuccessfully, to recharacterize the entire Nelson debt as equity. Although the bankruptcy court refused to dismiss the case on the ground it was filed in bad faith, it did dismiss it on the ground that RTI was unable to reorganize. The district court affirmed the bankruptcy court and denied Nelson's request to strike, as dictum, the finding that the case had not been filed in bad faith. Nelson appeals -- RTI cross appeals. (Meanwhile, Nelson also filed a complaint in federal court seeking damages for the breach of the loan agreement. The district court froze RTI's assets pending resolution of the case, but not before RTI paid $100,000 to its bankruptcy lawyers. The court also appointed a receiver who transferred all of RTI's assets to Nelson as the successful bidder at a UCC sale. The court approved the sale and dismissed the claims without prejudice.)

Nelson also brought suit, in state court, against RTI's lawyers. He alleged that the lawyers conspired with RTI to file the bankruptcy case to enrich themselves, that they tortiously interfered with his loan agreement with RTI, and that they abused the bankruptcy process. The defendants removed. The district court denied remand, even after Nelson withdrew his "abuse of the bankruptcy process" count. The court then, relying on the district court’s finding in the bankruptcy case that the bankruptcy case was not filed in bad faith, dismissed the abuse of process claim with prejudice. The defendants moved to dismiss the rest of the complaint on the grounds that the entirety of the complaint was based on an abuse of the bankruptcy process. The district court, however, concluded that some state claims remained and remanded to state court. The defendants appeal.

In their opinion, Chief Judge Easterbrook and Judges Ripple and Tinder vacated and remanded with instructions to dismiss in the bankruptcy court appeal and reversed and remanded in the district court appeal. First addressing the appeal of the bankruptcy court decision, the Court concluded that the case was moot. The district court, in an order not appealed, approved the sale of all of RTI's assets. An appellate review of the bankruptcy court's decision could therefore not provide any meaningful relief. Although the Court agreed with Nelson that the bankruptcy court's statement about the good faith filing was dictum, it declined to entertain the argument since one cannot appeal dictum. The Court therefore vacated the judgment of the district court and remanded with instructions to dismiss the appeal from the bankruptcy court as moot.

With respect to the appeal of the district court case, the Court also began with a discussion of its jurisdiction. The defendants had removed on three alternate grounds: bankruptcy jurisdiction, diversity jurisdiction, and complete preemption. The district court relied on its bankruptcy jurisdiction to keep the case. The Court noted that district courts have original jurisdiction of proceedings "arising in or related to" cases under title 11. The Court agreed with the district court that the claims in the case were predicated on the lawyers' participation in the bankruptcy case and therefore met the "arising in" jurisdiction. Even the pre-petition conduct alleged in the complaint was related to the claims of abuse of process. Before reaching the merits of the remand, however, the Court concluded that it also had to address the existence of jurisdiction under the alternate grounds argued -- diversity jurisdiction and complete preemption – since the existence of any federal jurisdiction ground would prohibit a remand. As to the former, the defendants earlier conceded that diversity jurisdiction could not be a basis for the original removal because of the "forum defendant rule." The defendants did not preserve the argument that diversity jurisdiction could be used to keep the case in federal court, notwithstanding the “forum defendant rule, since the original removal was on other, proper grounds that have now been eliminated. The court therefore did not reach that "interesting question." With respect to complete preemption, the Court noted that complete preemption requires the existence of a federal cause of action that can substitute for the state action and provide recovery. Here, the lack of a federal claim that could substitute for Nelson's civil conspiracy and tortious interference claims illustrates the absence of complete preemption. The district court therefore did not have an independent ground of federal jurisdiction and had discretion to remand the supplemental state claims. On the merits of the remand, the Court recognized the usual practice to dismiss supplemental state claims if federal claims are dismissed before trial and conceded that it rarely interferes with a district court's discretion in this area. However, the discretion is not absolute. Here, the state claims are based on the defendants' participation in the bankruptcy case and are inseparable from the dismissed federal claims. When state claims are so entangled with the dismissed federal claims, the district court should retain supplemental jurisdiction. The fact that the claims are so interrelated and entangled might suggest that the state law claims should be dismissed as well. Although conceding the logic of that point, the Court added that the district court's reliance on the bankruptcy court's dictum in dismissing the federal claim was flawed. Dictum has no preclusive effect. The state claims should be resolved, said the Court, without reference to that dictum.

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AVILA v. PAPPAS (January 4, 2010)

Maria Avila was already in trouble. Her employer, the Cook County Treasurer's Office, was about to conduct a disciplinary hearing. Avila made it worse when she told one of her coworkers that she might "go postal." Her coworker advised her superiors. They not only added a disciplinary count for the implied threat and fired her but alerted the authorities. Avila was criminally prosecuted. The prosecutor charged a felony, taking the position that one of the targets of Avila's threat was a public official. Avila was acquitted, the court holding that he was not a public official. Avila filed suit against her superiors pursuant to §1983, alleging both constitutional violations and state law malicious prosecution. Although the court dismissed the federal counts, it retained the state law claim under supplemental jurisdiction and resolved it on the merits in favor of the defendants. Avila appeals the judgment on the state law claim.

In their opinion, Chief Judge Easterbrook and Judges Wood and Tinder vacated and remanded with instructions to dismiss for want of jurisdiction. The Court first addressed its jurisdiction. Although Avila asserted four federal law theories, the Court emphasized that a federal claim must have substance to create a basis for federal jurisdiction. The Court concluded that the federal claims -- substantive due process, conspiracy, failure to train, and equal protection -- were frivolous. The Court principally relied on the Supreme Court's decision in Albright and the Court's own decision in Newsome, holding that malicious prosecution does not violate the Constitution if state law recognizes it as a tort (which Illinois does).

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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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HUKIC v. AURORA LOAN SERVICES (November 20, 2009)

Avdo Hukic took out a mortgage in 1997. The monthly obligation was $1335. The agreement allowed him to pay taxes and insurance directly -- as long as he provided proof of payment to the lender. Through no fault of his own, his April 1998 payment was processed for $200 less than the required amount. Although the lender notified Hukic of the error, he took no steps to rectify it. Instead. Hukic continued to pay the correct amount each month, but the lender always considered him one month in arrears because of the continuing shortage. At about the same time, the lender advised Hukic that it would start to pay the taxes and insurance unless Hukic provided proof of payment. Hukic did not respond. The lender set up an escrow for the payments and advised Hukic of a new monthly payment amount. Hukic continued to pay the original $1335 each month. The lender, now Aurora Loan Services, reported the mortgage to credit agencies as delinquent in November of 1999. In early 2000, Aurora assigned the loan to Ocwen. Ocwen notified Hukic of his default but continued to pay the taxes and insurance. In January of 2001, Hukic's lawyer advised Aurora that he was paying his taxes directly and complained about negative information on credit reports. Hukic filed a multiple-count suit against Aurora and Ocwen. The court dismissed seven counts and granted summary judgment to the defendants on the Fair Credit Reporting Act, breach of contract and tortious interference with prospective economic advantage counts. Hukic appeals.

In their opinion, Judges Bauer, Evans and Williams affirmed. The Court first considered its jurisdiction-and first considered diversity jurisdiction, the basis of the original removal to federal court. The Court pointed out several problems: Aurora was a limited liability company, the citizenship of an L.L.C. is the citizenship of its members, its only member was a federally chartered savings association, the citizenship of a federally chartered savings association was in doubt under the law, a federal statute that clarified an association's citizenship was not enacted until after the date of removal, and the statute clarifying the citizenship question only applied if the association was a party in a lawsuit (instead of, as here, the member of a party). Luckily, the Court was able to bypass those issues because it concluded that the presence of the FCRA claim provided federal question jurisdiction. Since the state law claims arose out of the same nucleus of fact, they were covered by supplemental federal jurisdiction. After rejecting several procedural arguments, the Court addressed the merits. The Court affirmed the summary judgment on the breach of contract, tortious interference and FCRA claims. It concluded that Hukic was in default and that Aurora and Ocwen thus never provided false information to credit agencies. The Court then addressed the dismissal of the defamation claim on statute of limitations grounds. Like the jurisdictional analysis, the Court's analytic path was tortured. It included discussion of the defamation limitations period, the discovery rule, the continuing violation rule and the single publication rule. Concluding that the Illinois Supreme Court would apply neither the single publication rule nor the continuing violation rule to the facts and therefore that Hukic could maintain a claim for defamation for statements made by Aurora within a year of the filing of the suit, the Court nevertheless affirmed the dismissal. Illinois requires that special damages be pled in a defamation per quod case, which this is. Hukic alleged no harm from the reports that are actionable. Finally, the Court affirmed the dismissal of the intentional infliction of emotional distress claim because it did not allege conduct so extreme or outrageous to state a claim under Illinois law.

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GOLDEN YEARS HOMESTEAD v. BUCKLAND (February 19, 2009)

Golden Years Homestead, Inc. (“Golden Years”) operates a nursing facility in Fort Wayne, Indiana. In early 2000, the Indiana Department of Health (“IDH”) conducted an annual certification inspection, as required by Golden Years’ participation in the Medicaid program. The inspection took place over a span of ten days. At some point during the inspection, the inspection team became upset with the conduct of the Golden Years’ team. From then on, the inspection team became loud, overly critical, hostile and accusatory. The team left information favorable to Golden Years out of its report. Golden Years was cited for seventeen violations. After a six-day evidentiary hearing and administrative appeals, all but one of the citations was reversed. Golden Years brought a lawsuit against the inspectors under 42 U.S.C. § 1983 for constitutional violations and state law claims for abuse of process and malicious prosecution. The district court granted summary judgment for the inspectors. Golden Years appeals the dismissal of the state law claims.

In their opinion, Judges Bauer, Rovner and Sykes affirmed. The Court first addressed Golden Years’s complaint that the court dismissed the state law claims sua sponte. The Court disagreed. Although the inspectors did not specifically address the state law issues in their motion, they did ask for all counts to be dismissed. Furthermore, Golden Years actually addressed the state law counts in its response. The lower court acknowledged the general rule that a court will decline to exercise jurisdiction over state law claims if all federal claims are dismissed before trial. The Court approved the lower court’s invocation of the exception to the rule when the state law claims are meritless. On the substance of the malicious prosecution claim, the Court stated that Golden Years was required to prove malice. Although it seemed to accept that the inspectors’ conduct was overzealous and unprofessional, the Court concluded that the evidence did not support personal animosity or malice. Similarly, the Court concluded that the evidence of hostility and rancor was insufficient to establish the ulterior motive requirement for abuse of process.

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