Fid. & Guaranty Life Ins. Co. v. Frerichs

• Decision Date: 31 October 2017
• Docket Number: No. 3:17-CV-03050,3:17-CV-03050
• Parties: FIDELITY & GUARANTY LIFE INSURANCE COMPANY, Plaintiff, v. MICHAEL W. FRERICHS, in his official capacity as Treasurer of the State of Illinois , Defendant.
• Court: U.S. District Court — Central District of Illinois

FIDELITY & GUARANTY LIFE INSURANCE COMPANY, Plaintiff, v. MICHAEL W. FRERICHS,in his official capacity as Treasurer of the State of Illinois , Defendant.

No. 3:17-CV-03050

UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF ILLINOIS SPRINGFIELD DIVISION

FILED: November 2, 2017

October 31, 2017

OPINION

SUE E. MYERSCOUGH, U.S. District Judge.

This cause is before the Court on the parties' objections to U.S. Magistrate Judge Tom Schanzle-Haskins' Report and Recommendation (d/e 31). The objections are overruled and the Court ACCEPTS the Report and Recommendation. The Motion to Dismiss (d/e 18) filed by Michael W. Frerichs, in his official capacity as Treasurer of the State of Illinois (the Treasurer), is GRANTED IN PART and DENIED IN PART. Counts 2, 5, 6, 7, 8, and 9 are dismissed without prejudice for lack of subject matter jurisdiction. Counts 3 and 4 are dismissed without prejudice for failure to state a claim. The Treasurer's motion to dismiss Count 1 is DENIED.

I. INTRODUCTION

The Court adopts the Statement of Facts set forth in the Magistrate Judge's Report and Recommendation. In sum, the case concerns unclaimed proceeds to life insurance policies. In 2012, the Treasurer initiated an audit of Plaintiff Fidelity & Guaranty Life Insurance Company (Fidelity) pursuant to the Illinois Disposition of Unclaimed Property Act (the Act), 765 ILCS 1025/0.05 et seq.

The Treasurer hired Kelmar Associates, LLC (Kelmar) to conduct the audit. The Treasurer agreed to pay Kelmar a percentage of the unclaimed property collected as a result of the audit. In August 2013 and August 2014, Kelmar sent letters to Fidelity instructing Fidelity to provide documents to Kelmar.

In 2013, Fidelity and the Treasurer agreed to an internal review by Fidelity in lieu of the audit. Fidelity's internal review resulted in Fidelity paying Illinois a total in $786,866.31 in accelerated payments pursuant to the agreement.

In February 2017, the Treasurer sent a letter to Fidelity noting that Fidelity had not complied with Kelmar's 2013 and 2014 letters requesting documents. The letter stated: "This letter serves as a final notice and demand that [Fidelity] allow the examination to take place and produce the requested data. If [Fidelity] does not produce the requested data by February 28, 2017, the Treasurer will take necessary legal steps to compel production."

On February 25, 2017, Plaintiff filed a Complaint for Declaratory and Injunctive Relief alleging:

(1) The audit violates the Fourth Amendment as an unreasonable search and seizure (Count 1);

(2) The audit violates Fidelity's right to substantive due process because the Treasurer is acting arbitrarily, irrationally, and without legitimate governmental purpose (Count 2);

(3) The audit violates Fidelity's right to procedural due process because the Treasurer breached the parties agreement for an internal review in lieu of the audit (Count 3);

(4) The audit violates Fidelity's right to procedural due process because Kelmar has a pecuniary interest in theoutcome of the audit because it will be paid a contingency fee based on a percentage of the unclaimed funds collected as a result of the audit (Count 4);

(5) The Act unconstitutionally discriminates against companies outside of Illinois in violation of the Commerce Clause by allowing the Treasurer to hire a third-party auditor on a contingency-fee basis with respect to holders of unclaimed property located outside the State of Illinois but not with respect to holders of unclaimed property located inside the State of Illinois (Count 5);

(6) The Audit burdens interstate commerce in violation of the Commerce Clause (Count 6);

(7) The scope of the audit is beyond the statutory authority of the Treasurer under the Act (Count 7);

(8) The Treasurer breached the 2013 Agreement (Count 8); and

(9) The Treasurer is estopped from reinstituting the audit after Fidelity performed on the 2013 Agreement (Count 9).

Fidelity also seeks to enjoin the Treasurer from proceeding with the audit (Count 10). Count 10 does not allege an independent claim for relief.

The Treasurer moved to dismiss the Complaint on the grounds of lack of standing, lack of ripeness, and sovereign immunity. The Treasurer also moved to dismiss the Complaint for failure to state a claim. This Court referred the motion to dismiss to the Magistrate Judge.

On September 5, 2017, the Magistrate Judge recommended that this Court dismiss Counts 2, 5, 6, 7, 8, and 9 without prejudice for lack of subject matter jurisdiction and dismiss Counts 3 and 4 for failure to state a claim. The Magistrate Judge recommended that the Court deny the Treasurer's motion to dismiss Count 1.

Both parties filed objections to the Report and Recommendation. The Treasurer argues that Count 1 should be dismissed. Fidelity argues that Counts 2, 5 and 6 are ripe and that Counts 3 and 4 state a claim. Fidelity does not object to the recommended dismissal of Counts 7, 8, and 9 without prejudice.

II. LEGAL STANDARD

Pursuant to Federal Rule of Civil Procedure 72(b)(3), the Court "may accept, reject, or modify the recommended disposition; receive further evidence; or return the matter to the magistrate judge with instructions." Fed. R. Civ. P. 72(b)(3). The Court reviews de novo any part of the Report and Recommendation to which a proper objection has been made. Fed. R. Civ. P. 72(b)(3).

III. ANALYSIS

A. Fidelity Has Standing to Bring the Fourth Amendment Claim in Count 1

The Magistrate Judge recommends that this Court find that Fidelity has standing to bring the Fourth Amendment. The Treasurer objects.

Federal courts are only authorized to hear "cases" and "controversies." U.S. Const. art. III, § 2. "A case or controversy requires a claim that is ripe and a plaintiff who has standing." Ind. Right to Life, Inc. v. Shepard, 507 F.3d 545, 549 (7th Cir. 2007) (noting that ripeness is concerned with when a claim is brought, while the focus of standing is on who may bring the action).

To have standing, (1) an individual must have suffered an injury in fact that is both (a) concrete and particularized and (b) actual or imminent; (2) the injury must be fairly traceable to the challenged action; and (3) it must be likely that a favorable decision will redress the injury. Sierra Club v. Franklin Cnty. Power of Ill., LLC, 546 F.3d 918, 925 (7th Cir. 2008).

The Treasurer argues that Fidelity does not have standing to assert the Fourth Amendment claim because Fidelity does not assert a cognizable injury that can be redressed by the Court.

The Court finds that Fidelity has alleged standing. Fidelity alleges that the audit is illegal. Fidelity alleges it will suffer an injury in fact from the audit by being subject to an illegal search. See Siebert v. Severino, 256 F.3d 648, 655 (7th Cir. 2001) ("The law recognizes that law-abiding citizens can sue and recover general (or presumed) damages for a Fourth Amendment violation, even without proof of injury.").

In addition, the alleged injury is imminent because the Treasurer stated his demand was his final demand and he would take appropriate steps to enforce compliance with the audit. The alleged imminent injury is traceable to forced compliance with theaudit. Finally, Fidelity asks the Court to redress the injury by declaring the audit illegal and enjoining the Treasurer from continuing the audit.

The Treasurer argues that the Magistrate Judge's conclusion that Fidelity alleged an actual injury in fact is founded on an incorrect factual premise—that Illinois is seeking to use the audit to require Fidelity to produce life insurance records going back to 1981. The Treasurer asserts that Illinois law limits the Treasurer's request to a period beginning in 1997.

However, the audit demand seeks records going back to at least 1986, if not 1981, with the only limitation being that the findings will only include unreported unclaimed property for the years permitted by each state's statutes:

The examination period in Delaware will be 1986 through present contingent on the examination being completed by June 30, 2015. If the examination is completed after June 30, 2015, the scope will be 1981 through present. While Kelmar is requesting complete records back to 1986, each of the participating states' examination findings will only include unreported unclaimed property for the years permitted in accordance with the respective statutes or, alternatively, in accordance with any negotiated settlement agreement.

Compl., Ex. G at 2, n.1 (d/e 1-1). Therefore, the Magistrate Judge's factual premise is valid.

The Treasurer also argues that the mere threat to take legal action is not sufficient to establish an imminent injury. However, the Treasurer stated in the February 2017 letter that the demand was a "final notice and demand" and that the Treasurer would take legal steps to enforce the demand. Fidelity is not obligated to wait until the Treasurer and the Attorney General sue. See Medimmune, Inc. v. Genetech, Inc., 549 U.S. 118, 128 (2007) (where the government threatens action, a plaintiff does not need to expose himself to liability before bringing suit to challenge the basis for the threat); see also, e.g., Wis. Cent., Ltd. v. Shannon, 539 F.3d 751, 760 (7th Cir. 2008) (it is no bar to ripeness that the government only threatened enforcement and did not bring a lawsuit).

The Treasurer also argues that the alleged harm is not redressable by this Court because the audit is a multi-state audit and relief in this case will not stop the audit of Fidelity by other states. However, Fidelity is challenging the examination pursued by Illinois. A favorable decision would redress Fidelity's injurybecause it would prevent the Illinois Treasurer's unreasonable and unconstitutional demand for unnecessary records. Therefore, the Court finds that Fidelity has alleged it has standing to bring the Fourth Amendment claim.

B. Fidelity's Fourth Amendment Claim in Count 1 is Ripe But the Substantive Due Process Claims in Counts 2, , and 6 Are Not Ripe

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