Fidelity Nat Title v. Intercounty Nat Title

• Decision Date: 17 June 2005
• Docket Number: No. 04-2335.,04-2335.
• Citation: 412 F.3d 745
• Parties: FIDELITY NATIONAL TITLE INSURANCE COMPANY OF NEW YORK, Plaintiff-Appellant, v. INTERCOUNTY NATIONAL TITLE INSURANCE COMPANY, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 745

412 F.3d 745

FIDELITY NATIONAL TITLE INSURANCE COMPANY OF NEW YORK, Plaintiff-Appellant, v. INTERCOUNTY NATIONAL TITLE INSURANCE COMPANY, et al., Defendants-Appellees.

No. 04-2335.

United States Court of Appeals, Seventh Circuit.

Argued April 11, 2005.

Decided June 17, 2005.

COPYRIGHT MATERIAL OMITTED

Albert E. Fowerbaugh, Jr., Lord Bissell & Brook, Chicago, IL, James S. Schreier (argued), Christensen, Miller, Fink, Jacobs, Glaser, Weil, & Shapiro, Los Angeles, CA, for Plaintiff-Appellant.

Myron M. Cherry, Cherry & Associates, Gerard D. Kelly (argued), Sidley Austin Brown & Wood, Richard L. Reinish, Seyfarth & Shaw, Daniel C. Meenan, Jr. (argued), Feiwell & Meenan, Dennis A. Berkson, Berkson & Associates, Chicago, IL, for Defendants-Appellees.

Before POSNER, RIPPLE, and SYKES, Circuit Judges.

POSNER, Circuit Judge

The plaintiff in this complicated commercial case, which is in the federal courts under the diversity jurisdiction, lost a jury trial and appeals, complaining about three pretrial rulings, all procedural.

In a typical house purchase, involving a mortgage and title insurance, the mortgage lender places the money for the loan in an escrow account administered by an escrow agent and insured by a title insurance company. A title insurance company named Intercounty National Title Insurance Company (INTIC) reinsured escrow accounts with the plaintiff, Fidelity. As a result of fraud by INTIC's owners and employees, $46 million disappeared from INTIC's insured escrow accounts and Fidelity ended up having to pay more than $36 million to persons and firms having claims to money in those accounts. Fidelity brought the present suit against INTIC, the principals of INTIC, and various entities and individuals connected with INTIC to recover as much as it could of that amount. Fidelity named as additional defendants another title insurance company, Stewart Title Guaranty Company (STG), together with firms and individuals affiliated with STG that we can ignore.

Fidelity alleged that between 1995 and 2000 INTIC's escrow agent, Intercounty Title Company ("New Intercounty"), which was controlled by INTIC's principals, had transferred millions of dollars stolen from the escrow accounts to another escrow agent controlled by INTIC's principals, "Old Intercounty," whose escrow accounts were reinsured by STG rather than by Fidelity. Although INTIC's principals looted the escrow accounts reinsured by STG (a predecessor of INTIC) as well as those reinsured by Fidelity, the diversion of funds from New Intercounty's escrow accounts, reinsured by Fidelity, to Old Intercounty's escrow accounts, reinsured by STG, had (Fidelity argued) unjustly enriched STG at the expense of Fidelity. Fidelity's theory was that STG hadn't had to make good the losses in Old Intercounty's escrow accounts because those accounts had been refilled with money looted from the escrow accounts reinsured by Fidelity. Thus, but for the diversion of funds, STG would have had more liability to the victims of the thefts and Fidelity less.

Even if STG was not a party to the fraud, if it received the proceeds of the fraud it could indeed be liable to Fidelity (in Fidelity's capacity as subrogee of the escrow account holders whose losses it had had to cover) under the doctrine of unjust enrichment. HPI Health Care Services, Inc. v. Mt. Vernon Hospital, Inc., 131 Ill.2d 145, 137 Ill.Dec. 19, 545 N.E.2d 672, 678-79 (1989); State Farm General Ins. Co. v. Stewart, 288 Ill.App.3d 678, 224 Ill.Dec. 310, 681 N.E.2d 625, 633-34 (1997); compare TRW Title Ins. Co. v. Security Union Title Ins. Co., 153 F.3d 822, 828-29 (7th Cir.1998). That was the theory — the only theory — on which the case against STG went to the jury. Although Fidelity had also charged STG with being a party to the fraud rather than just a beneficiary of it, the district court had dismissed the fraud charge before trial on the ground that Fidelity had failed to plead it with the particularity required by Fed.R.Civ.P. 9(b). We begin our analysis with that ruling.

What is required in the way of particularity in pleading fraud depends on the purpose of imposing such a heightened requirement of pleading — so at odds with the notice-pleading theory of the federal rules. The purpose is to minimize the extortionate impact that a baseless claim of fraud can have on a firm or an individual. In the typical commercial case there is a substantial interval between the filing of the complaint and the completion of enough pretrial discovery to enable the preparation and disposition of a motion by the defendant for summary judgment. Throughout that period a claim of fraud will stand unrefuted, placing what may be undue pressure on the defendant to settle the case in order to lift the cloud on its reputation. The requirement that fraud be pleaded with particularity compels the plaintiff to provide enough detail to enable the defendant to riposte swiftly and effectively if the claim is groundless. It also forces the plaintiff to conduct a careful pretrial investigation and thus operates as a screen against spurious fraud claims. Ackerman v. Northwestern Mutual Life Ins. Co., 172 F.3d 467, 469-70 (7th Cir.1999); Uni*Quality, Inc. v. Infotronx, Inc., 974 F.2d 918, 924 (7th Cir.1992); United States ex rel. Williams v. Martin-Baker Aircraft Co., 389 F.3d 1251, 1256 (D.C.Cir.2004); United States ex rel. Harrison v. Westinghouse Savannah River Co., 352 F.3d 908, 921 (4th Cir.2003); 5A Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 1296, p. 31 (3d ed.2004).

Fidelity's 52-page complaint with its 177 numbered paragraphs is sprawling, confusing, redundant — in short a mess. And a district judge has the authority to dismiss a complaint because it is confusing, though only in a rare case would he be justified in dismissing it on this ground with prejudice, Lindell v. McCallum, 352 F.3d 1107, 1110 (7th Cir.2003); In re Westinghouse Securities Litigation, 90 F.3d 696, 703-04 (3d Cir.1996); Simmons v. Abruzzo, 49 F.3d 83, 86-87 (2d Cir.1995); 5 Wright & Miller, supra, § 1281, pp. 708-12, thus barring the filing of an amended complaint. The fact that Rule 12(e) of the civil rules authorizes the granting of a defendant's motion for a more definite statement indicates that a confusing pleading is not ordinarily a fatal defect. But it can become one if despite repeated attempts the plaintiff is unable to draft an intelligible complaint. United States ex rel. Garst v. Lockheed-Martin Corp., 328 F.3d 374, 376, 378-79 (7th Cir.2003); Michaelis v. Nebraska State Bar Ass'n, 717 F.2d 437 (8th Cir.1983) (per curiam).

The district court did not purport to dismiss the complaint on this ground. Nor does STG urge it as an alternative basis for upholding the ruling. The court thought that STG couldn't figure out from the complaint the what, where, and when of the fraud charge against it. Sears v. Likens, 912 F.2d 889, 893 (7th Cir.1990); DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir.1990); Rodi v. Southern New England School of Law, 389 F.3d 5, 15 (1st Cir.2004). But it could. All the acts alleged to constitute fraud by STG are set forth, with dates, in the complaint; no more was required.

The complaint was confusing because of such paragraphs as 111, which states that "as described above, at all relevant times, defendants [ten are then listed, including `Stewart,' which denotes STG and its affiliates] were aware of significant deficiencies in the escrow accounts of Old Intercounty and New Intercounty, as well as the reasons therefor." The "relevant times" can be found elsewhere in the complaint and it is clear that the "reasons" for the "significant deficiencies" include fraud; the next paragraph, 112, alleges that "these defendants failed to disclose and fraudulently concealed said deficiencies from . . . Fidelity." The particulars of the charge of fraud would be easier to grasp if the acts, the times, the concealment, and a single defendant were placed in a single paragraph. But as long as those data are somewhere in the complaint — and they are — Rule 9(b) is satisfied. See Schwartz v. Celestial Seasonings, Inc., 124 F.3d 1246, 1252-53 (10th Cir.1997); Cramer v. General Telephone & Electronics Corp., 582 F.2d 259, 273 (3d Cir.1978). The complaint may still be vulnerable to a charge of being intolerably confusing; but, as we said, this is not contended. It thus was error to dismiss the fraud claim against STG.

A more difficult issue concerns the judge's ruling excluding Fidelity's only expert witness from testifying. William Pollard, a forensic accountant employed by Deloitte & Touche, conducted a detailed investigation into the fraud. In the course of the investigation he interviewed a number of persons accused of having participated in the fraud, including employees of Old Intercounty. Pollard, or others on the investigative team, destroyed (more precisely, as we are about to see, thought they had destroyed) most of the notes they'd taken of these interviews (and so did not turn them over to STG), on the ground that the notes did not "support" Pollard's expert opinion. By this was meant, however, not that they contradicted the opinion he planned to offer (that STG had benefited from the fraud because money obtained by the defrauders from accounts insured by Fidelity had been used to replenish Old Intercounty's escrow account, which STG had reinsured, thus reducing the losses that STG had had to cover) but that they were irrelevant to that opinion.

By the time it learned that it wouldn't be getting the notes, STG couldn't interview these individuals itself. They had been willing to talk to Pollard, but later, facing criminal prosecution, they refused on Fifth Amendment grounds to be interviewed further.

Most of the notes, it turned out, had not been destroyed. An almost complete set turned up in a related litigation. The notes revealed that one of Old Intercounty's employees had...