Richards v. Combined Ins. Co. of America

• Citation: 55 F.3d 247
• Decision Date: 11 May 1995
• Docket Number: No. 94-1038,94-1038
• Parties: RICO Bus.Disp.Guide 8825 Barry RICHARDS, Karen Richards, Roland Pepin, et al., Plaintiffs-Appellants, v. COMBINED INSURANCE COMPANY OF AMERICA and Credit Life Insurance Company of Ohio, Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 247

55 F.3d 247

RICO Bus.Disp.Guide 8825

Barry RICHARDS, Karen Richards, Roland Pepin, et al., Plaintiffs-Appellants, v. COMBINED INSURANCE COMPANY OF AMERICA and Credit Life

Insurance Company of Ohio, Defendants-Appellees.

No. 94-1038.

United States Court of Appeals, Seventh Circuit.

Argued Sept. 20, 1994.

Decided May 11, 1995.

Kristi L. Browne, Lawrence Walner, Julie Murphy Jaeger, Walner & Associates, Daniel A. Edelman (argued), Cathleen M. Combs, J. Eric Vander Arend, Michelle A. Weinberg, Edelman & Combs, Chicago, IL, Edward K. O'Brien, Needham, MA, for plaintiffs-appellants.

Kirk D. Messmer (argued), Kenneth T. Lopatka, Matkov, Salzman, Madoff & Gunn, Chicago, IL, for defendants-appellees.

Before ESCHBACH, RIPPLE and ROVNER, Circuit Judges.

RIPPLE, Circuit Judge.

Barry and Karen Richards and other plaintiffs (collectively "plaintiffs") brought this action against defendant Credit Life Insurance Company of Ohio ("Credit Life") and its parent corporation, Combined Insurance Company of America ("Combined"). They alleged that the defendants had a practice of keeping unearned insurance premiums that should have been refunded after the plaintiffs had made early loan payoffs or otherwise had terminated their policies. The district court granted summary judgment in favor of the defendants. The plaintiffs now appeal that judgment. For the reasons set forth below, we affirm.

I BACKGROUND

A. Facts

When the plaintiffs ¹ obtained loans from the finance company Advanced Financial Services, Inc. ("Advanced"), they were required to purchase credit life and disability insurance coverage for the term of the loan. The insurance offered to them by Advanced was issued by the defendant Credit Life. At the time plaintiffs procured their loans, they paid the entire premium for the insurance. Several days later, they received an insurance certificate from Credit Life which stated the terms of their insurance coverage. ² This certificate provided that the company would promptly refund any unearned premium if the loan was paid off early. ³ However, the insurance certificate did not state or require that the insured file any notification in order to receive a refund of the unearned premium. The plaintiffs allege that many borrowers did not receive a credit or rebate The plaintiffs' complaint ⁵ alleged that the defendants maintained a system which permitted them to retain for long periods of time, or to keep altogether, the refund money to which they had no claim. They asserted that an insurance business that fails to make refunds to consumers with the expectation that many will not notice and claim their money is engaging in dishonest conduct. They further alleged that the defendants made extensive use of the mail and wire services to execute such a scheme and practice of unlawfully withholding unearned credit insurance premiums after the loan was paid off early, in violation of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. Sec. 1962(c). ⁶ pp 113-118. The complaint also included state law counts alleging violations of the Illinois Consumer Fraud Act, common law fraud, breach of contract, and unjust enrichment.

of their unearned premiums. ⁴

B. RICO: The Relevant Statutory Provisions

To succeed in establishing a cause of action under Sec. 1962(c), the plaintiffs were required to establish "(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity." Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496, 105 S.Ct. 3275, 3284-85, 87 L.Ed.2d 346 (1985); McDonald v. Schencker, 18 F.3d 491, 494 (7th Cir.1994); Haroco, Inc. v. American Nat'l Bank & Trust Co., 747 F.2d 384, 386 (7th Cir.1984), aff'd, 473 U.S. 606, 105 S.Ct. 3291, 87 L.Ed.2d 437 (1985) (per curiam). The definition of "racketeering" provided in the statute includes a number of state and federal offenses, among which are wire and mail fraud. 18 U.S.C. Sec. 1961(1). The required "pattern" can be established by proof of at least two acts of racketeering activity within a ten-year period. 18 U.S.C. Sec. 1961(5). "[T]o prove a pattern of racketeering activity a plaintiff or prosecutor must show that the racketeering predicates are related, and that they amount to or pose a threat of continued criminal activity." H.J. Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 239, 109 S.Ct. 2893, 2900-01, 106 L.Ed.2d 195 (1989) (citations omitted). The remedy for an injury to business or property caused by violation of Sec. 1962 is a civil one: the recovery of treble damages plus costs and reasonable attorney's fees. 18 U.S.C. Sec. 1964(c). Proof of liability is by a preponderance of the evidence. Midwest Grinding Co. v. Spitz, 976 F.2d 1016, 1019 (7th Cir.1992); Liquid Air Corp. v. Rogers, 834 F.2d 1297, 1303 (7th Cir.1987), cert. denied, 492 U.S. 917 (1989); Appley v. West, 832 F.2d 1021, 1027 (7th Cir.1987).

The racketeering activity on which plaintiffs' complaint was premised was mail and wire fraud. See 18 U.S.C. Secs. 1341, 1343. Such a RICO allegation requires that the plaintiffs establish that the defendant (1) has participated in a scheme to defraud and (2)

                has mailed or knowingly has caused to be mailed a letter or other material for the purpose of executing the scheme.  McDonald, 18 F.3d at 494.   To support their RICO claim, therefore, these plaintiffs must demonstrate that Combined and Credit Life committed mail and wire fraud by establishing that the defendants knowingly schemed to defraud plaintiffs of their property and used the mail and wire services in furtherance of their scheme.  See Marcial v. Coronet Ins. Co., 880 F.2d 954, 958 (7th Cir.1989)
                

C. District Court Proceedings

The district court granted summary judgment to the defendant insurance companies on Count 1, the RICO count, and dismissed the state law counts. The court considered the defendants' challenges to each element of Sec. 1962(c), but focused its decision on the plaintiffs' failure to prove that the defendants committed the predicate acts of racketeering activity, namely a fraudulent scheme effectuated through use of the mail and wire services. It examined the complaint's allegation that the insurance documents misrepresented that, when a loan was paid off early, a refund of the unearned premium would be made without any action on the part of the insured. The court was of the view that "the language of those documents tends to indicate that the insurance company will make the refund and does not place a burden on the insured to take action to initiate the refund process." Mem. Op. at 7, 1993 WL 528043. Although the court agreed that the defendants were "prey[ing] upon consumers' inattention and consequent failure to seek refunds," it nevertheless concluded that RICO was not "the proper vehicle to right the wrongs done to Plaintiffs." Id. The court explained that the plaintiffs did not show that the defendants knowingly schemed to defraud the plaintiffs of their property by means of the mail or wire services. According to the court, the plaintiffs had alleged a scheme on the part of the defendants to convert the unearned premiums. Even though there was evidence of such a scheme, stated the court, conversion is not fraud:

[W]e cannot mesh these findings with the conventional requirements of fraud: a material misrepresentation relied upon by the plaintiff to his detriment. Plaintiffs state that the contents of the certificates of insurance are "not alleged to be fraudulent per se." Pl. Resp. to Motion to Dismiss, at 13-14. Plaintiffs reveal the flaw in their RICO theory in that same pleading: they state, "The fraud complained of in this case is the conversion of the unearned premium upon loan payoff, not the sale of insurance and not informing the borrowers that a demand is required by defendants." Pl. Resp. to Motion to Dismiss, at 13 (emphasis in original). Conversion is a tort distinct from fraud.... Moreover, in these sentences, Plaintiffs relinquish their claim that the representations that a refund would be made upon early pay-off were fraudulent. As much as we would like to punish Insurance Companies' reprehensible behavior, we cannot do so on a RICO mail or wire fraud theory where Plaintiffs relinquish their claim that a misrepresentation occurred.

Mem. Op. at 8 (footnote omitted). The court therefore granted summary judgment to the defendants on Count I and dismissed the remaining counts without prejudice.

II DISCUSSION

We begin our analysis with an examination of the complaint. The crux of the plaintiffs' allegations is that the insurance forms do not explain how the insured gets a refund, and do not "require that the insured file anything to obtain a refund." Compl. p 60(b). The complaint alleges that "[d]efendants knowingly and intentionally omitted to create any mechanism for keeping track of the holders of the loans," p 73, and that they "willfully, knowingly, and recklessly operated in such a manner that the borrowers would not receive their refunds, which instead would be kept by the defendants." p 76. The complaint also broadly stated that "defendants made extensive use" of the mails to further their fraudulent scheme, and listed these mailed documents: monthly finance reports, information on policy and premium allocation, and applications and certificates. Compl. p 115. The complaint did not allege that the documents were fraudulent; it did allege that, as a regular practice, the payoff statements "would not contain a credit for the unearned premium" and that the defendants "failed to apprise the borrowers of this information." p 116. The pleading also presented a vague, generalized claim of wire fraud: "Defendants kept apprised of the finance companies' activities and sales performance by interstate telephone calls." p 117. Many of these averments, especially the latter ones, are vague. There is no identification of specific fraudulent documents or activities. We need not decide definitively, however, whether the...