State Farm Auto. Ins. Co. v. Newburg Chiropractic

• Decision Date: 18 December 2013
• Docket Number: 13–5059.,Nos. Nos. 13–5028,s. Nos. 13–5028
• Citation: 741 F.3d 661
• Court: U.S. Court of Appeals — Sixth Circuit
• Parties: STATE FARM AUTOMOBILE INSURANCE COMPANY, Plaintiff–Appellee/Cross–Appellant (13–5028 & 13–5059), v. NEWBURG CHIROPRACTIC, P.S.C. and Cane Run Chiropractic, P.S.C., Defendants (13–5028), Defendants–Appellees (13–5059), Michael Plambeck, Defendant–Appellant/Cross–Appellee (13–5028 & 13–5059).

741 F.3d 661

STATE FARM AUTOMOBILE INSURANCE COMPANY, Plaintiff–Appellee/Cross–Appellant (13–5028 & 13–5059),

v. NEWBURG CHIROPRACTIC, P.S.C. and Cane Run Chiropractic, P.S.C., Defendants (13–5028), Defendants–Appellees (13–5059),Michael Plambeck, Defendant–Appellant/Cross–Appellee (13–5028 & 13–5059).

Nos. Nos. 13–5028, 13–5059.

United States Court of Appeals, Sixth Circuit.

Argued: Oct. 10, 2013.

Decided and Filed: Dec. 18, 2013.

ARGUED:Kenneth Richard Stein, Matthews, Stein, Shiels, Pearce, Knott Eden & Davis, L.L.P., Dallas, Texas, for Appellant/Cross–Appellee Plambeck and Appellees Newburg and Cane Run. Benjamin G. Kemble, Jones, Andrews & Ortiz, P.C., San Antonio, Texas, for Appellee/Cross–Appellant. ON BRIEF:Kenneth Richard Stein, Matthews, Stein, Shiels, Pearce, Knott Eden & Davis, L.L.P., Dallas, Texas, for Appellant/Cross–Appellee Plambeck and Appellees Newburg and Cane Run. Benjamin G. Kemble, David V. Jones, Jones, Andrews & Ortiz, P.C., San Antonio, Texas, John M. Bush, Quintairos, Prieto, Wood & Boyer, P.A., Louisville, Kentucky, for Appellee/Cross–Appellant.

Before: BOGGS and SUTTON, Circuit Judges; CLELAND, District Judge. ^*

SUTTON, J., delivered the opinion of the court, in which CLELAND, D.J., joined, and BOGGS, J., joined in the result. BOGGS, J. (pg. 667), delivered a separate opinion concurring in the judgment.

OPINION

SUTTON, Circuit Judge.

Michael Plambeck owned two chiropractic clinics in Kentucky that treated patients injured in car accidents, including some of State Farm's customers. All of the treating chiropractors were licensed to practice in Kentucky. Plambeck, however, was not. Plambeck assumed that he did not need to keep his Kentucky license because he was the owner of the facility and did not treat any patients in the State. State Farm, on the other hand, assumed that Plambeck had a license because Kentucky law required chiropractic practitioners and owners of chiropractic clinics to hold one. For years, Plambeck continued to operate his facilities, and for years State Farm continued to pay bills for the chiropractic treatments of its insureds. Throughout this period of time, neither party confirmed the accuracy of these assumptions.

Both parties eventually learned that their assumptions were false. That discovery led to this question: May State Farm recover more than $500,000 paid to Plambeck's clinics over four years even though all of the patients received the chiropractic services they requested? We conclude that it may not.

I.

During the years covered by this dispute, Plambeck was a licensed chiropractor somewhere. He just was not licensed as a chiropractor in Kentucky. From 1993 until May 2005, Plambeck allowed his Kentucky chiropractic license to lapse. During that same period, he was the sole owner of two chiropractic clinics in the State: the Newburg clinic and the Cane Run clinic. Plambeck never treated patients at the two clinics. He instead hired licensed Kentucky chiropractors who treated all of the patients. That did not free him from responsibility under Kentucky's chiropractic-licensing laws, however, because those laws also require owners to hold a license. Ky.Rev.Stat. § 312.145(3).

Many of the clinics' patients over the years sought treatment for injuries arising from car accidents. And some of the patients carried car insurance through State Farm. Because Kentucky law requires it, State Farm's car insurance policies provide no-fault coverage for injuries resulting from car accidents. See id. §§ 304.39–020(2), 304.39–030(1). Covered individuals thus may obtain chiropractic treatment under these plans. Even better for the patients, Kentucky law requires State Farm to pay for chiropractic services directly if an insured instructs them to do so. Id. § 304.39–241. Many patients did just that, and that is how State Farm came to pay Plambeck's clinics hundreds of thousands of dollars in medical bills even though State Farm and the clinics had no contractual relationship with each other. So far as the record shows, none of the State Farm patients complained about the services they received from these clinics.

State Farm paid the bills submitted to it by the clinics without ado from 2000 until mid–2004. When State Farm discovered that Plambeck lacked a Kentucky license, it stopped paying the clinics and sued Plambeck to recover all payments since 2000.

The district court granted summary judgment to State Farm. Because State Farm mistakenly believed that Plambeck had a Kentucky license and would not have paid the bills his clinics submitted had it known otherwise, the court held that the insurance company was entitled to recoup any amounts it paid stemming from the mistake under Kentucky law. The court awarded State Farm $557,124.78 in damages.

II.

A single principle unifies Kentucky common law claims for recovery of funds mistakenly paid: unjust enrichment. See Tucker v. Denton, 106 S.W. 280, 282 (Ky.1907). One person may not profit from another's innocent blunder. See Ky. W. Va. Gas Co. v. Preece, 260 Ky. 601, 86 S.W.2d 163, 165–66 (1935) (collecting cases). Thus, if one party gives another money based on the misapprehension that he must do so, the courts will use their equitable powers to undo the mistaken transaction. See McMurtry v. Ky. Cent. R.R., 84 Ky. 462, 1 S.W. 815, 815 (1886); see also Scott v. Bd. of Trs. of New Castle, 132 Ky. 616, 116 S.W. 788, 789–90 (1909).

Mistaken payment cases come in two types. The first is tied to a contract. If one party to a contract pays money to another party to the same contract based on a false factual or legal premise affecting her contractual duties, she may recover the funds. See Phoenix Indem. Co. v. Steiden Stores, 267 S.W.2d 733, 734 (Ky.1954). The second covers a broader spectrum of misapprehensions. If one person pays another based on a false assumption that the money is due—if in Kentucky's phrasing the money is paid “without consideration[ ] and not being due, either in law or conscience”—the court may force the recipient to return the money. McMurtry, 1 S.W. at 815;see also Gratz v. Redd, 43 Ky. (4 B.Mon.) 178, 190 (1843); Riverside Ins. Co. v. McDowell, 576 S.W.2d 268, 269 (Ky.Ct.App.1979).

In trying to recover its payments to the clinics, State Farm says that it mistakenly believed the clinics had a properly licensed owner and that it would not have made the payments had it known otherwise. Because State Farm and the clinics never had a contractual relationship, the first category of mistake cases do not cover it. That leaves the second type of case, requiring State Farm to show that it paid money to the clinics not due to them “either in law or conscience.” McMurtry, 1 S.W. at 815. That is a high bar, and State Farm has not cleared it.

State Farm never credibly explains how any misapprehension about the clinics' license affected its duty to pay for treatments provided to its policyholders. Even if we assume that the contracts between the clinics and the State Farm policyholders violated Kentucky public policy, as State Farm urges, that does not establish State Farm's right to obtain the services for free. At most, the licensing problem affected the policyholders' legal duty to pay for the clinics' services, not State Farm's. State Farm's legal duty to pay for these services arose under Kentucky statutory law, not under a contractual relationship with the clinics. And State Farm's statutory duty requires it to “honor the written direction of benefits provided by an insured” specifying how to “direct the payment of benefits among the different elements of loss,” Ky.Rev.Stat. § 304.39–241—elements of loss that include expenses incurred for “medical care, physical rehabilitation, rehabilitative occupational training, licensed ambulance services, and other remedial treatment and care .... includ[ing treatments rendered by] all healing arts professions licensed by the Commonwealth of Kentucky,” id. § 304.39–020(5)(a).

Perhaps if State Farm's insureds had not directed the insurance company to pay for these services, no payment might have been due. Who knows? But that is not what happened. All relevant policyholders received the chiropractic treatment they asked for, and they directed State Farm to make payments to the clinics for these treatments. In light of that directive, Kentucky law required State Farm to pay for the services. To be sure, Kentucky law with respect to retaining mistakenly paid money—that which “in law or conscience” they should not keep—suggests a continuum of possibilities, not a North Star. But State Farm sits at the far end, the least promising end, of that continuum when it claims a right to obtain the windfall of receiving medical treatment for its policyholders in fact without the duty to pay for it in law.

One other premise of State's Farm argument deserves mention. Its void-against-public-policy argument assumes that the policyholders themselves (or State Farm standing in their shoes) could now recover the money they paid the clinics for services actually provided. As a general rule, a party may not recover money paid to satisfy obligations in a void contract if “there is no proof that the services which were rendered to him were defective or that he in any other way did not receive value for the money which he paid.” Comet Theatre Enters., Inc. v. Cartwright, 195 F.2d 80, 83 (9th Cir.1952); see also Universal Acupuncture Pain Servs., P.C. v. State Farm Mut. Auto. Ins. Co., 196 F.Supp.2d 378, 387–88 (S.D.N.Y.2002) (dismissing a claim for unjust enrichment similar to this one on that ground); cf. City of Louisville v. Zanone, 58 Ky. (1 Met.) 151, 153–54 (1858) (concluding that money mistakenly paid in accordance with a void ordinance could not be recovered in restitution where the party seeking restitution “is enjoying a benefit from the work and labor expended”). “There is no unjust enrichment if the claimant receives the counterperformance specified by the parties'...