Norma Cooke v. Jackson National Life Insuran

• Court: Court of Appeals for the Seventh Circuit
• Decided: March 26, 2019
• Docket: 18-3583
• Status: Published

Opinion

In the

United States Court of Appeals For the Seventh Circuit ____________________

Nos. 18-3527 & 18-3583 NORMA L. COOKE, Plaintiff-Appellee, Cross-Appellant,

v.

JACKSON NATIONAL LIFE INSURANCE COMPANY, Defendant-Appellant, Cross-Appellee. ____________________

Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. No. 15 C 817 — Rubén Castillo, Chief Judge. ____________________

SUBMITTED MARCH 12, 2019 — DECIDED MARCH 26, 2019 ____________________

Before EASTERBROOK and BARRETT, Circuit Judges, and STADTMUELLER, District Judge.* EASTERBROOK, Circuit Judge. In this suit under the diversi- ty jurisdiction, a district court ordered Jackson National Life Insurance to pay about $191,000 on a policy of life insurance. 243 F. Supp. 3d 987 (N.D. Ill. 2017). The court added that the

* Of the Eastern District of Wisconsin, sitting by designation. 2 Nos. 18-3527 & 18-3583

insurer had litigated unreasonably and ordered it to reim- burse Cooke’s legal fees under 215 ILCS 5/155. (Throughout this opinion “Cooke” refers to plaintiff Norma Cooke, the widow of decedent Charles Cooke.) The insurer paid the death benefit and appealed to contend that the court should not have tacked on ahorneys’ fees. But because the district court had not specified how much the insurer owes, we dis- missed the appeal as premature. 882 F.3d 630 (7th Cir. 2018). The district court then awarded $42,835 plus interest. 2018 U.S. Dist. LEXIS 197908 (N.D. Ill. Nov. 20, 2018). The in- surer filed another appeal (No. 18-3527), which we resolve using the briefs filed in its initial appeal (No. 17-2080). Cooke filed a cross-appeal (No. 18-3583). Her lead contention is that the district court should have awarded a higher death bene- fit, but that argument comes too late. As our first decision explains, a judgment on the merits and an award of ahor- neys’ fees are separately appealable. Budinich v. Becton Dick- inson & Co., 486 U.S. 196 (1988). Cooke did not appeal within 30 days of the district court’s order specifying the amount payable on the policy, and a later award of ahorneys’ fees does not reopen that subject. Instead of seeking additional fees, Cooke’s brief in No. 18-3583 is principally devoted to contending that the judge did the right thing for the wrong reason. She made a similar argument in response to the insurer’s initial appeal. We turn to the award under §5/155 and consider all of the arguments in all of the briefs filed in Nos. 17-2080 and 18-3583. Section 5/155(1) provides: In any action by or against a company wherein there is in issue the liability of a company on a policy or policies of insurance or the amount of the loss payable thereunder, or for an unreasona- Nos. 18-3527 & 18-3583 3

ble delay in sehling a claim, and it appears to the court that such action or delay is vexatious and unreasonable, the court may al- low as part of the taxable costs in the action reasonable ahorney fees, other costs, plus an amount not to exceed any one of the fol- lowing amounts: (a) 60% of the amount which the court or jury finds such par- ty is entitled to recover against the company, exclusive of all costs; (b) $60,000; (c) the excess of the amount which the court or jury finds such party is entitled to recover, exclusive of costs, over the amount, if any, which the company offered to pay in sehle- ment of the claim prior to the action.

The district judge understood this statute to allow an award either for pre-litigation conduct or for behavior during the litigation. 243 F. Supp. 3d at 1006. He wrote that “Jackson’s denial of coverage was based on a good-faith dispute regard- ing the nature of Cooke’s payments” (ibid.) and that the in- surer could not properly be penalized for insisting that a judge resolve the parties’ dispute. But, the judge added, “Jackson’s behavior in this litigation has been much less rea- sonable.” Id. at 1007. The judge faulted the insurer because it opposed Cooke’s motion for judgment on the pleadings without ahaching the full policy to its papers. Jackson observed that Cooke had not supplied the court with all of the pertinent writings (which included an electronic funds transfer agreement as well as the policy) but failed to do so itself, until the sum- mary-judgment stage, and the judge thought this unreason- able. Ibid. The judge summed up (ibid.): This Court believes that this case could have been resolved on Plaintiff’s motion for judgment on the pleadings one year ago. 4 Nos. 18-3527 & 18-3583

This is a straightforward insurance policy dispute with essential- ly undisputed facts, and the primary issue is the interpretation of the policy. Had Jackson provided with its response the full doc- ument to be construed, or clearly identified those documents it had already turned over that it contended were necessary to in- terpret the policy, this case may have been resolved one year ago. By frustrating Plaintiff’s motion solely by pointing to the in- complete policy and then coyly refusing to identify the deficien- cy for months thereafter, Defendant unnecessarily and unrea- sonably extended this litigation for no reason related to its good- faith position on the merits.

The district court assumed that §5/155 governs the con- duct of litigation in federal court. It did not explain why. Many cases hold that federal, not state, rules apply to proce- dural mahers—such as what ought to be ahached to plead- ings—in all federal suits, whether they arise under federal or state law. See, e.g., Shady Grove Orthopedic Associates, P.A. v. Allstate Insurance Co., 559 U.S. 393 (2010); Burlington Northern R.R. v. Woods, 480 U.S. 1 (1987); Walker v. Armco Steel Corp., 446 U.S. 740 (1980); Mayer v. Gary Partners & Co., 29 F.3d 330 (7th Cir. 1994). Federal rules and doctrines provide ample means to penalize unreasonable or vexatious conduct in fed- eral litigation. The district court’s decision to rely on state rather than federal law was a mistake. Cooke tells us that TKK USA, Inc. v. Safety National Casu- alty Corp., 727 F.3d 782, 795 (7th Cir. 2013), has established that §5/155 regulates the conduct of federal litigation. We do not read it so. The district judge in TKK cited §5/155 in sup- port of an award against an insurer that filed unnecessary and unreasonable papers. In contesting that award, the in- surer did not rely on Shady Grove and its predecessors. In- stead it argued that its litigation strategy had been reasona- ble. We agreed with the district court on that score, and by Nos. 18-3527 & 18-3583 5

doing so we did not resolve an issue (the extent to which state law governs the conduct of federal litigation) that was neither briefed by the parties nor mentioned in the opinion. It has long been understood that federal judges have a common-law power (sometimes called an inherent power) to impose sanctions on parties that needlessly run up the costs of litigation. See Chambers v. NASCO, Inc., 501 U.S. 32 (1991). The parties and the panel in TKK understandably did not focus on the source of law, when §5/155 and Chambers came to the same thing. But the district court in our case did not invoke Chambers or treat §5/155 as a doppelganger of the Chambers doctrine. Instead it penalized Jackson for failing to ahach evidence to a document at the pleading stage. The initial question should have been whether the Rules of Civil Procedure require a defendant to ahach documents to a filing that opposes a plaintiff’s request, under Rule 12(c), for judgment on the pleadings. The answer is no. Quite the contrary. Although ahaching documents is permissible, the usual consequence is to defeat the motion and require the case to proceed to summary judgment. Rule 12(d) reads: RESULT OF PRESENTING MATTERS OUTSIDE THE PLEADINGS. If, on a motion under Rule 12(b)(6) or 12(c), mahers outside the plead- ings are presented to and not excluded by the court, the motion must be treated as one for summary judgment under Rule 56. All parties must be given a reasonable opportunity to present all the material that is pertinent to the motion.

Courts occasionally hold that, despite the word “must” in Rule 12(d), presenting the court with mahers outside the pleadings does not inevitably move the suit to the summary- judgment stage. See, e.g., Yassan v. J.P. Morgan Chase & Co., 708 F.3d 963, 975 (7th Cir. 2013). But conversion to summary 6 Nos. 18-3527 & 18-3583

judgment is the norm under Rule 12(d), which makes it hard to see how Jackson can be penalized for taking a step (not ahaching documents) that had the same effect as ahaching them: moving to summary judgment. If the district judge be- lieved that §5/155 changes the rules for what documents must be ahached to which filings, and with what effect, it was giving state law forbidden priority over a federal rule. Perhaps the district judge did not mean to penalize the insurer just for its failure to ahach documents to papers op- posing Cooke’s motion. Several passages in the judge’s opin- ion imply that the problem was Jackson’s failure to identify all of the pertinent documents, which had already been turned over under Fed. R. Civ. P. 26(a), so that the parties could focus their efforts on them. We agree with the district judge that Jackson could and should have done this earlier than it did. Imposing sanctions for failing to point to the right documents could have been justified under Chambers. But Cooke has not used this doctrine to defend the district court’s decision or asked us to remand so that the judge can consider Chambers. Instead she relies on Fed. R. Civ. P. 11, 26(g)(3), and 37(b)(2)(C), plus 28 U.S.C. §1927. Rule 11 concerns the pleadings, and neither Cooke nor the district judge identified any problem with the insurer’s pleadings. Nor did Cooke make the motion required by Rule 11(c)(2). Rule 26(g)(3) reads: If a certification violates this rule without substantial justifica- tion, the court, on motion or on its own, must impose an appro- priate sanction on the signer, the party on whose behalf the sign- er was acting, or both. The sanction may include an order to pay Nos. 18-3527 & 18-3583 7

the reasonable expenses, including ahorney’s fees, caused by the violation.

Rule 26(g)(1), to which Rule 26(g)(3) refers, requires a party or her ahorney to certify that its disclosures are complete and that any requested discovery is legally appropriate and not presented to harass the opponent or needlessly increase the cost of litigation. A false certificate is a good reason for a financial penalty—but Cooke does not develop an argument that Jackson’s lawyers signed a false certificate, let alone that the district court found any violation of Rule 26. Jackson turned over the policy and related papers as part of its Rule 26 disclosures. Cooke says that Jackson did not identify, clearly enough, just what parts of its disclosures it was rely- ing on when opposing her motion, but that’s outside the scope of Rule 26. Rule 37(b)(2)(C) provides that any litigant who disobeys a judge’s order with respect to discovery must pay the other side’s costs, including ahorneys’ fees. Yet Cooke does not contend that it requested, or that the district judge issued, any order requiring Jackson to produce additional docu- ments in discovery. Rule 37 is irrelevant. So is §1927. It allows a court to penalize a lawyer who “multiplies the proceedings in any case unreasonably and vexatiously”. But liability under §1927 is personal to the lawyer; the client may not be ordered to pay for counsel’s misconduct. See, e.g., Byrne v. Neshat, 261 F.3d 1075, 1106 (11th Cir. 2001); MaMa v. May, 118 F.3d 410, 413–14 (5th Cir. 1997). The district court’s award of ahorneys’ fees against Jackson therefore cannot be supported by §1927. Cooke contends that the award of fees should be affirmed for a reason that the district court rejected: that Jackson acted 8 Nos. 18-3527 & 18-3583

unreasonably and vexatiously before litigation began. Illi- nois asks whether an insurer’s conduct was objectively un- reasonable or vexatious. See West Bend Mutual Insurance v. Norton, 406 Ill. App. 3d 741, 745 (2010); Norman v. American National Fire Insurance Co., 198 Ill. App. 3d 269, 303–05 (1990). (Other decisions articulate a subjective standard. See, e.g., Deverman v. Country Mutual Insurance Co., 56 Ill. App. 3d 122, 124 (1977). For current purposes we assume that an objective approach governs.) In writing that Jackson’s pre-suit denial of coverage “was based on a good-faith dispute regarding the nature of Cooke’s payments” (243 F. Supp. 3d at 1006), Cooke contends, the judge asked and answered a question about Jackson’s state of mind. It is possible to read the district court’s bohom line as Cooke does, but we do not think it the best reading. The bulk of the analysis is objective. Charles Cooke had a policy of life insurance. For 15 years he paid premiums by monthly electronic transfers from his bank account, though the policy itself called for either annu- al or quarterly premiums. In May 2013 Jackson informed Charles that his premium for the next year (beginning in Ju- ly) would be $2,835.85 a month. Toward the end of July the insurer sent the usual transfer request to Charles’s bank, which rejected it because the account lacked sufficient funds. This started a 31-day grace period under the policy: Charles had until August 28 to make good the July payment or the policy would be cancelled. On August 15 Jackson sent Charles a leher telling him that he now owed a quarterly payment of $8,637.94. This leher specified a (retroactive) due date of July 28, which again implied that the grace period would end on August 28. But Charles did not pay anything Nos. 18-3527 & 18-3583 9

that month—not the $2,835.85 for July, not the payment for August, and not the $8,637.94 for the quarter. Charles died on September 10, 2013, and Jackson declined to pay the death benefit, telling his widow that the policy had lapsed because of non-payment plus the expiration of the grace pe- riod. When the suit began in 2015 Cooke contended that Jack- son had waived its right to enforce the policy’s payment terms or was estopped to do so. She filed an amended com- plaint in 2016 changing her theory. The amended complaint asserted that the leher of mid-August created a new grace period, running through September 15, even though the grace period (and thus the policy) otherwise would have ex- pired on August 28, and even though the leher gave a due date implying that the end of the grace period remained Au- gust 28. The district judge eventually agreed with Cooke’s contention, after conceding that neither the policy nor any state statute or decision said that a switch from monthly to quarterly premium collection would extend the grace peri- od. (Recall that Charles did not pay the premium for either July or August and died on September 10, which made it look like he was well over 31 days in arrears.) The district judge concluded that the lack of language in the policy or state law about how to handle an unpaid monthly premium, followed by a demand for a quarterly premium, made it im- proper to apply the label “vexatious and unreasonable” to the insurer’s decision to litigate rather than pay on demand. 243 F. Supp. 3d 1006–07. That is an objective analysis—it turns on the events in the world, and on the (lack of) appli- cable law, not on the contents of anyone’s head. 10 Nos. 18-3527 & 18-3583

This means that an award under §5/155 could be justified only by Jackson’s conduct during the litigation. For the rea- sons we have already given, federal rather than state law governs how federal litigation is conducted, plus when (and who) may be penalized for misconduct. As we have rejected Cooke’s arguments under federal law, the award must be reversed. And this means that we must reject Cooke’s argu- ment that §5/155 entitles her to legal fees incurred in oppos- ing Jackson’s appeals. REVERSED