SEC. Plans, Inc. v. CUNA Mut. Ins. Soc'y

• Court: Court of Appeals for the Second Circuit
• Decided: March 1, 2018
• Docket: 16-3188
• Status: Unpublished

Opinion

16-3188 Sec. Plans, Inc. v. CUNA Mut. Ins. Soc’y

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

SUMMARY ORDER

Rulings by summary order do not have precedential effect. Citation to a summary order filed on or after January 1, 2007 is permitted and is governed by Federal Rule of Appellate Procedure 32.1 and this court’s Local Rule 32.1.1. When citing a summary order in a document filed with this court, a party must cite either the Federal Appendix or an electronic database (with the notation “summary order”). A party citing a summary order must serve a copy of it on any party not represented by counsel.

At a stated Term of the United States Court of Appeals for the Second Circuit, held at the Thurgood Marshall United States Courthouse, at 40 Foley Square, in the City of New York, on the 1st day of March, two thousand eighteen.

Present: ROBERT A. KATZMANN, Chief Judge, ROBERT D. SACK, CHRISTOPHER F. DRONEY, Circuit Judges. ________________________________________________

SECURITY PLANS, INC., FKA CREDITOR SERVICES, INC.,

Plaintiff-Appellant, v. No. 16-3188

CUNA MUTUAL INSURANCE SOCIETY,

Defendant-Appellee. ________________________________________________

For Plaintiff-Appellant: Jerauld E. Brydges and John P. Bringewatt, Harter Secrest & Emery LLP, Rochester, NY.

For Defendant-Appellee: Jeffrey A. Mandell and Edwin J. Hughes, Stafford Rosenbaum LLP, Madison, WI; Jeffrey J. Harradine, Ward Greenberg Heller & Reidy LLP, Rochester, NY. Appeal from the United States District Court for the Western District of New York

(Larimer, J.).

ON CONSIDERATION WHEREOF, IT IS HEREBY ORDERED, ADJUDGED,

and DECREED that the judgment of the district court is AFFIRMED.

Plaintiff-Appellant Security Plans, Inc. (“SPI”) appeals from a judgment of the United

States District Court for the Western District of New York (Larimer, J.) entered August 17,

2016, dismissing its claim for breach of the implied covenant of good faith and fair dealing

against Defendant-Appellee CUNA Mutual Insurance Society (“CUNA”). We assume the

parties’ familiarity with the underlying facts, the procedural history of the case, and the issues on

appeal.

In 2003, SPI sold its assets, including its credit insurance business, to CUNA. An asset

purchase agreement (“the Agreement”) set forth the terms of the sale. In accordance with the

Agreement, the three shareholders of SPI agreed to assist CUNA for a three-year term in

retaining former SPI clients as CUNA clients. To incentivize SPI’s assistance in transitioning

those clients to CUNA, the parties included an “Earn Out” provision in the Agreement. Under

the Earn Out provision, SPI was entitled to, in addition to the sale price, a payment based on the

post-sale profitability of the business. The amount of the Earn Out was to be determined

primarily by two variables: a weighted average of the total written premiums converted from SPI

to CUNA and a weighted average of the combined loss ratios for the relevant policies. The

resulting Earn Out figure was then to be reduced by administrative service fees and by

“experience refunds” exceeding certain levels. When CUNA finalized its Earn Out calculations

in 2006, it determined that it was not obligated to pay an Earn Out to SPI, because deductions for

2 service fees and experience refunds eliminated any Earn Out to which SPI otherwise would have

been entitled.

SPI sued for breach of contract and breach of the implied covenant of good faith and fair

dealing, alleging that CUNA improperly calculated the Earn Out. Specifically, SPI alleged that

CUNA: (1) set its claim reserves unreasonably high, thus inflating the loss ratio; (2) improperly

calculated the administrative service fees; and (3) incorrectly calculated the experience refunds.

The district court granted partial summary judgment to CUNA with respect to the loss ratio issue

and the service fees issue, but concluded that there was a genuine dispute of material fact as to

the experience refunds issue.

In January 2013, two months after the district court’s summary judgment decision, SPI

filed a letter with the district court indicating that the experience refunds issue was “moot.” App.

at 153. In support of this contention, SPI pointed to CUNA’s asserted Earn Out calculation and

noted that even if SPI prevailed on the experience refunds issue, it would not be entitled to a

“positive earn-out figure,” id., and thus would be unable to prove damages. SPI thus requested

that the district court “amend its decision to dismiss the case in its entirety,” and noted that

CUNA had no objection. Id. at 154. The district court subsequently dismissed the case in its

entirety.

SPI then appealed the aspects of the district court’s summary judgment decision that were

unfavorable to SPI. In 2014, this Court affirmed the district court’s decision with respect to the

administrative service fees. See Sec. Plans, Inc. v. CUNA Mut. Ins. Soc’y, 769 F.3d 807, 815–17

(2d Cir. 2014). With respect to the loss ratio issue, we concluded that there was a triable issue as

to whether CUNA’s handling of its claim reserves constituted a breach of the implied covenant

of good faith and fair dealing, and remanded that claim to the district court for resolution. See id.

3 at 817–21. As to the experience refunds issue, we noted that SPI “contested the legal basis for

the experience refunds deductions in the district court, but that argument is not a subject of this

appeal.”1 Id. at 814 n.4.

On remand, SPI argued that the experience refunds issue (on which the district court had

initially found a genuine dispute of material fact) remained unresolved. The district court

disagreed, concluding that SPI had voluntarily dismissed with prejudice that aspect of the case in

order to pursue an appeal of other aspects of the district court’s summary judgment ruling.

Subsequently, CUNA moved to dismiss the entire action as “moot,” arguing that SPI could not

prove any damages because the district court’s refusal to consider the experience refunds issue

precluded SPI from demonstrating a positive Earn Out calculation. App. at 204–05, 210–11. The

district court granted CUNA’s motion and dismissed the case in its entirety. SPI appeals from

that order and subsequent judgment.

SPI argues that the district court erred in holding that the experience refunds issue was no

longer part of the case following remand. According to SPI, that issue had been rendered “moot”

by the district court’s summary judgment decision but it ceased to be “moot” when this court

reinstated the claims reserve issue. Appellant Br. at 17. Although SPI is correct in that, as pled,

the experience refunds issue and the loss ratio issue are interdependent, we find no error in the

district court’s judgment.

Two clarifications are in order. The first relates to the relationship between the factual

issues and SPI’s two causes of action, breach of contract and breach of the implied covenant of

good faith and fair dealing. As pled, the experience refunds issue was not a freestanding claim, but

rather a component of SPI’s two separate claims. When the district court held that SPI had failed to

1 This Court affirmed the district court’s grant of summary judgment on the breach of contract claim, id. at 810, and that claim is not before us.

4 raise a genuine issue of material fact on the loss ratio and service fees issues, an Earn Out damages

award on both SPI’s breach of contract claim and its breach of the implied covenant of good faith

and fair dealing claim was rendered mathematically impossible, even if SPI ultimately prevailed

on the experience refunds issue.

Second, a clarification regarding terminology: “A case becomes moot when it no longer

satisfies the ‘case-or-controversy’ requirement of Article III, Section 2 of the Constitution,” which

is to say, when the injury alleged cannot be “redressed by a favorable judicial decision.” Marrero

Pichardo v. Ashcroft, 374 F.3d 46, 51 (2d Cir. 2004). By contrast, when a factual dispute will not

“affect the outcome of the suit under the governing law,” it is immaterial. Beth Israel Med. Ctr. v.

Horizon Blue Cross & Blue Shield of N.J., Inc., 448 F.3d 573, 579 (2d Cir. 2006) (internal

quotation marks omitted). In short, cases are “mooted,” whereas factual issues become

“immaterial.”

SPI’s 2013 letter claiming that the experience refunds issue was “moot,” App. at 153,

conflated mootness and materiality. SPI did not assert that the parties had ceased to have a live

controversy capable of judicial redress. To the contrary, no Earn Out had been paid, SPI

continued to maintain that it was entitled to one, and a favorable verdict following a successful

appeal could have made SPI whole. Instead, because a positive Earn Out figure was no longer

feasible and SPI could not show that it was entitled to damages, the precise value of the

experience refunds was immaterial notwithstanding the genuine factual dispute on that issue. 2

This might be mootness in the colloquial sense of the word, but it is not Article III mootness and

it did not deprive the district court of jurisdiction. See Novella v. Westchester Cty., 661 F.3d 128, 2 Under New York law, proof of damages is an element of both breach of contract and breach of the implied covenant of good faith and fair dealing claims. JP Morgan Chase v. J.H. Elec. of N.Y., Inc., 893 N.Y.S.2d 237, 239 (2d Dep’t 2010) (breach of contract); RXR WWP Owner LLC v. WWP Sponsor, LLC, 17 N.Y.S.3d 698, 700 (1st Dep’t 2015) (breach of the implied covenant of good faith and fair dealing).

5 149 (2d Cir. 2011) (distinguishing between mootness of an issue and mootness of a case and

recognizing that issues do not become moot “within the meaning of Article III”).

Because there continued to be a live controversy between the parties regarding the Earn

Out, there was no basis to dismiss for lack of jurisdiction. Accordingly, instead of asking the

district court to “dismiss the case in its entirety,” App. at 154, the proper relief in 2013 would

have been requesting that the district court amend its order to enter judgment in favor of CUNA

because the district court’s ruling precluded SPI from prevailing on either cause of action. But

SPI requested dismissal. And, irrespective of whether this request was strategically motivated, it

had practical consequences: most importantly, it neutralized any incentive CUNA might have

had to cross-appeal the district court’s holding that a material factual dispute existed regarding

the experience refunds. In short, having received the relief that it requested, SPI cannot now

argue that the district court erred by precluding SPI from presenting evidence on a dismissed

factual issue.

SPI’s second argument is that the district court erred by denying SPI’s motion for relief

from judgment. In short, SPI claims that it is entitled to relief under Rule 60(b)(6) because it was

“obligated to inform the Court that its claim had been rendered moot” and was not acting

strategically. Appellant Br. at 32–33 (emphasis omitted). But, as explained above, SPI’s claim

was not moot; instead, SPI abandoned the experience refunds issue when it asked the district

court to “dismiss the case in its entirety.” App. at 154. Assuming this request was not

strategically motivated, it was a mistake. Under Federal Rule of Civil Procedure 60(b) “mistake,

inadvertence, surprise, or excusable neglect” are governed by subsection (b)(1). Fed. R. Civ. P.

60(b)(1). By contrast, subsection (b)(6), which SPI invokes, is a catch-all provision for “any

other reason that justifies relief,” Fed. R. Civ. P. 60(b)(6), and is reserved for “extraordinary

6 circumstances,” see Liljeberg v. Health Servs. Acquisition Corp., 486 U.S. 847, 864 (1988)

(internal quotation marks omitted). As we have previously explained, “Rule 60(b)(1) and Rule

60(b)(6) are mutually exclusive, such that any conduct which generally falls under the former

cannot stand as a ground for relief under the latter.” Stevens v. Miller, 676 F.3d 62, 67 (2d Cir.

2012) (internal quotation marks omitted). Accordingly, where, as here, “a party’s Rule 60(b)

motion is premised on grounds fairly classified as mistake, inadvertence, or neglect, relief under

Rule 60(b)(6) is foreclosed.” Id. In light of this clearly established law, the district court did not

abuse its discretion in denying SPI’s Rule 60(b)(6) motion.

We have considered all of SPI’s remaining arguments and find them to be without merit.

Accordingly, we AFFIRM the order of the district court.

FOR THE COURT: Catherine O=Hagan Wolfe, Clerk