Fidelity Nat'l Title v. Intercounty Nat'l ( 2005 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 04-2335
FIDELITY NATIONAL TITLE INSURANCE
COMPANY OF NEW YORK,
Plaintiff-Appellant,
v.
INTERCOUNTY NATIONAL TITLE
INSURANCE COMPANY, et al.,
Defendants-Appellees.
____________
Appeal from the United States District Court for
the Northern District of Illinois, Eastern Division.
No. 00 C 5658—Samuel Der-Yeghiayan, Judge.
____________
ARGUED APRIL 11, 2005—DECIDED JUNE 17, 2005
____________
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, complain-
ing about three pretrial rulings, all procedural.
In a typical house purchase, involving a mortgage and
title insurance, the mortgage lender places the money for
2 No. 04-2335
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 that
it had insured 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 ac-
counts. 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.
No. 04-2335 3
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., 545 N.E.2d 672, 678-79 (Ill. 1989); State
Farm General Ins. Co. v. Stewart, 681 N.E.2d 625, 633-34 (Ill.
App. 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—under which the case against
STG went to the jury. Although Fidelity had also charged
STG with being a party to the fraud, rather than being 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 plead-
ing 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 unre-
futed, 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
4 No. 04-2335
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 para-
graphs is sprawling, confusing, redundant—in short a mess.
And a district judge has the authority to dismiss a com-
plaint 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
No. 04-2335 5
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 sig-
nificant 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 exclud-
ing 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
6 No. 04-2335
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
fabricated documents with the intention of concealing the
fraud from STG. The notes may have contained other
material as well that STG could have used in cross-examin-
ing Pollard had the latter been permitted to testify. For they
indicated that one of the transactions that Pollard had de-
scribed as a sham in his report (a transfer of looted funds)
was legitimate; if so, this meant that some of the losses in
the escrow accounts occurred while the accounts were in-
deed reinsured by Fidelity rather than by STG.
A litigant is required to disclose to his opponent any
information “considered” by the litigant’s testifying expert,
Fed. R. Civ. P. 26(a)(2)(B); NutraSweet Co. v. X-L Engineering
Co., 227 F.3d 776, 785-86 (7th Cir. 2000); Salgado ex rel.
Salgado v. General Motors Corp., 150 F.3d 735, 741 n. 6
(7th Cir. 1998); In re Pioneer Hi-Bred Int’l, Inc., 238 F.3d
1370, 1375-76 (Fed. Cir. 2001), and the sanction for violating
No. 04-2335 7
this rule can include barring the expert from testifying. Fed.
R. Civ. P. 37(c)(1); Mems v. City of St. Paul, Department of Fire
& Safety Services, 327 F.3d 771, 779-80 (8th Cir. 2003); Ortiz-
Lopez v. Sociedad Espanola de Auxilio Mutuo y Beneficiencia de
Puerto Rico, 248 F.3d 29, 34-36 (1st Cir. 2001). Fidelity’s
contention that because Pollard’s exclusion doomed its case,
and was therefore “outcome determinative,” state rather
than federal law governs the issue is frivolous. The Federal
Rules of Civil Procedure, not state procedural rules, govern
in diversity, as they do in federal-question, cases in federal
district courts. Gasperini v. Center for Humanities, Inc., 518
U.S. 415, 427 n. 7 (1996); Hanna v. Plumer, 380 U.S. 460, 469-
74 (1965); Houben v. Telular Corp., 309 F.3d 1028, 1039-40 (7th
Cir. 2002).
Fidelity’s further argument that because the notes were
discarded pursuant to Deloitte’s “document retention” (i.e.,
document destruction) policy, there was no violation of
Rule 26, is also frivolous. There is nothing wrong with a
policy of destroying documents after the point is reached at
which there is no good business reason to retain them. Cf.
Arthur Andersen LLP v. United States, 2005 WL 1262915, at *5
(U.S. May 31, 2005). Without such a policy a firm or an
individual could drown in paper. There is no legal duty to
be a pack rat. But a firm’s document-retention policy cannot
trump Rule 26(a)(2)(B). The rule does not require merely
that the party disclose data that it happens to have retained;
it must disclose all the data that an expert that it retained to
testify at trial “considered,” implying that it must retain
those data, as otherwise it could not disclose them. Trigon
Ins. Co. v. United States, 204 F.R.D. 277, 288-89 (E.D. Va.
2001). A testifying expert must disclose and therefore retain
whatever materials are given him to review in preparing his
testimony, even if in the end he does not rely on them in
formulating his expert opinion, because such materials often
8 No. 04-2335
contain effective ammunition for cross-examination.
Committee Notes to 1993 Amendments to Fed. R. Civ. P.
26(a)(2); Karn v. Ingersoll-Rand Co., 168 F.R.D. 633 (N.D. Ind.
1996).
But he is not required to retain every scrap of paper that
he created in the course of his preparation—only documents
that would be helpful to an understanding of his expert
testimony or that the opposing party might use in cross-
examination. See Committee Notes, supra. Fidelity argues
that the interview notes could not have been used for any
purpose by STG in this lawsuit because STG’s knowledge or
lack thereof of the fraud was irrelevant to the claim of
unjust enrichment. It’s not true, however, that knowledge is
irrelevant to unjust enrichment. Obviously it could affect a
claim for punitive damages, see Martin v. Heinold Commodi-
ties, Inc., 643 N.E.2d 734, 757 (Ill. 1994); Tri-G, Inc. v. Burke,
Bosselman & Weaver, 817 N.E.2d 1230, 1262 (Ill. App. 2004);
1 Dan B. Dobbs, Law of Remedies § 3.11(2), p. 468 (2d ed.
1993), though they were not sought in this case. But it could
affect the determination of liability as well. A recipient of
proceeds of fraud can be deemed unjustly enriched by them
and forced to cough them up even if he is ignorant of their
tainted source, Smithberg v. Illinois Municipal Retirement
Fund, 735 N.E.2d 560, 565-66 (Ill. 2000); Norton v. City of
Chicago, 690 N.E.2d 119, 126 (Ill. App. 1997); Selmaville
Community Consolidated School District No. 10 v. Salem
Elementary School District No. 111, 421 N.E.2d 1087, 1090-91
(Ill. App. 1981); Restatement of Restitution § 13 (1937), but if
he had when he received them a reasonable belief that he
was entitled to them, and if he would suffer a large loss if
forced to give them back (that is, if he relied to his detriment
on what he reasonably believed to be his right to the
money), the court, balancing the equities, can excuse him
from having to repay. Bryan v. Citizens Nat’l Bank, 628
No. 04-2335 9
S.W.2d 761, 763 (Tex. 1982); Amalgamated Ass’n of Street
Electric Railway & Motor Coach Employees of America v.
Danielson, 128 N.W.2d 9, 10-11 (Wis. 1964); 28 Richard A.
Lord, Williston on Contracts § 70:200 (4th ed. 2004); Restate-
ment of Restitution, supra, § 69. So if the fraudsters deceived
STG into thinking that the replenishment of the Old
Intercounty escrow account and resulting benefit to STG
was on the up and up, this could help STG escape liability.
Fidelity’s remaining argument against the exclusion of
Pollard is its strongest: that the sanction for the nondisclo-
sure of the interview notes was too severe. In admeasuring
sanctions for violating the rules of pretrial discovery, as in
other areas of the law, the punishment should fit the crime.
Rice v. City of Chicago, 333 F.3d 780, 784 (7th Cir. 2003);
Melendez v. Illinois Bell Telephone Co., 79 F.3d 661, 672 (7th
Cir. 1996); Bonds v. District of Columbia, 93 F.3d 801, 807-09
(D.C. Cir. 1996); see also Doe v. Cassel, 403 F.3d 986, 990 (8th
Cir. 2005) (per curiam). This is apparent from the breadth of
the range of sanctions that the civil rules authorize for
failure to disclose materials on which an expert’s opinion is
based. See Fed. R. Civ. P. 37(c)(1), incorporating by refer-
ence the list of sanctions in Fed. R. Civ. P. 37(b)(2)(A)-(C).
The punishment was excessive because the judge had
already, on another ground, ruled that Pollard could not
testify concerning STG’s knowledge of the fraud. Pollard
should have been allowed to give testimony in which he
would merely have traced the money from the fraud to
Old Intercounty’s escrow account and demonstrated how
that movement of funds had benefited STG by reducing its
insurance liability. The interview notes would have borne
only peripherally on that issue. And although as we noted
earlier the complete interview notes might have enabled
STG to show that some of the losses in the escrow accounts
occurred while they were insured by Fidelity rather than by
10 No. 04-2335
STG, STG thinks so little of the point as barely to hint at it in
its brief in this court. The reason may be that, as far as we
can determine, the set of interview notes that surfaced in the
other litigation was almost complete; and since those notes
were available to STG nearly three months before the trial
in this case, the prejudice to STG from the delay in disclo-
sure was minimal.
Any (slight) harm to STG caused by Fidelity’s violation of
Rule 26 could have been fully compensated by the judge’s
granting STG a continuance to enable it to conduct any
additional discovery that might have been warranted by
information revealed by the interview notes and requiring
Fidelity to reimburse STG for the expense of such additional
discovery and for any other litigation expenses caused by
Fidelity’s failure to make timely and complete disclosure of
the notes. Fed. R. Civ. P. 37(c)(1).
The judge did not mention Rule 37, however, and maybe
therefore we should consider him to have been exercising
his “inherent” power to control the course of the litigation
rather than applying the civil rules. By this is meant only
that a judge’s power includes not only what he is expressly
empowered to do but also such ancillary powers as are nec-
essary and proper to his exercise of the explicitly conferred
ones. Chambers v. NASCO, Inc., 501 U.S. 32, 43 (1991); United
States v. Hudson, 7 Cranch (11 U.S.) 32, 34 (1812); G. Heileman
Brewing Co. v. Joseph Oat Corp., 871 F.2d 648, 651-52 (7th Cir.
1989) (en banc); United States v. Kouri-Perez, 187 F.3d 1, 7 (1st
Cir. 1999). But when a domain of judicial action is covered
by an express rule, such as Rules 26 and 37 of the civil rules,
the judge will rarely have need or justification for invoking
his inherent power. Chambers v. NASCO, Inc., supra, 501 U.S.
at 50; Zapata Hermanos Sucesores, S.A. v. Hearthside Banking
Co., 313 F.3d 385, 391-92 (7th Cir. 2002); Kovilic Construction
Co. v. Missbrenner, 106 F.3d 768, 772-73 (7th Cir. 1997). He
No. 04-2335 11
did not here.
STG argues that even if the judge’s bar against Pollard’s
testifying was erroneous, the error was harmless because
other Fidelity witnesses testified to the money flows. Cf. Hill
v. Porter Memorial Hospital, 90 F.3d 220, 224 (7th Cir. 1996).
But given the complexity of the case, the exclusion of the
only witness who could have tied up the loose ends and
presented a compact and coherent account cannot be
deemed harmless. See Johnson v. United States, 780 F.2d 902,
906 (11th Cir. 1986); cf. Roback v. V.I.P. Transporation, Inc., 90
F.3d 1207, 1216 (7th Cir. 1996).
The final issue concerns the judge’s refusal to allow
Fidelity to present summaries, which it furnished to STG
only 30 days before the start of trial, of the hundreds of
thousands of pages of contracts that it believed demon-
strated how STG had been enriched by the fraud. The judge
gave two grounds for his action. First, he said that “a court
should be wary lest a party use a summary as an opportu-
nity to argue its view of the evidence or to misstate the
evidence causing the jury to misconstrue the evidence,” and
therefore “we do not find that the usage [sic] of summaries
were [sic] warranted in this instance.” Second, the judge
thought 30 days before trial too little time to enable STG’s
counsel to review the summaries. The first ground was
unreasoned, and the second incorrect. Rule 1006 of the
Federal Rules of Evidence, which makes summaries of
“voluminous writings” admissible at trial, does not express
any “wariness” concerning the legitimacy of summaries; the
fact that they might be inaccurate is not a ground for
excluding them without any determination of whether they
are inaccurate. Fidelity submitted several affidavits, which
STG did not contest in the district court, that purported to
demonstrate the accuracy of the summaries. United States v.
Robinson, 774 F.2d 261, 276 (8th Cir. 1985); State Office
12 No. 04-2335
Systems, Inc. v. Olivetti Corp. of America, 762 F.2d 843, 845
(10th Cir. 1985); United States v. Behrens, 689 F.2d 154, 161
(10th Cir. 1982).
As for the summaries being untimely, Rule 1006 requires
only that the summarized documents be made available to
the opposing party at a “reasonable time”; it does not say
when the summaries must be made available to the party—
for that matter, it nowhere states that the summaries must be
made available to the opposing party. Coates v. Johnson &
Johnson, 756 F.2d 524, 550 (7th Cir. 1985). No federal rule is
needed, however, to empower a district judge to prevent a
party from springing summaries of thousands of documents
on the opposing party so late in the day that the party can’t
check their accuracy against the summarized documents
before trial. Air Safety, Inc. v. Roman Catholic Archbishop of
Boston, 94 F.3d 1, 8 (1st Cir. 1996); 31 Charles Alan Wright &
Victor James Gold, Federal Practice and Procedure § 8045, pp.
548-50 (2000); see Canada Dry Corp. v. Nehi Beverage Co., 723
F.2d 512, 523 (7th Cir. 1983); Davis & Cox v. Summa Corp.,
751 F.2d 1507, 1516 (9th Cir. 1985). (So here is a good
example of the inherent power of a district judge to control
the course of litigation.) But Sidley Austin Brown & Wood,
STG’s counsel, is a huge law firm that could easily have spot
checked the summaries for accuracy immediately upon
receiving them 30 days before the trial began, and if the
check had revealed inaccuracies STG would then have had
solid grounds for moving to exclude them from the trial
unless the inaccuracies were promptly corrected. See
Needham v. White Laboratories, Inc., 639 F.2d 394, 403 (7th Cir.
1981). By failing to employ this simple expedient STG
forfeited any claim of untimeliness.
We are not certain how badly Fidelity was hurt by the
exclusion of the summaries. But since there must be a new
trial because of the exclusion of Pollard’s testimony, the
No. 04-2335 13
issue of harmless error in the exclusion of the summaries is
academic; STG will have plenty of time to check their
accuracy. STG also argues that some of the summarized
documents should be ruled inadmissible, which if correct
would obviously affect the accuracy of the summaries,
AMPAT/Midwest, Inc. v. Illinois Tool Works, Inc., 896 F.2d
1035, 1044-45 (7th Cir. 1990), but that too is an issue for the
remand.
REVERSED AND REMANDED.
A true Copy:
Teste:
_____________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—6-17-05