Safeco Insurance Company of A v. F. Bemis ( 2009 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 09-8027
IN RE:
S AFECO INSURANCE C OMPANY
OF A MERICA , et al.,
Petitioners.
On Petition for Leave to Appeal
Under 28 U.S.C. § 1453(c).
No. 3:09-cv-00315-GPM-PMF—G. Patrick Murphy, Judge.
O CTOBER 22, 2009
Before R IPPLE, M ANION and K ANNE, Circuit Judges.
R IPPLE, Circuit Judge. On February 11, 2005, F. Ryan
Bemis, an Illinois chiropractor, filed a class action in the
Illinois state court. On February 18, 2005, seven days
later, the Class Action Fairness Act of 2005 became effec-
tive. Four years later, on March 25, 2009, the state court
granted class certification. On April 24, 2009, the Safeco
Insurance Company of America (“SICA”) and Safeco
Insurance Company of Illinois (“SICI”) (collectively
hereinafter referred to as “Safeco” or “petitioners”) re-
moved the action to the district court, but the district
2 No. 09-8027
court granted Dr. Bemis’ motion to remand the action to
the state court. Safeco then filed this petition for permis-
sion to appeal under 28 U.S.C. § 1453(c). We grant the
petition for leave to appeal and, for the following
reasons, affirm the judgment of the district court.
I
BACKGROUND
A. The Parties and the Allegations
Dr. Bemis filed this action in Illinois state court, alleging
that Safeco had employed a computerized bill payment
program to underpay systematically claims made under
automobile insurance policies. The introductory paragraph
of the complaint established the gravamen of the action:
“This is a case about a scheme by [SICA] and [SICI]
(collectively, “Defendants” or “Safeco”) and its Safeco
insurer affiliates (such as American States) to mislead and
improperly reduce payouts under medical payments
coverage by using biased third party bill audit software
programs to adjust those medical expense claims.” S.A. 1.
The complaint alleged three causes of action based on
state law: (1) breach of contract,1 (2) violation of various
Illinois consumer fraud statutes and (3) unjust enrichment.
The only named defendants were SICA and SICI. The
complaint further explained that the suit was brought as
a class action on behalf of:
1
Dr. Bemis alleged that he is an assignee of an insured’s
rights under the relevant contracts. S.A. 3, 8.
No. 09-8027 3
All insured persons and licensed medical providers
who: (a) submitted first-party medical claims to a
Safeco member company pursuant to a Safeco insur-
ance policy; (b) had their claim submitted to computer
review, [sic] (c) received or were tendered an amount
less than the submitted medical expenses and [sic]
(d) received or were tendered an amount less than
the stated policy limits.
S.A. 9.2
SICA and SICI are both wholly owned subsidiaries of
Safeco Corporation, which, in turn, is wholly owned by a
holding company. The ultimate owner is Liberty Mutual
Group Inc. SICA adjusts claims for some other companies
owned by Safeco Corp. SICI only adjusts its own claims.
S.A. 457. It appears that, at all relevant times, SICA ad-
justed claims for at least five other Safeco Corporation
companies.3
In October 1997, Safeco Corporation acquired American
States Financial Corporation, the corporate parent of six
2
The complaint did not define the term “Safeco member
company.” The term “Safeco insurance policy” appears to mean
an insurance policy issued by SICA or SICI because “Safeco”
was defined to mean SICA and SICI. S.A. 1.
3
These include General Insurance Co. of America, First
National Insurance Co., Safeco Insurance Co. of Indiana, Safeco
Lloyds Insurance Co., and Safeco National Insurance Co. Pet.
Br. 7-8. It may also include two other companies owned by
Safeco Corporation: Safeco Insurance Co. of Oregon and Safeco
Surplus Lines Insurance Co. S.A. 460.
4 No. 09-8027
other insurance companies.4 Prior to the acquisition, the
American States companies were competitors of the
Safeco companies. SICA did not begin to adjust claims
made under policies issued by the American States compa-
nies until December 1998 at the earliest.
B. Proceedings in the State and Federal Courts
1.
The state court initially dismissed Count I of the com-
plaint (breach of contract) because of insufficient evidence
that the rights under the contract had been assigned to
Dr. Bemis, but granted leave to amend. Dr. Bemis then
filed a first amended complaint that contained the
required assignment as an exhibit, but Safeco concedes
that, in all other material respects, this pleading was
identical to the initial complaint. Later, Dr. Bemis volun-
tarily dismissed the consumer fraud and unjust enrich-
ment causes of action; only the breach of contract claim
remains.
4
These include American States Insurance Co., American
Economy Insurance Co., American States Insurance Co. of Texas,
American States Lloyds Insurance Co., American States Pre-
ferred Insurance Co., and Insurance Company of Illinois. S.A.
460. The petition suggests it was only five, but this does not
comport with the record. Pet. Br. 8. The complaint did not
define “American States” and nowhere else referenced that
term, but it presumably refers to the American States Financial
Corporation and its subsidiaries.
No. 09-8027 5
On March 25, 2009, long after the effective date of the
Class Action Fairness Act of 2005, Pub. L. 109-2, 119 Stat. 4(2005) (“CAFA”), Dr. Bemis sought, and was granted, class
certification. The state court certified a class of:
All persons insured by Safeco property and casualty
insurance companies in [14 states] (and their assignee
medical providers), who
(a) during the period from January 1, 1997, to the date
of this Order, submitted one or more claims for pay-
ment of medical expenses pursuant to an auto-
mobile policy’s medical payments coverage;
(b) had their claim(s) adjusted and reviewed by com-
puter bill review software incorporating Ingenix “MDR
modules;” and
(c) received or were tendered payment in an amount
less than the submitted medical expenses due to
charges purportedly exceeding the usual, customary
or reasonable amount based on the Ingenix “MDR
modules.”
S.A. 270.5
2.
Safeco then removed the action to the district court.
The notice of removal explained that removal was pre-
mised on our decision in Knudsen v. Liberty Mutual Insur-
5
The class definition also contained certain exceptions not
relevant here. S.A. 270-71.
6 No. 09-8027
ance Co., 435 F.3d 755 (7th Cir. 2006) (Knudsen II), which
had held that a certified class definition that adds new
claims which do not relate back to the original complaint
may commence a new action for purposes of removal
jurisdiction under CAFA. Dr. Bemis moved to remand,
maintaining that no new action was commenced because
the class definition related back to the initial complaint.
He contended that the original complaint had provided
notice that the claims were based on Safeco’s role in
adjusting the policies of the Safeco affiliates.
The district court granted the motion to remand. Noting
that CAFA’s grant of subject matter jurisdiction is
available only for actions commenced after CAFA’s
effective date, February 18, 2005, the district court con-
cluded that it lacked subject matter jurisdiction; in its
view, the certified class definition related back to the pre-
CAFA complaint. Applying Illinois’ relation-back rule, 735
ILCS 5/2-616(b), the court concluded that SICA and SICI
were on notice that Dr. Bemis intended to hold them
liable for their role in the adjustment of claims based on
the policies of affiliate companies prior to the effective
date of CAFA. In ruling that the “new claims” commenced
by the class certification related back to the original pre-
CAFA complaint, the court pointed to the language of
the complaint and to several instances in the state court
record. The district court concluded “that it is disingenu-
ous for [Safeco] to pretend that prior to the state court’s
grant of class certification [it] had no reason to believe
that [Dr. Bemis] intended to try to hold [it] liable for
the acts of affiliated companies.” Bemis v. Safeco Ins. Co. of
America, Civil No. 09-315, 2009 WL 1972169, at *7 (S.D.Ill.
No. 09-8027 7
July 8, 2009). Accordingly, the district court remanded
the action to the state court.
Safeco then sought leave to appeal the district court’s
remand ruling under 28 U.S.C. § 1453(c).
II
DISCUSSION
We review remands based on jurisdictional defects de
novo.6 The burden of persuasion rests with the party
asserting federal jurisdiction. See Hart v. FedEx Ground
Package Sys. Inc., 457 F.3d 675, 679 (7th Cir. 2006); Boyd v.
Phoenix Funding Corp., 366 F.3d 524, 529 (7th Cir. 2004).
Safeco contends that this action is removable under
CAFA because (1) the post-CAFA class certification
definition adds claims that do not relate back to the
original complaint, see Knudsen II, 435 F.3d 755, and (2) the
class certification changed the scope of Safeco’s
potential liability from what it had been pre-CAFA. See
Marshall v. H&R Block Tax Servs., Inc., 564 F.3d 826 (7th
Cir. 2009).
Removal of actions from state to federal court is gov-
erned by 28 U.S.C. § 1441. That statute provides that,
except as otherwise provided, “any civil action brought
6
See Tanoh v. Dow Chem. Co., 561 F.3d 945, 952 (9th Cir. 2009);
Kaufman v. Allstate New Jersey Ins. Co., 561 F.3d 144, 151 (3d Cir.
2009); Amoche v. Guar. Trust Life Ins. Co., 556 F.3d 41, 48 (1st Cir.
2009).
8 No. 09-8027
in a State court of which the district courts of the United
States have original jurisdiction, may be removed by the
defendant or the defendants, to the district court of the
United States for the district and division embracing the
place where such action is pending.” 28 U.S.C. § 1441(a).
Under CAFA, federal courts have jurisdiction over cases in
which the amount in controversy exceeds $5 million, the
class contains at least 100 members, and, as relevant here,
“any member of a class of plaintiffs is a citizen of
a State different from any defendant.” 28 U.S.C.
§ 1332(d)(2)(A), (d)(5)(B). The district court found that
there are more than 100 class members, that the amount
in controversy exceeds $5 million exclusive of interest
and costs and that Dr. Bemis is a citizen of Illinois,
while SICA is a citizen of the State of Washington. Neither
party suggests that the district court clearly erred in
finding these jurisdictional facts, and our own exam-
ination of the record has not revealed any reason to
question these findings.
As the district court recognized, CAFA is not retro-
active. Exxon Mobil Corp. v. Allapattah Servs., Inc., 545 U.S.
546, 571 (2005); see also Pub. L. 109-2, § 9, 119 Stat. 4 (2005)
(“The amendments made by this Act shall apply to any
civil action commenced on or after [February 18, 2005].”);
Oshana v. Coca-Cola Co., 472 F.3d 506, 511 n.2 (7th Cir. 2006).
This action was filed before its effective date. Therefore,
removal under CAFA is permissible only if the class
certification order constitutes the commencement of a
new action for CAFA purposes.
We have held, in consonance with all other circuits to
have addressed the question, save one, that events occur-
No. 09-8027 9
ring after a complaint is filed may constitute the com-
mencement of a new action for CAFA purposes.7 Such
events may include the addition of a new party, a new
claim for relief or any other event that courts would
treat as independent for limitations purposes. See
Springman v. AIG Mktg., Inc., 523 F.3d 685, 687 (7th Cir.
2008); Schorsch v. Hewlett-Packard Co., 417 F.3d 748, 749 (7th
Cir. 2005); Knudsen v. Liberty Mut. Ins. Co., 411 F.3d 805,
807-08 (7th Cir. 2005) (Knudsen I). The petitioners submit
that the post-CAFA class certification definition intro-
duced new causes of action concerning claims made on
policies issued by their non-party affiliates. Some of those
companies did not become petitioners’ affiliates until
nearly a year into the class period and some did not have
SICA adjust accident claims made against their policies
for nearly two years after CAFA’s effective date. These
purported new claims commence an action for CAFA
purposes only if they do not “relate back” to the initial pre-
CAFA complaint. See Santamarina v. Sears, Roebuck & Co.,
466 F.3d 570, 573 (7th Cir. 2006).8
7
See Smith v. Nationwide Prop. & Cas. Ins. Co., 505 F.3d 401, 405-
06 (6th Cir. 2007); Prime Care of Northeast Kansas, LLC v. Humana
Ins. Co., 447 F.3d 1284, 1285-86 (10th Cir. 2006); Braud v. Transp.
Serv. Co. of Illinois, 445 F.3d 801, 803-04 (5th Cir. 2006); Plubell v.
Merck & Co., 434 F.3d 1070, 1071-72 (8th Cir. 2006). But see
McAtee v. Capital One, F.S.B., 479 F.3d 1143, 1145-48 (9th Cir.
2007).
8
The petitioners do not suggest that the first amended com-
plaint, which simply added the necessary evidence of the
(continued...)
10 No. 09-8027
We have reserved the question of whether federal or
state law governs the relation-back analysis under CAFA
(and have assumed that state law applies). See Schorsch,
417 F.3d at 750-51. This litigation does not require that
we resolve this question. We twice have noted that
Illinois’ relation-back doctrine is, in all material respects,
identical to the federal rule. Marshall, 564 F.3d at 829 (citing
Porter v. Decatur Mem’l Hosp., 882 N.E.2d 583, 591-93 (Ill.
2008)); Springman, 523 F.3d at 688. Furthermore, we
apply the same relation-back rules to “new claims” added
mid-action by class certification definitions as we do to
amended complaints filed mid-action. See Knudsen II,
435 F.3d at 757. An amendment will relate back to the
original complaint if the amendment alleges events “close
in time and subject matter” to those previously alleged,
and if they “led to the same injury.” Porter, 882 N.E.2d at
593. The essential inquiry is whether “the original pleading
furnishes the defendant with notice of the events that
underlie the new contention.” Knudsen II, 435 F.3d at 757.
In Schorsch v. Hewlett-Packard Co., we examined when
an amended complaint constitutes the commencement of
a new action for CAFA purposes. 417 F.3d at 749. The
plaintiff filed a complaint against Hewlett-Packard (“HP”),
“proposing to represent a class of persons who pur-
chased from HP drum kits for use in its printers.” Id.The drum kits contained some of the machinery
8
(...continued)
insured’s assignment of rights to Dr. Bemis, initiated a new
action for CAFA purposes.
No. 09-8027 11
that dispensed the toner to the paper. The kit also con-
tained a computer chip that, when the machinery was
sufficiently worn out that it could impact adversely
printing quality or endanger the effectiveness of other
components, prevented the printer from working until a
new drum kit was installed. Id. The plaintiffs maintained
that the inclusion of this computer chip injured consumers
who wished to continue using the worn-out drum kits
past HP’s pre-programmed cut-off point. Id. After CAFA
became effective, the plaintiff tendered an amended
complaint that expanded the class definition from pur-
chasers of drum kits to purchasers of all printer con-
sumables (like toner cartridges for laser printers and ink
cartridges for ink-jet printers) that also contained the
same kind of computer chip. Id. at 749-50. We held that
the change in the class definition did not constitute a
new claim. We explained that “[f]rom its outset, this suit
has been about HP’s use of EEPROM chips to shut down
its printers until a component has been replaced. The
identity of the consumable is a detail.” Id. at 750. We
further noted that HP’s attempted removal of the whole
action—including the claim about the drum kit from the
initial pre-CAFA complaint—suggested that it really
believed there was only one claim. We reasoned that, if
there were only one claim, the later amendments surely
related back to the first. In our view, the challenged
“transaction” in the relation-back analysis was HP’s
inclusion of the computer chips in its printer consumables,
and the use of the computer chips was an “all or none
affair” because HP had advanced no reason why it
would be permissible to use them in one type of printer
12 No. 09-8027
consumable but not another. Id. Accordingly, the pro-
posed amended class definition did not commence a
new action.
Applying the analysis in Schorsch to this case, it is
apparent that the “new claims” added by the class certifi-
cation order relate back to the relevant transaction or
occurrence, i.e., Safeco’s use of the automated bill payment
system, alleged in the original complaint. The plaintiffs in
Schorsch believed they were shortchanged on their toner;
Dr. Bemis and the class members believe that they were
shortchanged on their insurance contracts. As in Schorsch,
Safeco has attempted to remove the entire action, not
just the purported new claims, suggesting that it believes
there to be only one cause of action. As in Schorsch, this
case also appears to be an “all or none affair”: either the
automated billing software cheats claimants or it does not.
We cannot accept Safeco’s contrary view of this matter.
It believes that this case is analogous to Knudsen II.
Knudsen II is based on an exception to the general rule
set forth in Schorsch. Knudsen II was brought against a
subsidiary of Liberty Mutual contending that it had
underpaid claims submitted as a result of a flawed auto-
mation system. Liberty Mutual removed the action after
a routine adjustment to the class definition, and the
district court ordered the case remanded because the
action had been commenced prior to CAFA’s effective
date. We denied leave to appeal, Knudsen I, 411 F.3d at
808, but noted that, if Liberty Mutual Fire Insurance
Co.—the corporate entity actually responsible for claims
adjusting—were added, it might be able to remove the
No. 09-8027 13
claims against it. On remand, the state court entered a
default judgment against Liberty Mutual because it
concealed Liberty Fire’s role as the proper defendant.
The plaintiffs then “sought more relief—much more
relief.” Knudsen II, 435 F.3d at 756 (emphasis in original).
The state court acquiesced and certified a class including
“[a]ll insured of Liberty Mutual Insurance Company, its
affiliates and subsidiaries . . . who submitted medical bills
covered by a Liberty Mutual Insurance Policy, and whose
claims were paid for less than the medical charge, based
upon the application of a medical cost and utilization
database.” Id. Moreover, because the state court had
entered a default judgment, Liberty Mutual would be
obligated to pay without regard to whether it had dis-
honored any insurance policy, any policy’s terms, co-
payment requirements, caps on allowable fees, or any
other reason consistent with the contract language
that might result in a payment for less than the amount
submitted for payment. We reasoned that, although
a complaint alleging that the insurance company mis-
handled its claims-adjusting database would be one
claim regardless of who had issued the policy, Liberty
Mutual did not do all of the adjusting work. Id. at 757. Two
of the affiliates had done their own adjusting, using
their own software. Id. One affiliate, acquired in 1998,
had done its own adjusting since 1985. Yet, the class
definition employed would reach back to that year,
bringing in claims against a separate entity, which, at
the time, had had nothing to do with the named defen-
dants. Id. The certified class might make Liberty liable
for claims against other corporations with which it
14 No. 09-8027
was not affiliated at the time the claims were submitted,
for whom it did not perform adjusting services and in
the absence of any theory of vicarious liability. Id. Ac-
cordingly, we held that the certified class definition,
which would have required Liberty Mutual “to pay on
account of other insurers’ decisions taken long ago
under different rules for calculating proper payment, and
without any opportunity to defend itself on the merits or
even insist that the policies’ actual terms be honored,”
constituted a new claim. Id. at 758. Consequently, the
district court should not have remanded the case. Id.Schorsch and Knudsen II make clear that, for purposes of
determining whether the “new claims” in this case
relate back, the relevant transaction is Safeco’s use of the
Ingenix claims-processing system regardless of what
affiliate wrote the policies that Safeco later adjusted. See
Schorsch, 417 F.3d at 750; Knudsen II, 435 F.3d at 757.
The question then becomes whether the allegations of
the pre-CAFA complaint sufficiently placed Safeco on
notice of the claims against it based on adjustments that
originated with its affiliated companies. See Knudsen II,
435 F.3d at 757.
We believe the district court correctly followed the
general rule of Schorsch rather than the exception to that
rule crafted in Knudsen II. First, unlike the situation in
Knudsen II, the pre-CAFA complaint in this case put
Safeco on notice that its actions in adjusting claims based
on policies written by affiliate corporations were within
the scope of the complaint. Second, and also unlike
Knudsen II, the class definition implicitly excludes
claims adjusted by affiliate companies.
No. 09-8027 15
With respect to the question of notice, it is important to
recall that SICA and SICI make no argument about the
affiliated companies for whom SICA always had acted
as claims adjustor. Rather, their argument is limited to
those companies that were acquired in 1997—the American
States companies. The opening paragraph of Dr. Bemis’
pre-CAFA complaint explains, “This is a case about
a scheme by [SICA] and [SICI] (collectively, “Defendants”
or “Safeco”) and its Safeco insurer affiliates (such as
American States) to mislead and improperly reduce
payouts . . . using biased third party bill audit software
programs . . . .” S.A. 1. Unlike in Knudsen II, therefore,
there is a firm basis for Dr. Bemis’ contention that the
petitioners have known from the outset of this action that
it involved claims based on policies issued by these
affiliate companies. Indeed, it appears that Safeco was
well aware of the scope of Dr. Bemis’ allegations because
it moved to abate this case in favor of a separate case
involving the American States companies on the ground
that the two cases involved the “same cause.” S.A. 26-30.
While their motion to abate certainly did not constitute
notice itself, Safeco’s interpretation of, and actions based
upon, the pre-CAFA complaint—including the filing of
the motion to abate—are evidence that the pre-CAFA
complaint provided the requisite notice of the inclusion
of claims based on policies issued by Safeco affiliates in
this action. Knudsen II rested on the determination that
the defendants in that case could not have known of the
increased potential liability; here, the petitioners did
know. Accordingly, Knudsen II does not control.
16 No. 09-8027
Safeco stresses that American States companies were not
acquired until ten months into the class period and that
SICA did not adjust claims for American States policies
until two years after the class period began. Safeco con-
tends that it should not be held liable for policies issued
by corporations over which it had no control. This con-
cern is resolved in the class definition. The class is limited
to claimants who had their claims adjusted by Safeco’s use
of one particular computer program. Safeco has not
provided any basis to interpret the complaint as seeking
to hold Safeco liable for claims adjusted by the American
States affiliates before the adjustment of their accounts
by the Safeco program. Indeed, it is difficult to see how a
person who submitted a claim before the acquisition
would have been insured at the relevant time by a “Safeco
company,” and, notably, the petitioners make no argu-
ment in this respect.
Safeco also contends that the district court ignored
Marshall v. H&R Block Tax Services, Inc. 564 F.3d 826. In its
view, Marshall teaches that, in a case where (1) a post-
CAFA change in class certification expands a named
defendant’s potential liability to include liability for the
conduct of its affiliates and (2) the pre-CAFA complaint
did not specifically advance such an affiliate liability
theory, a new action has been commenced that cannot
relate back to the pre-CAFA complaint. Pet. Br. 12-13.
Safeco also points to language in Marshall stating that, at
least with respect to class actions initiated in Illinois,
conspiracy or concerted action must be pleaded with
specificity.
No. 09-8027 17
In Marshall, we held that decertification of the
defendant class effectively commenced a new “action”
because it expanded the defendant’s potential liability
by exposing it to liability for the conduct of its affiliates.
564 F.3d at 829. We also held that, despite language in the
operative complaint explicitly alleging “joint and several,
if not ultimate, liability” of the named defendant and its
affiliates, the operative complaint did not provide the
defendant notice that a joint and several liability theory
might actually become operative mid-action and thus
there was no relation back. Id. In discounting the
language in the complaint alleging joint and several
liability, we noted that “Illinois law requires that con-
spiracy or other concerted action be pleaded specifi-
cally.” Id.We believe that, at bottom, Marshall is compatible with
our earlier holdings and does not alter the fundamental
principle governing the relation back of amendments to
a complaint, “new claims” added mid-action or altera-
tions in the defendant class. The key remains adequate
notice to the defendant of its potential liability. We are
convinced that, when the complaint is read as a totality,
the original complaint clearly placed Safeco on notice
that it was facing liability for its use of the computer
program in adjusting the accounts of its affiliates’ policy
holders. Routine, “workaday” changes to class definitions
do not create new litigation for CAFA purposes. See
Schorsch, 417 F.3d at 751.
18 No. 09-8027
Conclusion
For the foregoing reasons, we grant the petition for
leave to appeal and affirm the judgment of the district
court.
P ETITION FOR L EAVE TO A PPEAL G RANTED ;
JUDGMENT A FFIRMED
10-22-09