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

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
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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.
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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).
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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
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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
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