April 22, 2005
ENTRY ON MOTION FOR JUDGMENT ON THE PLEADINGS
Six plaintiffs have sued four related companies after their business relationship with the companies fell apart. The demise of that relationship has spawned several lawsuits that have been consolidated before this court. Plaintiffs have alleged multiple theories of recovery. Defendants have moved for judgment on the pleadings with respect to several of those theories.
One defendant, Conseco, Inc., has been discharged in bankruptcy. All the parties now agree that it should be dismissed from this litigation as requested in defendants' motion. The three remaining defendants are: (1) Conseco Services, LLC ("Conseco Services"); (2) Conseco Life Insurance Company ("Conseco Life"); and (3) Conseco Marketing, LLC ("Conseco Marketing"), all Indiana citizens (collectively, the "Conseco Entities"). The six plaintiffs include two Delaware corporations, National Marketing Alliance Holding, Inc. ("NMA Holding") and Marketing Alliance, Inc. ("MAI"), along with four individuals who are also shareholders in the two corporations: (1) Ronald K. Bloomingkemper; (2) Ronald J. Petrinovich; (3) David Gin; and, (4) Curtis Cobb ("Individual Plaintiffs"). Diversity of citizenship is complete, and the court has jurisdiction under 28 U.S.C. § 1332.
Standard of Review
When a party moves for judgment on the pleadings under Rule 12(c), the standard is the same as for a motion to dismiss for failure to state a claim under Rule 12(b)(6). R.J. Corman Derailment Services, LLC v. International Union of Operating Engineers, 335 F.3d 643, 647 (7th Cir. 2003). The court may consider only the pleadings, and the court must view the allegations are viewed in a light most favorable to the non-moving party, as this court does below in its recitation of the allegations below. Id. The motion may be granted only if it appears beyond any doubt that a plaintiff cannot prove any facts that would support a claim for relief. Guise v. BWM Mortg., LLC, 377 F.3d 795, 798 (7th Cir. 2004).
The Conseco Entities are a part of a family of companies devoted to the insurance business that have operated under the Conseco name. Under the Conseco umbrella, these entities aggressively pursued and acquired other insurance businesses during the 1990s. One of those acquisitions was Life Partners Group, Inc., which owned a life insurance company known as Massachusetts General Life Insurance Company ("Mass General"). This acquisition came in 1996 and Mass General's business was folded into Conseco Life. The Individual Plaintiffs were agents for Mass General and also owned plaintiff NMA Holding, a marketing company that sold Mass General policies. Together, the Individual Plaintiffs and NMA Holding represented the largest piece of the Mass General independent sales organization. In addition, NMA Holding had a subsidiary that held a reinsurance contract with Mass General, allowing agents to reap reinsurance profits in addition to sales commissions.
The Conseco Entities found the NMA Holding sales force and its subsidiary's reinsurance contract attractive. Accordingly, the Conseco Entities proposed and NMA Holding and the Individual Plaintiffs agreed to an arrangement under which the Individual Plaintiffs would receive cash and shares in Conseco, Inc., the publicly owned company that has since gone through bankruptcy, in exchange for their interests in the NMA Holding sales force and its reinsurance subsidiary. In addition, the Individual Plaintiffs received the right to participate in a Conseco, Inc. stock option plan while agreeing to sell Conseco insurance products exclusively. The deal was consummated through the execution of three written agreements, all of which were made a part of plaintiffs' Complaint. The purchase of the reinsurance business was accomplished through an Asset Purchase Agreement between Conseco, Inc. and NMA Holding and the Individual Defendants. The sales network was the subject of a Managing General Agent Agreement between Conseco Marketing and MAI, which had been created for that single purpose. The Individual Plaintiffs and NMA Holding transferred the sales network to MAI. Then MAI, along with the Individual Plaintiffs, agreed to become exclusive agents for Conseco insurance products under the General Agent Agreement. The third documented agreement was an Administration Agreement under which Conseco Services agreed to provide MAI with the administrative services necessary to handle and process the business MAI would generate through procuring insurance applications from prospective customers.
The plaintiffs allege that officers of Conseco Inc. and Conseco Marketing made numerous knowingly false representations about the financial strength, capabilities, and business intent of Conseco, Inc. and the Conseco Entities during the course of the negotiations that led to the purchase of Mass General's business and the plaintiffs' interests in the same. In short, plaintiffs claim that these misrepresentations were made to leave the impression that Conseco, Inc. and its family of companies was a growing, thriving insurance conglomerate with great cash flow and nearly unlimited upside potential because of its acquisition methods and its management techniques. In actuality, plaintiffs allege, Conseco, Inc. had significant financial problems that were not readily apparent because of its accounting practices. Those problems eventually manifested themselves in the form of inadequate staffing to handle all the newly acquired business, insufficient loss reserves, investigations and inquiries from state insurance regulators, and diversion of Conseco, Inc. assets to pay interest on unpaid loans to its senior officers. The loans had been made for the purpose of funding stock purchases, which in turn helped support an artificially higher stock price.
By 2002 the financial problems continued to mount for Conseco, Inc. and the Conseco Entities. The number of claims being made under the acquired Mass General policies outpaced the reserves that had been set aside. The number of policy cancellations had been overestimated, and Conseco Life decided to embark upon a program of selling replacement insurance. This required MAI and other producers to approach existing policy holders and to persuade them to cancel existing policies due to potential loss and to reinvest in a higher priced product that provided less protection. The pursuit of the replacement program resulted in customer complaints and inquiries and requests for additional information from state insurance regulators.
Through their attorneys, MAI and the Individual Plaintiffs began making inquiries to the Conseco Entities, requesting specific information regarding the replacement program. For example, they sought actuarial information that would support the cost/benefit illustrations being used to convince policy holders to cancel and reinvest in the new policies. They requested the assumptions being made in connection with the illustration projections as well. Before providing any answers, the Conseco Entities terminated the Managing General Agent Agreement between Conseco Marketing and MAI, claiming that MAI and the Individual Plaintiffs had breached the exclusivity provisions. According to plaintiffs, the Conseco Entities then took over the sales network that had been built up through NMA Holding, and essentially cut MAI and the Individual Plaintiffs out of their portions of commission payments. No further commissions have been paid to plaintiffs, and their requests for an accounting have fallen on deaf ears.
Conseco Life has sued each of the Individual Plaintiffs on unpaid loans they received from Mass General before its parent was purchased. Those actions have been consolidated for pre-trial purposes with this one. In this case, the Individual Plaintiffs along with NMA Holding and MAI assert sixteen different claims for relief. Those claims are titled as follows:
1. Breach of contract.
2. Breach of implied covenant of good faith and fair dealing.
3. Unjust enrichment.
4. Fraudulent representation.
5. Fraudulent concealment.
6. Wrongful termination of contract in violation of public policy.
7. Tortious interference with contract.
8. Violation of Colorado Consumer Protection Act.
9. Violation of Colorado Securities Act.
10. Violation of Indiana Securities Act.
11. Violation of Texas Securities Act.
12. Indiana statutory damage action for criminal mischief.
13. Indiana statutory damage action for criminal written deception.
14. Indiana statutory damage action for criminal advertising deception.
15. Action for accounting.
16. Civil conspiracy.
Defendants seek dismissal of the eighth claim in its entirety and those parts of the first, second, third, fourth, fifth, sixth, seventh and sixteenth claims that depend on assertions of wrongful termination, "failure to fund," fraud in the inducement or any implied contract theory. Although some of defendants' arguments may ultimately prevail at later stages of the case, the stringent standard applied to a motion for judgment on the pleadings does not allow dismissal at this early stage of the case.
In referring to this "early" stage of the case, the court is aware of its 2002 docket number. The case was stayed during the Conseco bankruptcy proceedings.
I. Wrongful Termination
The defendants' motion asks the court to dismiss the first, second, third, sixth, seventh, and sixteenth claims to the extent they are based upon wrongful termination. Defendants point out that the Managing General Agent Agreement was terminable at will. Conseco Marketing was required to provide only notice of its intent to terminate 180 days prior to the termination date. Defendants also point out that plaintiffs did not allege in their Complaint a failure to provide notice or facts to support the limited public policy exceptions to at-will terminations.
Defendants' argument is at best premature. Plaintiffs were not required to plead their claims, other than fraud or mistake, with such specificity. Hammes v. AAMCO Transmissions, Inc., 33 F.3d 774, 778 (7th Cir. 1994). In addition, in their response brief, plaintiffs state that they intend to assert and prove a lack of timely notice. That statement of intent is sufficient for now. See Chavez v. Illinois State Police, 251 F.3d 612, 650 (7th Cir. 2001) ("when reviewing a dismissal under Rule 12(b)(6), `we will consider new factual allegations raised for the first time on appeal provided they are consistent with the complaint'").
There is another related reason to reject defendants' argument. The pleadings, taken in a light most favorable to plaintiffs, allege that Conseco Marketing purported to terminate the Managing General Agent Agreement for cause. Termination for cause under the agreement could be effective immediately, but only if cause can be shown, of course. It is clear from the pleadings that plaintiffs challenge the basis for the for cause termination. This challenge is at the heart of a number of their claims. It would be inappropriate to dismiss any claim on the basis that the agreement was terminable at will, without cause but with notice, where the allegations are that defendants purportedly terminated it for cause and without notice, and where the asserted cause for the termination is being challenged.
Along with their reply brief, defendants submitted a letter which they argue shows that the Managing General Agent Agreement was terminated without cause by agreement of the parties. However, in deciding the Rule 12(c) motion, the court may consider only the matters brought forth in the pleadings. The letter has been stricken from the record in a separate order on plaintiffs' motion to strike.
II. Failure to Fund
Defendants also seek dismissal of any claim that they failed to fund obligations under the contract. First, any claim that defendants failed to fund an express obligation under any of the contracts is unquestionably a viable claim, subject to proof. However, defendants suggest that plaintiffs concede that defendants did not breach any express obligation. Defendants then go on to concentrate their attack on any claims that might be based on implied obligations or statements made outside the four corners of the various agreements. They argue that under Indiana law, unjust enrichment applies only where there is no express contract. They point out that the Managing General Agent Agreement contains an express integration clause with a disclaimer of prior oral representations. Defendants then invoke the parole evidence rule to complete the broad argument that any claim based on fraud in the inducement or any implied obligation is barred by the combination of the rule's application and the existence of an express written agreement that contains a disclaimer and integration clause. According to defendants, portions of the first, second, third, fourth, fifth and sixteenth claims should therefore be dismissed.
In response, plaintiffs first point out that defendants have given short shrift to choice of law issues. Defendants rely on the choice of law provisions of the written contracts, which provide that Indiana law should apply across the board. In a commercial context like this one, the parties' choice to apply Indiana law to their written agreements will be upheld and followed. E.g., Allen v. Great American Reserve Ins. Co., 766 N.E.2d 1157, 1162 (Ind. 2002). But the court is not convinced, at least at this pleading stage, that Indiana law applies to all of the claims that arise beyond the four corners of those documents. In a diversity jurisdiction case like this one, a district court applies the choice of law rules prevailing in the state in which it sits. Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 496 (1941). In Indiana, tort claims require the court to follow a modified form of the lex loci delicti rule. Hubbard Mfg. Co. v. Greeson, 515 N.E.2d 1071, 1073 (Ind. 1987). If the location where the tort was committed bears little significance to the underlying claim, the court moves on to examine other factors to see if applying the law of the location of the tort makes sense. Id. at 1073-1074. And in deciding where the tort was committed, Indiana law looks to where the last event necessary to attach liability takes place. Id.
III. Fraud Claims
Plaintiffs' fourth and fifth claims are fraud claims, which they assert pursuant to the state laws of Texas, Colorado and California, the three states of residence and citizenship for the various plaintiffs. Their sixteenth claim is for civil conspiracy, which also sounds in tort and has been asserted pursuant to the law of those same three states. The last elements necessary to establish a prima facie case of fraud in any jurisdiction are the reliance upon a misrepresentation and the resulting injury. The court assumes that each plaintiff's reliance and subsequent damages, if any, took place in his or its home state. Since the states where plaintiffs did business on behalf of Conseco have as much or more of a connection to the claims than any other state, the law of the state in which each plaintiff does business may provide the law of the claim for that plaintiff.
Defendants have argued that Indiana law applies and that fraud in the inducement of a contract is inapplicable under Indiana law when the written agreement contains a disclaimer of past representations. They also argue that no independent claim for civil conspiracy exists under Indiana law. These arguments fail to address the fact that these tort claims may be decided pursuant to some other state's law. Also, defendants' authority for disposing of any fraudulent inducement claim dealt with a much different disclaimer. In Circle Centre Development Co. v. Y/G Indiana, L.P., 762 N.E.2d 176 (Ind.App. 2002), the state court of appeals ruled that a fraudulent inducement claim could not be sustained by a tenant when the lease contained a disclaimer stating: "Tenant acknowledges that it has independently investigated the potential for the success of its operations in the Center and has not relied upon any inducements or representations on the part of Landlord or Landlord's representatives other than those contained in the Lease." Id. at 178-80. In this case, the disclaimer states only: "[A]ny understandings, negotiations, representations, statements, promises and agreements, oral or otherwise, not included herein shall have no force and effect in the construction of the rights and obligations of the parties hereto. . . ." Though the court in Circle Centre found that a fraudulent inducement claim could not stand, it did so because it was impressed by the specificity of the representation that the tenant had conducted his own investigation. Id. at 179. The court acknowledged that, otherwise, Jenkins v. Nebo Properties, Inc., 439 N.E.2d 686, 694 (Ind.App. 1982), indicated that claims of fraudulent representation are not negated by typical disclaimer language in a contract. In any event, although it is not clear which state's law applies in each situation, it is clear that Indiana law may not apply to the tort claims and that even if it did, there might still be a basis for allowing the fraud claims to move forward.
IV. Unjust Enrichment and Good Faith
That leaves plaintiffs' second and third claims for breach of implied duty of good faith or fair dealing and unjust enrichment still subject to defendants' motion. Defendants argue that there is no implied duty of good faith and fair dealing under Indiana law. They also maintain that since an express written agreement between the parties exists, there is no basis for asserting a quasi-contractual equitable remedy such as unjust enrichment. According to defendants, Indiana law prohibits the avoidance of the specific written parameters of a business relationship through the application of such a remedy.
Plaintiffs counter that the Supreme Court of Indiana has recognized a duty of fair dealing in connection with insurance agency contracts. Plaintiffs rely on Allen v. Great American Reserve Ins. Co., 766 N.E.2d 1157 (Ind. 2002). In Allen a group of insurance agents who worked under a general agent brought an action against the insurer and the general agent claiming they had been falsely told that the annuities they were selling had no front end load or commission to detract from the immediate cash value. Id. at 1160. The annuities actually had a front end commission charge which caused only 65% to 85% of the annual premiums to be applied to the cash value of the annuity during the first five years. Customers complained after determining that this was the case. Id. at 1161. After the agents faced state insurance agency investigations, discipline, and civil lawsuits, they sued the insurer and its general agent claiming that the general agent had misrepresented the nature of the annuities and had told them specifically to sell the annuities as not having a front end load. Id.
The plaintiffs in Allen asserted multiple theories of recovery, including a claim for breach of contract. Id. at 1162. In that count the Allen plaintiffs alleged that their contract with the insurer implied a duty of good faith and fair dealing that had been breached by the fraudulent misrepresentations of the general agent. Id. The at-will agency agreement contained a choice of law provision designating Indiana law as applicable. Id. Acknowledging that Indiana would not recognize a claim that an implied covenant prevented the termination of an at-will contract, the Indiana Supreme Court held that this type of agency relationship carried with it an implied obligation on the part of the insurer "to avoid placing the agent in harm's way." Id. It further found that if the plaintiff agents could demonstrate that the insurer or its general agent knew that those agents were relying on the accuracy of statements regarding the nature of the policy, then a breach of that duty might be established. Id. at 1163.
The facts alleged in this case are not similar. In their second claim for relief, plaintiffs allege that an implied duty was breached when the Conseco Entities failed to fund certain obligations necessary to accomplish the intended goals of the contract, and when Conseco Marketing terminated the contract without good cause. Allen did not establish an implied duty that fits the facts alleged in the second claim for relief in this matter. The Allen court specifically refused to recognize an implied duty with respect to terminating an at-will contract. Id. at 1163 n. 2. Most important, the second claim here adds nothing to the breach of contract claim made in plaintiffs' first claim for relief. Whether the obligation is express or implied, if it arises out of the contract, plaintiffs' first claim covers any claim for breach. The second claim is at best duplicative and unnecessary.
In response to defendants' argument to dismiss the unjust enrichment claim, plaintiffs make a general argument in favor of allowing alternative pleading along with four specific arguments in support of the claim. First, they contend that the unjust enrichment claim is outside the choice of law provision of the contract and is brought pursuant to the laws of the home states of the particular plaintiffs. Second, they maintain that the claim is appropriate even under Indiana law because they have also alleged that the contract was procured by fraud and hence subject to rescission. If determined in their favor, that claim would leave a claim for unjust enrichment as an appropriate alternative pleading. It would serve to support recovery of any unearned monetary benefit they bestowed on the defendants. Plaintiffs also invoke the Allen case as a third basis for allowing a quasi-contractual remedy to stand at this point. Fourth, plaintiffs contend that unjust enrichment is barred only where a specific contractual provision governs the item of enrichment.
Without commenting on the contention that other states' laws might apply to an unjust enrichment claim, the ability to plead in the alternative is sufficient reason to deny dismissal of the unjust enrichment claim now. See Pizzo v. Bekin Van Lines Co., 258 F.3d 629, 635 (7th Cir. 2001). Like most of the arguments advanced in defendants' motion, this one might find more traction at a later stage of the litigation, either after an opportunity for discovery or in deciding how to instruct the jury at trial.
V. Colorado Consumer Protection Act
Defendants argue that the Colorado Consumer Protection Act does not offer relief to plaintiffs under their eighth claim for relief. Because an at-will employment or agency relationship does not create a recognized property interest, defendants claim plaintiffs cannot assert the necessary injury to bring a claim under the Act. Defendants also cite Rhino Linings U.S. v. Rocky Mountain Rhino Lining, Inc., 62 P.3d 142, 149 (Colo. 2003). There the Colorado Supreme Court explained that "a plaintiff must establish not only that the defendant engaged in a deceptive trade practice, but also that the defendant's challenged practice significantly impacts the public as actual or potential consumers of the defendant's goods, services, or property."
Again, defendants' arguments are premature. Plaintiffs' complaint contains ample allegations regarding the damaging impact of the Conseco Entities' replacement insurance program on the purchasing public. Those allegations are sufficient to defeat a motion under Rule 12(c) or Rule 12(b)(6). Also, although defendants continue to refer to the agency contract as terminable at will, there was a requirement of 180 days notice that leaves some contingency for the company to meet. Perhaps that right creates a property interest sufficient under Colorado law to sustain the claim. The Colorado Supreme Court decision in Hall v. Walter, 969 P.2d 224 (Colo. 1998), makes clear that under certain circumstances, non-consumers may assert claims under the Colorado Consumer Protection Act. A trial court can dismiss a claim under the Act if there are no allegations of public impact. See Travelers Indem. Co. of Illinois v. Hardwicke, 339 F. Supp. 2d 1127, 1132 (D. Colo. 2004). Where such public injury has been alleged, as in this case, the remaining facts must be fleshed out before this court can determine whether there is sufficient public impact to allow the claim to advance to trial.
For the reasons discussed in this entry, defendants' Motion for Partial Judgment on the Pleadings is granted only insofar as plaintiffs' claim for relief number two, titled Implied Covenant of Good Faith and Fair Dealing, is dismissed as duplicative, and all claims against defendant Conseco, Inc. are dismissed with prejudice based on the bankruptcy discharge. Defendants' motion is denied in all other respects.