Herndon denies motion to dismiss suit alleging RICO activity in Avery v. State Farm

A federal judge on Thursday denied a motion to dismiss a class action lawsuit alleging fraudulent activity in Avery v. State Farm.

In a 43-page memorandum and order, U.S. Chief Judge David Herndon lifted a stay on initial disclosures and directed Magistrate Judge Stephen Williams to issue a scheduling and discovery order in the case that hasn’t seen a filing since late November.

Herndon’s order stems from the May 2012 suit that three plaintiffs from Avery v. State Farm brought against State Farm Mutual Automobile Insurance Co.; William Shepherd, an attorney at the insurance company; and Ed Murnane, president of the Illinois Civil Justice League (ICJL).

The plaintiffs – Mark Hale, Todd Shale and Carly Vickers Morse—also named Illinois Supreme Court Justice Lloyd Karmeier’s campaign committee, Citizens for Karmeier, as a defendant, but voluntarily dismissed it in September as the political association dissolved several years ago.

In their class action suit, the plaintiffs claim the defendants violated the Racketeer Influenced and Corruption Organizations (RICO) Act by creating an enterprise “to enable State Farm to evade payment of a $1.05 billion judgment affirmed in favor of approximately 4.7 million State Farm policyholders.”

The plaintiffs assert the defendants implemented their scheme in two phases, the first of which involved recruiting, financing and electing a candidate to the Illinois Supreme Court who would vote to overturn the judgment against State Farm once elected.

This phase, according to the plaintiffs’ suit, was completed when Karmeier beat Gordon Maag in the 2004 race for the Fifth District seat on the state high court and nine months later, voted in favor of overturning the billion dollar judgment against the insurance giant.

According to the complaint, the second phase took place in 2005 and 2011, when State Farm used the U.S. Mail to file alleged misrepresentations to the Supreme Court in response to the plaintiffs’ requests for the high court to vacate their decision that overturned the judgment.

The plaintiffs claimed that Karmeier should have recused himself because he received campaign contributions from State Farm employees. Some of that money, they assert, was funneled through the U.S. Chamber of Commerce and ICJL, as well as its political action committee JUSTPAC.

In its response to those requests, both of which were unsuccessful, the plaintiffs allege that State Farm made misrepresentations about its role in Karmeier’s campaign, as well as Murnane and Shepherd’s involvement.

Among other reasons, the defendants all filed motions to dismiss to the suit, claiming that federal courts don’t have jurisdiction to review civil judgments of state courts under the Rooker-Feldman doctrine.

They also argued in their motions to dismiss that the plaintiffs failed to not only prove their claims under RICO, but failed to do so in a timely fashion.

After about four months of dormancy in the case, Herndon last week dismissed the defendants’ motions to dismiss, a ruling that will allow the complaint to move forward.

In regards to the defendants’ argument for dismissal under the Rooker-Feldman doctrine, Herndon wrote that he agrees with the plaintiffs that the doctrine doesn’t apply.

“In particular, plaintiffs assert that they neither seek review nor rejection of the Avery judgment and that plaintiffs’ injuries were not caused by any action of the Illinois Supreme Court but solely as the result of these defendants’ conduct,” Herndon wrote.

He added, “Instead, they allege that defendants’ conduct and Justice Karmeier’s failure to step aside prevented them from raising their claims before the full Illinois Supreme Court.”

Based on the plaintiffs’ allegations, Herndon determined that the Rooker-Feldman doctrine doesn’t apply and that he has subject-matter jurisdiction in the case.

Herndon also rejected the defendants’ argument that the plaintiffs’ RICO claims were untimely.

The defendants argued that the plaintiffs’ claims accrued in 2005, when the Supreme Court issued its ruling in Avery v. State Farm, or at the latest, in 2006, when the U.S. Supreme Court denied their petition for certiorari.

Based on those dates, the defendants assert that the limitations period to bring RICO claims would have expired in 2009 or 2010, at least two years before the plaintiffs filed their complaint in 2012.

Adopting the plaintiffs’ arguments, Herndon determined that the plaintiffs were not injured until 2011, when State Farm mailed its second brief to the Supreme Court that denied its role in Karmeier’s election, and as such filed their complaint “well within the four-year statute of limitations.”

In their motions to dismiss, the defendants also argued that the plaintiffs failed to sufficiently allege claims under RICO.

“Based on the record before the Court, the Court finds that plaintiffs have sufficiently alleged injury to business or property element and that they have standing to pursue the RICO claims,” Herndon wrote.

In addition, Herndon refused to weigh in on some of the defendants’ arguments, saying they would be better addressed at later stages of the litigation.

For instance, Herndon refused to weigh in on the defendants’ argument that res judicata and/or collateral estoppel barred the plaintiffs’ claims because they had already fully litigated them before the Supreme Court, which rejected them.

“The Court finds that making such factual determinations regarding res judicata and/ or collateral estoppel at this stage in the proceedings is not proper and declines to do so,” he wrote. “The Court concludes that these arguments are better suited for discussion and decision after discovery has been completed

Another argument Herndon declined to immediately address came from Murnane and Shepherd, both of whom claimed they were simply exercising their First Amendment right to participate in political speech by supporting Karmeier’s campaign and that the plaintiffs failed to prove they engaged in fraudulent activity.

“[T]his argument is best addressed at the summary judgment stage,” he wrote. “The Court finds that whether defendants’ actions are protected by the First Amendment will ultimately require resolution of a number of factual issues which are more appropriately reserved for resolution at summary judgment or trial on a full factual record.”

Based on the complaint, Herndon said the plaintiffs have shown that “the motivation for this seven-year-long cover-up is both plausible and demonstrable.”

The plaintiffs are represented by Tennessee attorneys W. Gordon Ball and Charles Barrett, as well as Louisiana attorney Patrick Pendley.

Chicago attorneys Joseph Cancila Jr., J. Timothy Eaton and James Gaughan, as well as Edwardsville attorney Patrick Cloud, represent State Farm.

Belleville attorneys Russell Scott and Laura Oberkfell represent Shepherd and Chicago attorneys Richard O’Brien and David Greenfield represent Murnane.

Editor's note: The Madison County Record is owned by the U.S. Chamber of Commerce Institute for Legal Reform.