CHICAGO – U.S. Seventh Circuit judges directed District Judge David Dugan to remand a $3.5 billion suit against Country Mutual to St. Clair County Circuit Court on Oct. 2.
The appellate court concluded that Dugan should have allowed exceptions to the national Class Action Fairness Act, which limits class litigation in state courts.
They found he should have ruled that the case against Country Mutual involved internal workings of an Illinois corporation.
They also found Dugan shouldn’t have designated defendant Robert Bateman of Massachusetts as a primary defendant.
Justice Michael Scudder wrote that the complaint identified Bateman as chief financial officer for two and a half years, “but it does not otherwise say much about him.”
Precedents allow classification of more than one defendant as primary, but in this case the Seventh Circuit classified Country Mutual as a single primary defendant.
Bateman and 45 other individuals occupy the background.
Angela Sudholt and Kyhl Sudholt of Clinton County sued Country Mutual last November, along with Kara Jones and Benjamin Jones of St. Clair County.
Gerard Stranch of Nashville, Tennessee, Lynn Toops of Indianapolis and David Cates of Swansea represent them.
The plaintiffs claimed a mutual company must provide insurance at the cost of claims.
They claimed Country Mutual’s revenue from premiums exceeded the cost of claims for ten years, and its directors and officers enriched themselves with the surplus.
The plaintiffs alleged fiduciary breaches, contract breaches, consumer fraud, and unjust enrichment.
They proposed to certify an Illinois class.
On Dec. 19, St. Clair County Chief Judge Andrew Gleeson assigned Circuit Judge Christopher Kolker.
Country Mutual counsel William Kelly removed the complaint to district court on Dec. 22.
Plaintiffs moved to remand it in January, and Dugan held a hearing in May.
“When they saw that they had a surplus, they should have decided how much of the surplus we want to return,” Stranch said.
“They didn't do that so that goes directly to the internal workings and affairs of the corporation,” he added.
Country Mutual counsel Sessions Hootsell of New Orleans said plaintiffs claimed Bateman breached fiduciary duties directly to them.
He said they claimed Bateman retained profits, drove surplus up to an unnecessary amount, and failed to give serious consideration to providing insurance at cost.
“He’s being accused of a number of different actions that all relate to his own decisions as an executive vice president,” he wrote.
Hootsell said Bateman was there for two and a half of the ten years.
“I don't think you can be a primary defendant if you are not even on the hook for that,” he said.
Dugan denied the motion to remand, finding the alleged injuries extended beyond Illinois.
He found Country Mutual covered 1.4 million vehicles and 700,000 homes in 19 states.
“Likewise, the parties appear to agree that 55% of premiums were paid by Illinois policy holders and 45% of premiums were paid by non-Illinois policy holders,” he wrote.
Dugan found plaintiffs targeted Country Mutual’s operations generally without any indication that the operations didn’t impact policy holders in 18 other states.
He found Bateman’s alleged actions and involvement in events were significant.
“Bateman’s alleged conduct conceivably impacted a significant portion of the proposed class during and in the years after his tenure,” he wrote.
Dugan found the test for identifying primary defendants requires a court, “without meaningful acuity or resolution,” to forecast apportionment of damages.
“Even assuming each defendant is liable, though, the court cannot estimate the amount any single defendant or class of defendants may lose if liable,” he wrote.
“Plaintiffs do not even attempt to do so or to meaningfully distinguish between the defendants on this basis,” he added.
“For these reasons the conflict of law principles underlying the internal affairs doctrine do not apply in this case,” he concluded.
Justices Scudder, Diane Wood, and David Hamilton heard argument on Sept. 11, and resolved the issue in three weeks.
Scudder wrote, “This case belongs in state court under the Class Action Fairness Act’s internal affairs exception.”
“We see no way to adjudicate any of these claims without immersion into the boundaries of the discretion afforded by Illinois law to officers and directors of a mutual insurance company to set capital levels and make related decisions about surplus distributions to policy holder members,” he added.
The appellate court found that only the state of incorporation should have authority to regulate a corporation’s internal affairs.
They found that determining whether Country Mutual retained excessive capital would depend on assessment of how director and officers exercised their discretion.
“The necessary analysis must account for the complexity of insuring losses,” Scudder wrote.
The appellate court found that resolution wouldn’t come from spreadsheets or policy interpretations, “but from a qualitative assessment of management’s business judgments.”
They reduced Bateman’s status from primary defendant, finding no allegation that he played a particular or significant role.
“We have little difficulty seeing the spotlight of the plaintiffs’ complaint as shining foremost on Country Mutual,” Scudder wrote.
“No doubt Country Mutual is the deepest pocket in the case and surely the party from which the plaintiffs seek the lion’s share of any recovery,” he added.