FYI: 7th Cir Holds Insurer Had No Duty to Defend FDCPA, TCPA, and Related Common Law Claims

The U.S. Court of Appeals for the Seventh Circuit recently affirmed a trial court's judgment that an insurer had no duty to defend a debt collector in an action brought by a consumer asserting claims under the federal Fair Debt Collection Practices Act (FDCPA) and the federal Telephone Consumer Protection Act (TCPA), as well as common law claims of defamation and invasion of privacy.

 

In so ruling, the Seventh Circuit concluded that the consumer stated a claim under the FDCPA against the debt collector, and therefore the consumer's allegations fell within policy exclusions.  Because the remaining claims arose out of the alleged FDCPA violations, the Court held that the consumer's injuries were excluded from coverage under the policy, and the insurer had no duty to defend.

 

A copy of the opinion is available at:  Link to Opinion

 

In 2015, a consumer sued a debt collector for its attempts to collect on a mortgage loan that was the subject of a bankruptcy discharge.  Counts I through III of her complaint relied on the Fair Debt Collection Practices Act (FDCPA) and the Telephone Consumer Protection Act (TCPA). Count IV alleged common-law defamation and Count V alleged common-law invasion of privacy.

 

Soon after the consumer filed her action, the debt collector asked its insurer for a defense pursuant to an insurance agreement between the two entities. However, the insurer refused and filed a declaratory judgment action against the debt collector, alleging that policy exclusions in the insurance agreement relieved it of the duty to defend or indemnify.

 

The first exclusion, for "Recording and Distribution of Material or Information in Violation of Law," precludes coverage for bodily injury and personal and advertising injury:

 

directly or indirectly arising out of or based upon any action or omission that violates or is alleged to violate:

 

(1)  The [TCPA] …

(2)  The CAN-SPAM Act of 2003 [Pub. L. No. 108-187] [and amendments] …

(3)  The Fair Credit Reporting Act [FCRA] ... including the Fair and Accurate Credit Transaction Act; or

(4)  Any federal, state statute, ordinance or regulation other than the TCPA, CAN-SPAM Act of 2003 or FCRA and their amendments and additions, or any other legal liability, at common law or otherwise, that addresses, prohibits or limits the printing, dissemination, disposal, monitoring, collecting, recording, use of, sending, transmitting, communicating or distribution of material or information.

 

The second exclusion, for "Violation of Communication or In- formation Law," is similar in scope. It excludes bodily injury, property damage, and personal and advertising injury:

 

resulting from or arising out of any actual or alleged violation of:

 

(A) the [TCPA], [Driver's Privacy Protection Act, or DPPA], or [CAN-SPAM Act]; or

(B) any other federal, state, or local statute, regulation or ordinance that imposes liability for the:

(1) Unlawful use of telephone, electronic mail, internet, computer, facsimile machine or other communication or transmission device; or

(2) Unlawful use, collection, dissemination, disclosure or re-disclosure of personal information of any manner by any insured or on behalf of any insured.

 

The debt collector in turn counterclaimed that the insurer breached its duty to defend, and the insurer responded by filing a motion for judgment on the pleadings.

 

After reviewing the insurance policy and the factual allegations in the complaint, the trial court concluded that all of the allegations fell within the scope of the policy exclusions.

 

The trial court held that the FDCPA is swept into the "catch-all" clause at the end of each policy exclusion as an "other statute" that regulates the communication of information. Because the FDCPA prohibits calls made with the "intent to annoy, abuse or harass," the trial court concluded that even if some of the debt collector's calls to the consumer did not violate the TCPA, they still violated the FDCPA because they were made after the consumer had asked the debt collector to stop calling.

 

The trial court also held that the common-law claims in Counts IV and V (defamation and invasion of privacy) were excluded because they were based on conduct "arising out of" the same operative facts as the conduct that was alleged to have violated the FDCPA. Thus, the trial court held that the insurer had no duty to defend the debt collector in the lawsuit brought by the consumer.

 

This appeal followed.

 

For its appeal, the debt collector argued that insurance coverage may exist because the consumer's complaint included the possibility that (1) some calls were made to the consumer's home phone using a live operator, (2) some calls were made to the cell phone without the use of an automatic telephone dialing system, and (3) some calls were not made with the intent to annoy, abuse, or harass. If true, the first and second allegation would preclude TCPA liability, and the third allegation would preclude FDCPA liability. In any of these scenarios, the insurer's duty to defend would be triggered. See Title Indus. Assurance Co. v. First Am. Title Ins. Co., 853 F.3d 876, 887 (7th Cir. 2017).

 

The Seventh Circuit initially discussed the legal standard for an insurer's duty to defend. This duty exists "unless it is clear from the face of the underlying complaint that the facts alleged do not potentially fall within the policy's coverage." G.M. Sign, Inc. v. State Farm Fire and Cas. Co., 18 N.E.3d 70, 77 (Ill. App. Ct. 2014). "If any portion of the suit potentially falls within the scope of coverage, the insurer is obligated to defend." Health Care Indus. Liab. Ins. Program v. Momence Meadows Nursing Ctr., 566 F.3d 689, 694 (7th Cir. 2009). Additionally, when deciding whether coverage exists, Illinois courts "liberally construe[]" the insurance policy and the complaint in the insured's favor. Pekin Ins. Co. v. XData Sols., Inc., 958 N.E.2d 397, 400 (Ill. App. Ct. 2011).

 

Next, the Seventh Circuit analyzed the language in the policy exclusions and concluded that the use of "arising out of" calls for a "but-for" inquiry: if the consumer would not have been injured but for the conduct that violated an enumerated law, then all injuries that resulted from that underlying conduct are excluded from coverage, regardless of the legal theory used. See G.M. Sign, Inc., 18 N.E.3d at 78 ("'Arising out of' means 'originating from,' 'having its origin in,' 'growing out of,' and 'flowing from.'").

 

With these legal principles in mind, the Seventh Circuit determined that the consumer's complaint contains no factual allegations that the debt collector called the consumer on her home phone using a live operator. Instead, the debt collector's contrary argument was based on a stitching together of two unrelated components of the complaint.

 

The Seventh Circuit also did not find persuasive the debt collector's assertion that the complaint potentially alleges calls made to the consumer's cell phone without the use of an ATDS, which would not violate the TCPA. The complaint states that "some or all" of the calls to the consumer's cell phone "were made using" an ATDS. The Court construed the term "some or all," in the context of this particular complaint, to serve only to distribute responsibility for the phone calls among the five ATDS devices listed in the complaint.

 

Finally, even if some of the debt collector's conduct, as described in the complaint, did not violate the TCPA, the Seventh Circuit held that the alleged conduct clearly violated the FDCPA.

 

Despite the consumer's statement in Count V that the debt collector "intentionally and/or negligently" invaded her privacy by calling her repeatedly, the Court held that the term "negligently" was merely a "legal label" that Illinois courts refuse to put stock in without corresponding facts. See G.M. Sign, 18 N.E.3d at 79 (where a complaint is "so bereft of factual allegations" and is so vague that "myriad unpleaded scenarios could fall within its scope," it cannot trigger a duty to defend).

 

Instead, the factual allegations point to an intent to "annoy or harass." "A debt collector may harass a debtor by continuing to call the debtor after the debtor has requested that the debt collector cease and desist communication." Arteaga v. Asset Acceptance, LLC, 733 F. Supp. 2d 1218, 1227 (E.D. Cal. 2010) (discussing Fox v. Citicorp Credit Servs., Inc., 15 F.3d 1507 (9th Cir. 1994)). The trial court discerned an intent to "annoy or harass" from the debt collector continuing to call after the consumer asked it to stop, and the Seventh Circuit held that the court did not err in drawing this inference.

 

Accordingly, the Seventh Circuit concluded that because the complaint describes conduct that as a whole would violate the FDCPA, the consumer's injuries were excluded from coverage under the insurance agreement. Thus, because the insurer had no duty to defend based on the facts in the complaint, the Court affirmed the trial court's judgment.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Tennessee   |   Texas   |   Washington, DC

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

 

and

 

California Finance Law Developments

 

 

 

 

FYI: 7th Cir Rejects Settlement Class Members' Untimely Attempt to Opt Out

The U.S. Court of Appeals for the Seventh Circuit recently affirmed the denial of a post-judgment motion filed by two class members to exclude themselves from the class settlement or alternatively enlarge their time to opt out in order for them to continue parallel litigation in state court.

 

In so ruling, the Seventh Circuit held that their separate litigation was barred by the release in the class settlement, and that the trial court did not abuse its discretion because the dissenting class members were provided notice of the settlement by mail, their attorneys had actual notice of the settlement, they failed to show excusable neglect to justify extending the opt-out deadline, and the trial court properly rejected their argument that their continued litigation provided "reasonable indication" of a desire to opt out of the settlement. 

 

A copy of the opinion is available at:  Link to Opinion

 

A manufacturer of trucks ("Manufacturer") settled a class action lawsuit concerning allegedly defective engines for $135MM, which was preliminarily approved in the U.S. District Court for the Northern District of Illinois ("district court") in June 2019. 

 

A court-approved notice pursuant to Fed. R. Civ. P. 23(e) (the "Notice Letter") was mailed to all class members on August 9, 2019 notifying them of the suit, settlement terms, option to litigate independently, relevant opt-out deadlines and instructions to obtain full opt-out details online or by telephone.  A fairness hearing was held on November 13, 2019 wherein some class members' objections to the settlement were rejected, and a final judgment implementing the settlement was entered on January 21, 2020.

 

Meanwhile, a concurrent lawsuit against the Manufacturer filed in Ohio state court by two member corporations of the settlement class (the "Dissenting Class Members") proceeded after the trial court declined to enjoin parallel suits in state court.  After the settlement was approved, the Manufacturer's lawyers notified the Dissenting Class Members' counsel of its position that their claims in Ohio state court were barred by the release in the settlement and final judgment. 

 

The Dissenting Class Members argued that they were not bound by the class settlement because they purportedly never received notice of the settlement and argued that the continued prosecution of the state court matter provided "reasonable indication" of their desire to opt out.

 

The trial court permitted the Dissenting Class Members to intervene to present its belated argument for exclusion from the class settlement.  Upon consideration of the briefs and review of the evidence, the trial court concluded: (i) that two Notice Letters were sent to Dissenting Class Members at its business addresses (though the Dissenting Class Members argued that the envelopes providing the Notice Letters were addressed properly but were not allegedly received, the district held that but mailing is evidence of receipt, see Hagner v. United States, 285 U.S. 427, 430 (1932), and a disclaimer of memory does not refute receipt); (ii) the Dissenting Class Members were given opportunity to provide an email address to the Manufacturer for notice and had chosen not to do so; (iii) the Dissenting Class Members' lawyers in the Ohio suit had actual notice of the settlement based upon letters sent to the Manufacturer's counsel showing awareness of the pending class action and distinguishing their settlement demand from the class-action settlement; (iv) the Dissenting Class Members' lawyers must have known about the need to opt out but did not do anything to protect their interest in opting out, and; (v) the Dissenting Class Members could not show excusable neglect that would justify an extension of the opt-out deadline because they and their attorneys had actual knowledge of the need to opt out.  

 

Accordingly, the trial court denied the Dissenting Class Members' intervening motion to exclude them from the settlement or alternatively enlarging their time to opt out.  This appeal followed.

 

On appeal, the Seventh Circuit first reviewed the Dissenting Class Members' argument that the mailing of the Notice Letters by first-class mail was in sufficient under the Due Process Clause of the Fifth Amendment. 

 

The Seventh Circuit rejected this argument, citing the Supreme Court of the United States' opinion in Dusenbery v. United States, 534 U.S. 161 (2002) which holds that mail (to the correct address) satisfies the constitutional requirement that notice be reasonably calculated to give actual knowledge.  Even if some other forms of notice may be necessary if the postal service returns mail unclaimed (Jones v. Flowers, 547 U.S. 220 (2006)), neither of the Notice Letters were returned and the Dissenting Class Members' lawyers undisputed actual knowledge of the class action settlement is imputed to their clients.

 

Next, the Court examined whether the Dissenting Class Members' delay was excusable, permitting an untimely opt out.  The Seventh Circuit determined that the Dissenting Class Members' delay was not excusable because their counsel's actual knowledge of the settlement is conclusive, and the trial judge's suspicions that the Dissenting Class Members were trying to achieve the greater of two potential settlements in the class action and their own state court case — which has been impermissible since the 1966 amendments to Rule 23 (Premier Electrical Construction Co. v. National Electrical Contractors Ass'n, Inc., 814 F.2d 358, 362–63 (7th Cir. 1987)) – was not an abuse of her discretion.

 

Lastly, the Dissenting Class Members argued that their continued litigation in Ohio state court provided "reasonable indication" of that it wanted to opt out of the class.  This language comes from Wright & Miller's standard set forth in 7A Federal Practice & Procedure §1787 (1972) (now 7AA Federal Practice & Procedure Civil §1787 (3d ed.)), explaining that "considerable flexibility is desirable in determining what constitutes an effective expression of a class member's desire to exclude himself and any written evidence of it should suffice." 

 

The Tenth Circuit adopted this standard in In re Four Seasons Securities Laws Litigation, 493 F.2d 1288 (10th Cir. 1974), holding that a district court did not abuse its discretion by finding that a class member effectively opted out in a letter to the Trustee for Four Seasons, rather than to the clerk of court as the notice had directed, while the Second Circuit also cited this language in Plummer v. Chemical Bank, 668 F.2d 654, 657 n.2 (2d Cir. 1982), observing that the Court "f[ou]nd nothing in Rule 23 which requires them to file written reasons for their exercise of choice. Any reasonable indication of a desire to opt out should suffice."

 

While the Seventh Circuit acknowledged that a rule under which any "reasonable indication" of a desire sufficiently excludes oneself from a class has been mentioned in the Seventh Circuit, but not adopted (Sanders v. John Nuveen & Co., Inc., 524 F.2d 1064, 1075 (7th Cir. 1975)), it declined to adopt any such rule. 

 

While agreeing that when a trial court has not issued instructions about how to opt out, a judge may accept an "reasonable indication" of such a desire, when a judge has specified opt-out procedures in detail, such as the case here, it cannot accept an opt out by other means, as doing so could make class actions difficult, if not impossible to administer.

 

Because the Dissenting Class Members did not opt out of the class settlement, their state court claims were barred by the release in the settlement, and the trial court's order denying their motion to exclude themselves from the settlement was affirmed.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Tennessee   |   Texas   |   Washington, DC

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

 

and

 

California Finance Law Developments