Liberty Mutual Insur v. Knudsen, Kirsten ( 2006 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 05-8037
KIRSTEN KNUDSEN, CHRIS BAKER,
and VIKKI BAKER,
Plaintiffs-Respondents,
v.
LIBERTY MUTUAL INSURANCE COMPANY,
Defendant-Petitioner.
____________
Petition for Leave to Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 05 C 5924—Ruben Castillo, Judge.
____________
SUBMITTED JANUARY 5, 2006—DECIDED JANUARY 27, 2006
____________
Before COFFEY, EASTERBROOK, and MANION, Circuit
Judges.
EASTERBROOK, Circuit Judge. Liberty Mutual Insur-
ance Company has removed this litigation to federal court
a second time, again invoking the Class Action Fairness Act
of 2005, 119 Stat. 4 (2005). Last year we held that the
initial removal was unavailing, because the suit had
been “commenced” in state court before February 18, 2005,
the new Act’s effective date. 411 F.3d 805 (7th Cir. 2005).
Liberty Mutual contended that the only appropriate
defendant is Liberty Mutual Fire Insurance Company,
which had issued the policies on which plaintiffs sought
2 No. 05-8037
to collect. It argued that a mention of Liberty Fire in a
proposed amendment to the class definition effectively
began a new suit. We thought otherwise, observing that
Liberty Mutual remained the only defendant and that
the state judge had not acted on the plaintiffs’ proposal by
adding either new claims or new parties. But we added:
“Maybe that lies in store. . . . If in the future Liberty
Mutual Fire Insurance Company should be added as a
defendant, it could enjoy a right to remove under the
2005 Act, for suit against it would have been commenced
after February 18, 2005.” Id. at 807-08 (emphasis in
original). Liberty Mutual contends that this has come to
pass.
Plaintiffs allege that Liberty Mutual pays unjustifiably
little on claims for medical services under workers’ compen-
sation and casualty (accident) policies. All three plaintiffs
are covered by or have claims derived from policies issued
by Liberty Mutual Fire Insurance Company. The suit they
commenced in Illinois, however, named as a defendant only
its corporate parent, Liberty Mutual Insurance Company.
The complaint did not allege that Liberty Mutual and
Liberty Fire are so lax about corporate formalities that
their separate existence may be disregarded under veil-
piercing principles (those of Massachusetts, where they
are incorporated), or that Liberty Fire deceived its insureds
into thinking that the policies were backed by a firm with
deeper pockets. See United States v. Bestfoods, 524 U.S. 51
(1998) (discussing principles of state law that determine
parent corporations’ liability for acts of subsidiaries and
affiliates). Instead the plaintiffs have argued—and the state
judge has held—that Liberty Mutual is liable because it did
not do enough in discovery to alert plaintiffs’ counsel to the
need to substitute Liberty Fire as a defendant. Indeed, the
state court thought that Liberty Mutual’s “concealment” of
Liberty Fire’s role (despite the fact that only Liberty Fire’s
name is on the policies) is so egregious that it has entered
No. 05-8037 3
a default in plaintiffs’ favor on the merits, leaving only
damages for consideration.
After our first decision plaintiffs sought more
relief—much more relief. They asked the state court to hold
Liberty Mutual responsible for all policies issued by any
subsidiary or affiliate, about 35 firms in all. Plaintiffs
asked, moreover, that all claims for payment by all insureds
on all of these policies everywhere in the nation be covered
by the default, so that Liberty Mutual would be compelled
to pay without proof that an affiliate had failed to honor
any policy. It should be enough, plaintiffs contended, that
an insurer disbursed less than the medical bill, regardless
of any policy’s actual terms. This would override co-pay-
ment requirements, caps on total indemnity, schedules of
allowable fees, and many other common clauses. Finally,
plaintiffs proposed that they be certified to represent a
nationwide class, and that the court disregard any differ-
ence in insurance and workers’ compensation laws across
the 50 states. Despite decisions by both the Supreme Court
of Illinois and this court describing the grave problems with
class actions for damages under multiple states’ laws, see
Avery v. State Farm Mutual Automobile Insurance Co., 216
Ill. 2d 100, 835 N.E.2d 801 (2005); In re
Bridgestone/Firestone, Inc., Tires Products Liability
Litigation, 288 F.3d 1012 (7th Cir. 2002), the state judge
approved plaintiffs’ proposal with immaterial changes. The
class as certified is: “All insureds of Liberty Mutual Insur-
ance Company, its affiliates and subsidiaries (collectively
‘Liberty Mutual’), their third party beneficiaries and their
assignees who submitted medical bills covered by a Liberty
Mutual insurance policy, and whose claims were paid for
less than the medical charge, based upon the application of
a medical cost and utilization database.”
The order certifying this class was entered on September
29, 2005, well after the Class Action Fairness Act’s effective
date, and Liberty Mutual immediately filed a notice of
4 No. 05-8037
removal. A second removal is proper when based on a new
development. See 28 U.S.C. §1446(b) ¶2: “If the case stated
by the initial pleading is not removable, a notice of removal
may be filed within thirty days after receipt by the defen-
dant . . . of a copy of an amended pleading, motion, order or
other paper from which it may first be ascertained that the
case is one which is or has become removable”. But the
district court remanded the proceeding. It held that,
because Liberty Mutual remains the one and only defen-
dant, the “commencement” date is still the time of the suit’s
filing in state court, just as we held on the prior appeal.
2005 U.S. Dist. LEXIS 33102 (N.D. Ill. Dec. 13, 2005). The
district judge relied not only on Knudsen I but also on two
later decisions holding that routine changes in class
definitions—the sort that relate back to the original
pleading for limitations purposes—do not “commence” new
actions. See Schorsch v. Hewlett-Packard Co., 417 F.3d 748
(7th Cir. 2005); Schillinger v. Union Pacific R.R., 425 F.3d
330 (7th Cir. 2005).
Liberty Mutual is the original defendant, but it is
faced with new claims for relief. Illinois law, which we
described in Schorsch and Schillinger, provides that a
new contention relates back to the original complaint
(and hence is not a new “claim for relief” or “cause of
action”) when the original pleading furnishes the defendant
with notice of the events that underlie the new contention.
See also 735 ILCS §5/2-616(b); Zeh v. Wheeler, 111 Ill. 2d
266, 282, 489 N.E.2d 1342, 1349 (1986). Schorsch holds that
a complaint dealing with instructions in computer chips
alleged a single claim, whether the chips were embedded in
drum kits for laser printers (as the original complaint
alleged) or toner cartridges that work with these drum kits
(as the amended pleading added). Schillinger holds that a
complaint dealing with railroads’ use of rights of way stated
a single claim no matter how many states the track passed
through. Similarly, a complaint alleging that Liberty
No. 05-8037 5
Mutual mishandled its “medical cost and utilization data-
base” when adjusting demands for payment of medical bills
would be one claim, whether Liberty Mutual or Liberty Fire
had issued the policy: the grievance concerns the way that a
particular “medical cost and utilization database” works,
and the number of different policies or issuers to which a
single database and software package applies would be a
detail, as long as Liberty Mutual itself did the adjustment
work using the contested procedure.
What causes the class definition of September 2005
to initiate new claims is the fact that Liberty Mutual
does not adjust all demands for payment of all of
its affiliates’ policies. For example, Liberty Northwest
Corporation, one of Liberty Mutual’s affiliates, has adjusted
claims against its own policies since 1996 using its own
cost-and-utilization software. The complaint initially filed
in this case could not have notified Liberty Mutual that
plaintiffs contested any decision made by Liberty North-
west—nor did the complaint allege that Liberty Mutual and
Liberty Northwest are alter egos. It did not mention any
insurer other than Liberty Mutual itself. Our first opinion,
issued in June 2005, noted that plaintiffs had not made an
alter-ego or veil-piercing argument. Apparently they have
changed their tune, but contentions first raised in the
second half of 2005 cannot demonstrate that Liberty Mutual
was on notice of this claim for relief before February 18,
2005.
Employers Insurance of Wausau provides an even bet-
ter example. Liberty Mutual acquired Wausau in 1998, so
it is part of “Liberty Mutual” under the class definition.
Wausau has employed a “medical cost and utilization
database” since 1985. It adjusts its own claims, how-
ever—obviously so before the acquisition. Yet the class
includes all insureds (and their assignees) whose claims
were adjusted by Wausau using its own data and meth-
ods back to 1985, when Wausau’s cost-and-utilization
6 No. 05-8037
database was inaugurated. Because of the default, more-
over, Liberty Mutual cannot invoke the statute of limita-
tions or present any other defense; to be included in the
class definition is to be assured of victory. The complaint
that Knudsen filed in March 2000 did not even hint that
Liberty Mutual might be accountable for underpayments on
the Wausau policies, claims against which had been
adjusted as long as 15 years earlier under a distinct system.
Any effort to recover on account of these policies is a
distinct claim for relief (“cause of action” in the
state’s parlance). And as we intimated in Knudsen I and
Schorsch, and now hold, a novel claim tacked on to an
existing case commences new litigation for purposes of
the Class Action Fairness Act.
The conduct of plaintiffs and the state judge in this
litigation, turning an arguable error in discovery into a
sprawling proceeding in which Liberty Mutual will be
required to pay on account of other insurers’ decisions taken
long ago under different rules for calculating
proper payment, and without any opportunity to defend
itself on the merits or even insist that the policies’ actual
terms be honored, illustrates why Congress enacted the
Class Action Fairness Act. The stakes exceed $5 million;
more than two-thirds of the class members live outside
Illinois; minimal diversity is established. See 28 U.S.C.
§1332(d), §1453(b) (as amended by the 2005 Act). The
addition of new claims after February 18 means that
litigation has been commenced within the Act’s coverage
period.
We grant the petition for leave to appeal. The decision of
the district court is vacated, and that court must revoke the
remand and decide this litigation on the merits. The Class
Action Fairness Act provides for federal resolution of the
plaintiffs’ claims, so the district court need not (and should
not) give any weight to the state judge’s order of default and
the scope of the class certification. These and all other
No. 05-8037 7
questions are open to independent resolution in the federal
forum.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—1-27-06