7th Circuit Provides (No) Clarity on Compulsory Counterclaims

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Federal procedure requires a defendant to plead all counterclaims that arise out of the same transaction or occurrence as the plaintiff’s claim, or his claim may be barred in a later suit.  Fed. R. Civ. P. 13(a).  Although the “transaction or occurrence” language in the rule isn’t the model of clarity, the Seventh Circuit’s recent decision in Greene v. U.S. Dep’t of Educ., No. 13-3257 (7th Cir. Oct. 27, 2014), muddied the waters on compulsory counterclaims even further.

In his 2005 chapter 7 bankruptcy, Greene filed an adversary proceeding against the Department of Education to have his student loan debt discharged, based on undue hardship.  Despite Greene’s uncontested loan default, DOE did not file a counterclaim for judgment on the unpaid amounts.  Greene’s claim for discharge ultimately failed, leaving DOE free to collect the debt after Greene’s bankruptcy.

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Seventh Circuit Limits the Use of the Federal Assignment Law under the False Claims Act

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It’s common in the healthcare industry for large insurers to negotiate discounts from pharmacies for prescription drugs. The federal government, the granddaddy of all insurers, does this too, when it negotiates discounts on behalf of its Medicaid program. One would think that with all that bargaining power the federal government would get the biggest discounts of them all. But it doesn’t. Medicaid, in fact, is a poor negotiator, often paying more than its private-industry counterparts (a phenomenon that any first-year economics student can rightly explain as caused by the government’s lack of a “residual claimant”).

Carl Thulin, a former Shopko retail pharmacist, knew that Medicaid typically paid more to his employer than private insurers did, and he thought that that was wrong. Or, setting any speculation about his mores to one side (and perhaps more realistically), he at least hoped to get in on part of the action. Thulin filed a qui tam action against Shopko under the False Claims Act, alleging that Shopko committed fraud when it filed for reimbursement of the prescription drug costs for certain “dual eligible” consumers (that is, customers eligible to participate in Medicaid, but who also have private health insurance) and received anything more than it would receive from a private insurer. The Seventh Circuit, in a decision written by Judge Dow (of the N.D. Ill. and sitting by designation), took the opposing view and affirmed Judge Conley of the W.D. Wis., who earlier had dismissed Thulin’s complaint. Thulin v. Shopko Stores Operating Co., No. 13-3638 (7th Cir. Nov. 12, 2014).

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7th Circuit Dusts off the Erie Crystal Ball on Title Insurance Defense

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Lawyers generally enjoy prognosticating future developments in the law. Under the Erie doctrine, federal judges have a legitimate need to engage in this pastime. Recently, in Philadelphia Indemnity Ins. Co. v. Chicago Title Ins. Co.,  No. 12-2525 (7th Cir. Nov. 13, 2014), the Seventh Circuit predicted how the Illinois Supreme Court would address a question of first impression regarding title insurance. The court’s decision might be reasonably taken as a prediction as to what the Wisconsin Supreme Court would do with the same facts. But a recent unpublished decision by the Wisconsin Court of Appeals suggests some caution in setting the odds.

Philadelphia Indemnity centered around a failed commercial development on Chicago’s South Side. After the lender initiated foreclosure proceedings, the developer responded with a separate lawsuit, alleging a flurry of contract, tort, and statutory claims. Because the developer’s complaint included a quiet-title cause of action, the lender tendered the defense to its title insurance company. The title insurer agreed to pay costs associated with the title claims, but refused to subsidize the tangentially related contract and tort-claim defense. Ultimately, the lender’s commercial general liability (“CGL”) insurer sought a declaratory judgment against the title insurer to sort out their respective coverage obligations and rights.

The “complete-defense” rule requires an insurer with a duty to defend one count in a complaint also to defend against all the others. Wisconsin, like Illinois, has adopted this rule for CGL insurance policies. See School Dist. of Shorewood v. Wausau Ins. Co., 170 Wis. 2d 347, 366 (1992); Pekin Ins. Co. v. Wilson, 930 N.E.2d 1011, 1015 n.2 (Ill. 2010). In Philadelphia Indemnity, the CGL insurer argued that the complete-defense rule governed, while the title insurer relied on express coverage limitations in the policy.

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Freedom From Religion Foundation: 7th Circuit Reminds That Standing Is Every Plaintiff’s Cross to Bear

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There is something to be said for not paying your taxes. At least, that is one lesson that the plaintiffs may have learned from the Seventh Circuit’s opinion last Thursday in Freedom From Religion Foundation, Inc. v. Lew, No. 14-1152 (7th Cir. Nov. 13, 2014).

A Wisconsin group of agnostics and atheists, Freedom From Religion Foundation (FFRF), and its two co-presidents, filed suit challenging the constitutionality of the Internal Revenue Code’s “parsonage exemption” (located at 26 U.S.C. § 107), which exempts from gross income the rental allowance paid to (or rental value of church-owned housing provided to) a “minister of the gospel.” FFRF’s co-presidents receive a housing allowance from FFRF; but, they said, they have to include the amounts in their gross income. Since ministers do not, FFRF claimed a violation of the First Amendment. Judge Barbara Crabb of the Western District of Wisconsin agreed, holding the rental-allowance exemption an unconstitutional establishment of religion under the three-part test of Lemon v. Kurtzman, 403 U.S. 602 (1971).

In a unanimous opinion by Circuit Judge Joel Flaum, the Seventh Circuit found that the plaintiffs lack standing to sue and, therefore, vacated the district court’s decision.

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Appraisal of Insurance Losses and the “Actual” Definition of “Actual Cash Value”

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Imagine a devastating fire renders your rental property uninhabitable. You dig out your insurance policy and are relieved to find that you are insured up to the “actual cash value” of the building. But what exactly does this phrase mean? The Wisconsin Court of Appeals recently grappled with this question in Coppins v. Allstate Indem. Co., No. 13AP2739 (Nov. 12, 2014). However, the decision casts some doubt on the level of deference being paid to insurance appraisals under the Wisconsin Supreme Court’s decision in Farmers Auto Ins. Ass’n v. Union Pac. Ry. Co., 2009 WI 73.

An appraisal clause is common within many property insurance policies: in the case of a claim valuation dispute, the insured and insurer each pick an appraiser, the appraisers choose an umpire, and the parties agree to be bound by the process. Over a strong dissent, Farmers approved of such appraisals as “a fair and efficient tool” that “place[s] a difficult factual question . . . into the hands of those best-equipped to answer that question.” 2009 WI 73, ¶43. Farmers also instructed judges to defer to appraisal valuations, only vacating them in cases of “fraud, bad faith, a material mistake, or a lack of understanding or completion of the contractually assigned task.” Id. at ¶44.

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