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Client Funding Solutions Corp. v. Crim

United States District Court, Seventh Circuit

May 6, 2013

CLIENT FUNDING SOLUTIONS CORP., Plaintiff,
v.
DEBBIE CRIM, a.k.a. Debbie Crim Clark, Defendant/Third-Party Plaintiff,
v.
THE VRDOLYAK LAW GROUP, Third-Party Defendant.

MEMORANDUM OPINION AND ORDER

ROBERT M. DOW, Jr., District Judge.

Before the Court are Third-Party Plaintiff Debbie Crim's motion for leave to amend her operative third-party complaint [232] and motions in limine to exclude expert testimony by Gene Neri [226] and Peter Vrdolyak [231], Third-Party Defendant Vrdolyak Law Group's ("VLG") motions in limine numbers 1-12 [228] and motion for instructions [265], and the parties' supplemental written memoranda concerning issues raised by the Court. See [259], [260], [262], [263]. For the reasons stated below, the Court denies Crim's motion for leave to amend [232]; grants in part and denies in part her motions in limine, [226] and [231]; grants in part, denies in part, and reserves ruling on in part VLG's motions in limine [228]; and denies as moot VLG's motion for instructions [265]. This case remains set for status hearing on May 15, 2013 at 10:15 a.m.

I. Motion for Leave to Amend

Leave to amend a complaint should be freely given "when justice so requires." Fed.R.Civ.P. 15(a). Nevertheless, "courts in their sound discretion may deny a proposed amendment if the moving party has unduly delayed in filing the motion, if the opposing party would suffer undue prejudice, or if the pleading is futile." Campania Mgmt. Co. v. Rooks, Pitt & Poust, 290 F.3d 843, 849 (7th Cir. 2002). Delay alone is usually insufficient to deny a motion to amend, Dubicz v. Commonwealth Edison Co., 377 F.3d 787, 792 (7th Cir. 2004); the Federal Rules of Civil Procedure countenance amendments during and after trial. See Fed.R.Civ.P. 15(b)(2). But "the longer the delay, the greater the presumption against granting leave to amend, " King v. Cooke, 26 F.3d 720, 723 (7th Cir. 1994) (internal quotation omitted), as "[e]leventh hour additions are bound to produce delays that burden not only the parties to the litigation but also the judicial system and other litigants." Soltys v. Costello, 520 F.3d 737, 743 (7th Cir. 2008) (quotation and alterations omitted).

Crim filed her motion seeking leave to amend Count VIII of her second amended third-party complaint nearly eight months after the completion of discovery, a mere six weeks prior to the originally scheduled trial date, and only after VLG filed its motions in limine. See Soltys v. Costello, 520 F.3d 737, 743 (7th Cir. 2008). She contends that the changes she wishes to make are "technical" in nature and will "clarify her claim * * * so that her case may be tried on the merits." [232]. VLG contends that Crim's proposed amendments raise a "new and completely different theory, " such that allowing the amendment would prejudice it and require the reopening of discovery. [234]. The Court denies the motion, because granting Crim leave to amend her third-party complaint as requested at this late juncture would cause undue prejudice to VLG and would unduly delay the already protracted progression of this case.

From the outset, Crim consistently alleged in Count VIII a conspiracy between Plaintiff Client Funding Solutions ("CFS") and VLG to convert her settlement proceeds. See [21] § 150; [123] § 153; [140] § 177. "In furtherance of said conspiracy, " she alleged, "CFS knowingly used information Vrdolyak revealed in breach of his fiduciary duty to Crim as the basis for this lawsuit and to attach the proceeds of Crim's settlement." [21] § 151; [123] § 153; [140] § 178. She also alleged that "Vrdolyak used CFS' lawsuit as an excuse to withhold and convert all of the settlement proceeds not just the amount sought by CFS." [21] § 153; [123] § 156; [140] §180. The conspiracy described by these allegations is plainly - and solely - one to convert her settlement proceeds.

The parties' proposed pretrial order [230] expanded the scope of the alleged conspiracy, but did so in a manner consonant with the proceedings in the case up to that point. The pretrial order stated that "Count VIII of the complaint is for Conspiracy. [Crim] claims that she was damaged because [VLG] conspired with another to withhold money belonging to [Crim] and coerce [her] to pay a series of loans." [230] at 3. These sorts of "constructive amendments" to complaints are permissible, particularly where the parties agree as to the issues that have been or are being litigated. See Torry v. Northrup Grumman Corp., 399 F.3d 876, 878-79 (7th Cir. 2005).

Crim's proposed third amended third-party complaint attempts to expand her allegations further still. Although Crim claims that "[t]he only thing that is being changed is the time period of the conspiracy, " [244] at 5, it appears from the face of the proposed third amended third-party complaint that the scope and object of the alleged conspiracy have significantly changed. The proposed third amended third-party complaint omits any mention of conversion and instead alleges that "CFS and Vrdolyak conspired to induce Crim to enter into a lending relationship with CFS and obtain a large portion of Crim's litigation proceeds." [232-1] § 177. It also adds allegations that the loans from CFS "violated the Truth in Lending Act by, among other things, describing loan amounts that Crim never received, " id. § 178, and contends that "Vrdolyak used CFS' lawsuit as an excuse to withhold all of the settlement proceeds, not just the amount sought by CFS, and pressure Crim to settle with CFS to avoid further inquiry into CFS' illegal lending practices and the relationship between Vrdolyak and CFS." Id. § 182 (omitting any mention of conversion). The allegations about settlement pressures were contained in the pretrial order, but the others were not and indeed have been largely absent from the proceedings.

Crim's proposed amendments change the character and substance of the alleged conspiracy. Rather than alleging a conspiracy to convert, the proposed amendments omit any mention of conversion and add allegations about inducement to use CFS, coercion to settle claims with them, and noncompliance with the Truth in Lending Act. This is a marked departure from Crim's earlier characterizations of the alleged conspiracy, which had at its "core" certain "demand letters" from CFS and the attachment of Crim's funds. See [76] at 3; see also [64] (describing conspiracy as "colluding with CFS to tie up Crim's funds"); [209] at 17 ("The act of filing the complaint was the unlawful purpose in furtherance of the conspiracy to deprive Crim of her money and force her to pay Client Funding."). Crim points to one paragraph of a summary judgment brief, see [209] at 18, and a single line of her deposition testimony, see [244] at 6, in an attempt to establish that the parties had "pretried" the Truth in Lending Act theory, see Torry, 399 F.3d at 878, such that VLG could not claim surprise or prejudice. See [232] § 15. Complaints may be amended to conform to the evidence adduced, see Fed.R.Civ.P. 15(b), but two isolated suggestions after years of discovery do not evidence make. Likewise, although the parties exchanged discovery as to the relationship between VLG and CFS dating back to 2005, Crim's testimony as to her belief that VLG and CFS were "working together throughout the course of the time, " her assertions that each loan transaction with CFS was initiated by Vrdolyak, and her efforts to obtain a complete list of referrals to CFS do not serve to give VLG notice of her belatedly broadened conspiracy allegations. Permitting the requested amendment at this stage of the litigation would require further discovery (on top of the already costly and extensive discovery that has been taken in this case) to avoid prejudice to VLG and further postponement of the trial. See Aldridge v. Forest River, Inc., 635 F.3d 870, 875-76 (7th Cir. 2011). The motion for leave to amend [232] is denied.

II. Nature of Breach of Fiduciary Duty Claim: Legal or Equitable

Following a discussion of the issue at the last pre-trial conference, the Court requested that the parties submit supplemental briefs concerning whether Crim is entitled to a jury trial on her breach of fiduciary duty claim [259]. After reviewing the parties' submissions, [260], [262], [263], and carefully examining the applicable law, the Court concludes that Crim's breach of fiduciary claim is equitable in nature and must be resolved by the Court.

Federal procedural law controls the question of whether there is a right to a jury trial. Simler v. Conner, 372 U.S. 221, 221 (1963); Int'l Fin. Servs. Corp. v. Chromas Techs. Canada, Inc., 356 F.3d 731, 735 (7th Cir. 2004). Federal Rule of Civil Procedure 38(a) provides that there is a right to a jury trial where either the Seventh Amendment or any federal statute so requires. Fed.R.Civ.P. 38(a); Int'l Fin. Servs. Corp., 356 F.3d at 735. Because Crim has not pointed to any statutes supporting her contention that she is entitled to a jury trial on this claim, her right to a jury trial depends solely on the Seventh Amendment, Int'l Fin. Servs. Corp., 356 F.3d at 735, which guarantees the right to a jury "In Suits at common law, where the value in controversy shall exceed twenty dollars." U.S. Const. amend. VII. The Supreme Court has interpreted the phrase "Suits at common law" to refer to "suits in which legal rights were to be ascertained and determined, in contradistinction to those where equitable rights alone were recognized, and equitable remedies were administered." Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 41 (1989) (quoting Parsons v. Bedford, 3 Pet. 433, 447 (1830)). To determine whether a claim falls within the ambit of "Suits at common law, " the Court must conduct a two-stage inquiry. First, it must "compare the statutory action to 18th-century actions brought in the courts of England prior to the merger of the courts of law and equity. Second, we examine the remedy sought and determine whether it is legal or equitable in nature." Id. at 42 (quoting Tull v. United States, 481 U.S. 412, 417-18 (1987)). "The second stage of this analysis is more important than the first." Id.; see also Int'l Fin. Servs. Corp., 356 F.3d at 735.

There is no dispute that actions for breach of fiduciary duty historically were considered equitable. See, e.g., Pereira v. Farace, 413 F.3d 330, 338 (2d Cir. 2005); In re Evangelist, 760 F.2d 27, 29 (1st Cir. 1985) (Breyer, J.) ("Actions for breach of fiduciary duty, historically speaking, are almost uniformly actions in equity, ' carrying with them no right to trial by jury."); George v. Kraft Foods Global, Inc., 2008 WL 780629, at *3 (N.D. Ill. Mar. 20, 2008); cf. Kinzer ex rel. City of Chi. v. City of Chi., 539 N.E.2d 1216, 1220 (Ill. 1989) ("This court has not accepted the Restatement (Second) of Torts view but has regarded breach of fiduciary duty as controlled by the substantive laws of agency, contract, and equity." (citations omitted)). The first stage inquiry thus indicates that the claim should be tried to the bench.

The second stage inquiry is the more important of the two, however. At this stage, the Court must determine whether the type of relief sought is equitable or legal. "Unfortunately, there is no cut-and-dried rule that allows a court to determine whether a remedy is equitable or legal in nature." Int'l Fin. Servs. Corp., 356 F.3d at 736. As a general matter, though, legal remedies traditionally involve money damages, while "[e]quitable remedies, by contrast, are typically coercive, and are enforceable directly on the person or thing to which they are directed." Id.

Crim seeks three distinct remedies in connection with her breach of fiduciary duty claim. First, she seeks disgorgement or forfeiture of the $800, 000 in attorneys' fees that VLG received for representing her in the personal injury action. That is a precise and directly traceable sum. Although money would be disgorged or forfeited if Crim were to prevail, at bottom both disgorgement and forfeiture are equitable in nature. Chauffeurs, Teamsters & Helpers, Local No. 391 v. Terry, 494 U.S. 558, 570 (1990) (disgorgement); see Scanlan v. Eisenberg, 669 F.3d 838, 841 (7th Cir. 2012) ("Lastly, Scanlan seeks equitable relief, including * * * the disgorgement of attorneys' fees.") (disgorgement); Johnson v. Gudmundsson, 35 F.3d 1104, 1116 (7th Cir. 1994) ("Whether Johnson's breach was so egregious as to require the forfeiture of any compensation to which he may otherwise have been entitled is a discretionary and fact-dependent question to be resolved by weight all of the relevant equities") (forfeiture). "[T]he fact that disgorgement involves a claim for money does not detract from its equitable nature: in such an action, the court is not awarding damages to which plaintiff is legally entitled but is exercising the chancellor's discretion to prevent unjust enrichment." S.E.C. v. Rind, 991 F.2d 1486, 1493 (9th Cir. 1993) (quotation omitted).[1]

Second, Crim seeks to be reimbursed for the $225, 000 that she paid to CFS in satisfaction of the litigation loans that she claims she never would have obtained but for VLG's breach in recommending CFS without fully disclosing the personal relationship between the entities or researching CFS's interest rates. As explained more fully below in connection with the discussion of VLG's Motion in Limine No. 5, Crim potentially may be entitled to recover at most $116, 500, as there is no dispute that she received the benefit of $108, 500 in funds and she is not entitled to a windfall regardless of any injury that she may have suffered. If this were a claim against CFS, it, too, might be equitable in nature, as it essentially would be seeking disgorgement or forfeiture of funds that CFS possessed. But because Crim seeks recovery of those amounts from VLG, that portion of the relief that she seeks for the alleged breach of fiduciary duty appears to be legal in nature; it is money damages aimed at compensating Crim for a loss that she claims to have sustained.

Third, Crim seeks punitive damages "in the amount of three times the compensatory award or $600, 000, whichever is greater, " [230] at 5, "[i]n connection with the claims for breach of fiduciary duty and conversion." Id. [2] Punitive damages "are not awarded as compensation, but serve instead to punish the offender and to deter that party and others from committing similar acts of wrongdoing in the future." Tri-G, Inc. v. Burke, Bosselman & Weaver, 856 N.E.2d 389, 417 (Ill. 2006). Punitive damages are considered legal relief. See, e.g., Curtis v. Loether, 415 U.S. 189, 196 (1974).

The dual nature of the relief Crim seeks presents a challenging question. On the one hand, it is well settled that "[a] suit seeking only equitable relief is not a suit at common law, regardless of the nature of the issues likely or even certain to arise in the case." Dexia Credit Local v. Rogan, 629 F.3d 612, 625 (7th Cir. 2010) (quoting Marseilles Hydro Power, LLC v. Marseilles Land & Water Co., 299 F.3d 643, 648 (7th Cir. 2002). At the same time, "[w]here both legal and equitable relief are sought by a plaintiff, the Seventh Amendment right to a jury trial requires that the legal claims be tried first, to a jury." Miles v. Indiana, 387 F.3d 591, 599 (7th Cir. 2004) (quoting Ohio-Sealy Mattress Mfg. Co. v. Sealy, Inc., 585 F.2d 821, 844 (7th Cir. 1978)). Here, the question is whether a judge or a jury should resolve a single claim in which the plaintiff seeks both legal and equitable relief as a remedy. Neither party has presented - nor has the Court located - any controlling authority addressing the proper procedure in these peculiar circumstances.

At least one district court to examine the question in analogous circumstances has concluded that a plaintiff seeking both legal and equitable relief for a breach of fiduciary duty claim has no right to have a jury decide that claim. See Cantor v. Perelman, 2006 WL 318666, at *8-9 (D. Del. Feb. 10, 2006). There, the court "consider[ed] the long history of treating breach of fiduciary duty claims as equitable and balance[d] that with the mixed equitable and legal remedies sought." Id. at *9. In addressing the first prong of the Granfinanciera test, the court had no difficulty concluding that the plaintiffs' breach of fiduciary duty claims[3] were equitable. Id. at *7. Then, turning to the second prong, the court determined that the plaintiffs sought both recovery of benefits (equitable relief) and compensatory damages (legal relief). Id. at *7-9. In so doing, the court specifically distinguished the relief sought in Pereira - namely, funds that the defendant never possessed, see Pereira, 413 F.3d at 340 - from the "benefits obtained by defendants [in Cantor ] as a result of their breaches of fiduciary duty, " which those defendants certainly did possess. Cantor, 2006 WL 318666, at *9. In the final analysis, the court found a "mixed result" under prong two, as the breach of fiduciary duty claims sought "both legal and equitable relief." Id. And in resolving the ultimate question of the appropriate finder of fact to resolve those claims, the court concluded that "the scales tip in favor of Plaintiffs' claims being judged equitable" because "[t]o weigh the factors differently would effectively ignore the historical factor, contrary both to the Seventh Amendment's purpose * * * and to the express holding of Granfianciera, 492 U.S. at 42, that history is to be accorded weight in the balancing." Id. at *9.

This Court finds Cantor both on point and persuasive. Here, as in Cantor, the first Granfinanciera factor points toward equity. The second either sits inconclusively in equipoise - Crim seeks both legal and equitable relief - or points toward equity, as the requested equitable relief predominates the parties' briefing of the issue. Even if the Court were to consider the second factor a wash, the first factor still tips the scale toward equity.

Of course, as the parties have recognized, the conclusion that Crim's breach of fiduciary claim is equitable in nature and ultimately must be resolved by the Court leaves on the table a series of issues relating to the format and presentation of evidence at trial. See Int'l Fin. Servs. Corp., 356 F.3d at 737-39 (noting that "[a] jury trial does not have to include all or nothing" and discussing options such as bifurcating equitable issues, taking an advisory jury verdict on those issues, or resolving them in post-judgment motions under Federal Rule of Civil Procedure 69(a)). To begin with, to the extent that there are common factual issues between this equitable claim and Crim's legal claims, those common issues of fact must be resolved by a jury, whose findings will in turn bind the Court. See Allen v. Int'l Truck & Engine Corp., 358 F.3d 469, 471 (7th Cir. 2004); Int'l Fin. Servs., 356 F.3d at 737 n.1. In addition, certain evidence - for example, testimony of Crim's expert, Ms. Robinson, and VLG's expert, Mr. Collins - may pertain exclusively to the breach of fiduciary duty claim, it may not be relevant to the jury's fact-finding duties. The Court will address these issues with counsel and the parties at the next status hearing in an effort to resolve them in an orderly fashion before trial.

III. Motions to Exclude Expert Testimony

Both parties have filed motions [see 226, 228, 231] to exclude certain expert testimony. The Court ...


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