United States District Court, N.D. Illinois, Eastern Division
MEMORANDUM OPINION AND ORDER
REBECCA R. PALLMEYER, District Judge.
Kenneth Conner worked for Mutual Bank of Harvey ("Mutual Bank") from August 2000 until October 2007. In 2011, Conner filed a qui tam action against a number of Mutual Bank officials, the bank's appraisal firm, Adams Value Corporation ("AVC"), and AVC's president, Douglas Adams ("Adams"). United States ex rel. Conner v. Veluchamy, No. 11 C 4458 (N.D. Ill. filed June 30, 2011). Conner's suit alleges that AVC, Mutual Bank, and the individual defendants collectively engaged in a scheme to defraud the Federal Deposit Insurance Corporation ("FDIC") by overstating the value of properties that secured loans made by the bank, thereby reducing the bank's liability for deposit insurance assessments. AVC tendered defense of the case to its insurer, General Star National Insurance Company ("General Star").
In the instant case, Plaintiff General Star seeks a declaration that it has no duty to defend AVC or Adams, because the acts alleged by Conner are not covered by the insurance policy issued by General Star to AVC. Arguing that the alleged conduct potentially falls within the policy, Conner moves to dismiss General Star's complaint for failure to state a claim . In a separate motion, the Adams Defendants seek dismissal on the basis that General Star failed to join necessary parties, including the bank officials sued by Conner in the underlying action. General Star, for its part, seeks judgment on the pleadings. For the reasons discussed below, with respect to the individuals that the Adams Defendants suggest are necessary parties, those individuals' interests are too insubstantial to justify dismissal of the case. The court concludes, further, that the conduct alleged by Conner in the underlying suit ( i.e., that AVC knowingly participated in a scheme to mislead the FDIC) does not fall within the provisions of the insurance policy in dispute. Thus, General Star has no duty to defend, and its motion for judgment on the pleadings is granted.
Defendant Conner worked for Mutual Bank (and a predecessor entity) from August 2000 until October 2007. He was assigned to the bank's Harvey, Illinois headquarters from fall 2005 until the conclusion of his employment. During his tenure, Conner was responsible for reviewing the appraisals of properties that secured commercial real estate loans. ( Qui tam complaint, Ex. B to Pl.'s Am. Compl. , ¶ 1.) Conner filed the underlying action pursuant to the False Claims Act ("FCA"), which is designed to prevent fraud against the federal government. The basic concept of qui tam suits under the FCA is that a private citizen with personal knowledge of such fraudulent activity may bring a suit on behalf of the government in return for a share of the proceeds, should the suit prevail. United States ex rel. Lamers v. City of Green Bay, 168 F.3d 1013, 1016 (7th Cir. 1999). In his underlying action, Conner seeks to recoup damages from certain former Mutual Bank employees and directors, AVC, and Adams. ( Qui tam complaint, Ex. B to Pl.'s Am. Compl., ¶ 1) During his time at the bank's headquarters, Conner allege, he repeatedly notified Mutual Bank that it grossly overvalued the collateral on commercial real estate loans based on falsely inflated appraisals provided by AVC. (Id.) In response to these communications, Conner claims, Mutual Bank Officials instructed him to "ignore the issue." (Id. ¶ 27.) Also, when Conner questioned whether Pethinaidu Veluchamy, owner of Mutual Bank and the Chairman of the Board, knew there were valuation problems with the appraisals, another board member allegedly replied, "Yes, do you think he is an idiot?" (Id. ¶ 61.) Based upon these false appraisals, Conner alleges, Mutual Bank was able to secure favorable commercial loans for real estate properties and "reduce deposit insurance premiums due to the FDIC and otherwise conceal risk." (Id. ¶ 1.)
Conner claims that the conduct of Mutual Bank officials and AVC constitutes a violation of Section 3729 of the FCA. To establish civil liability under the FCA, one must generally prove (1) that the defendant made a statement in order to receive money from the government; (2) that the statement was false; and (3) that the defendant knew the statement was false. 31 U.S.C. § 3729(a)(1). Conner alleges that the defendants in the underlying suit violated the FCA by submitting to the FDIC appraisals that they knew to be inflated and, as a result, the bank decreased its obligation to pay deposit insurance to the federal agency. ( Qui tam complaint, Ex. B to Pl.'s Am. Compl., ¶¶ 94-96.)
While Conner's False Claims Act case proceeded, General Star commenced this action, seeking a declaratory judgment that it has no duty to defend AVC in the underlying suit under the terms of Real Estate Errors & Omissions Liability Insurance Policy No. NJA985501F ("Insurance Policy"), which General Star issued to AVC. (Pl.'s Am. Compl. ¶ 36.) The Insurance Policy requires General Star to "pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as Damages for Claims during the Policy period... arising out of any act, error, omission or Personal Injury in the rendering or failure to render Professional Services...." (Insurance Policy, Ex. A to Pl.'s Am. Compl., at 3.) Claims are defined as "a demand for money [or] the filing of a Suit... naming the Insured and alleging an act, error, omission or Personal Injury resulting from rendering or failure to render Professional Services." (Id. at 8.) Professional Services constitute "services performed by an Insured in an Insured's capacity as a broker, buyer's broker, agent, appraiser of real estate, a real estate consultant, auctioneer, counselor or property manager, as long as such service is rendered for a fee, commission, or other compensation...." (Id. at 10.) General Star has "the right and duty to defend any Suit against the Insured seeking Damages to which [the] insurance applies, " but has "no duty to defend the Insured against any Suit seeking Damages to which the insurance does not apply." (Id. at 3.)
General Star argues that the Insurance Policy does not provide coverage to AVC, because the underlying FCA suit does not arise from professional services rendered by AVC, but, instead, from the representation of false information to the FDIC. (Pl.'s Am. Compl. ¶ 29.) Defendants respond that AVC's alleged actions of preparing inflated appraisals to Mutual Bank triggered General Star's duty to defend under the Insurance Policy, because such actions resulted from the professional services on which the underlying FCA suit is based. (Defs.' Resp. to Pl.'s Mot. for J. on the Pleadings , at 4-6.)
Three motions are before the court: (1) Defendants Adams and AVC have moved to dismiss for General Star's failure to join necessary parties; (2) Defendant Conner separately moves to dismiss for failure to state a claim; and (3) General Star seeks judgment on the pleadings. The court will address the issue of necessary parties before turning to the substantive motions.
I. Motion to Dismiss for Failure to Join Necessary Parties
Defendants contend that General Star's complaint for declaratory judgment must be dismissed for failure to join necessary parties. Whether a party is necessary in the Rule 19 sense requires a two-step inquiry. First, the court must determine whether the party in question is a necessary party. Davis Cos. v. Emerald Casino, Inc., 268 F.3d 477, 481 (7th Cir. 2001) (citing Thomas v. United States, 189 F.3d 662, 667 (7th Cir. 1999)). To make this decision, the court considers whether full relief can be granted in the party's absence, whether the party's ability to protect its interest will be adversely affected, and whether the existing parties will be subjected to a substantial risk of multiple or inconsistent obligations in the party's absence. Id. If the court decides the party in question is a necessary party but that it cannot be joined in the lawsuit, the court then turns to Rule 19(b) to determine whether the litigation can continue in the party's absence. Id.; FED. R. CIV. P. 19(b).
Both Adams and AVC contend that the Mutual Bank defendants in the underlying FCA action are necessary parties in this case, as well. Specifically, the Adams Defendants urge that the other fourteen defendants in the underlying qui tam suit have an interest in the current action because those defendants have "a potential cross-claim for contribution or other relief against [AVC]" for any FCA liability they might incur. (Defs.' Mot. to Dismiss for Failure to Join Necessary Parties , hereinafter "Defs.' Mot. to Dismiss, " at 3.) "As a result, " the Adams Defendants urge, "those parties have an interest in this action and therefore should be present in this action to protect their interests." ( Id. at 6-7.)
The court disagrees. The Mutual Bank officials deemed "necessary" by Defendants in this case are not parties to the Insurance Policy in dispute and have no interest in that policy. The term "complete relief" in Rule 19 refers to "relief between the persons already parties, and not as between a party and the absent person whose joinder is sought." Davis Cos., 268 F.3d at 484 (quoting Perrian v. O'Grady, 958 F.2d 192, 196 (7th Cir. 1992)). As AVC and Adams hypothesize, the Mutual Bank defendants may well seek recovery against AVC and may, therefore, have a financial interest in the proceeds of the Insurance Policy, but they have no legal interest that will be impeded by the judgment in this case. See Pasco Int'l (London) Ltd. v. Stenograph Corp., 637 F.2d 496, 503 (7th Cir. 1980) ("potential indemnitors have never been considered indispensable parties, or even parties whose joinder is required if feasible"); see also 4-19 Moore's Federal Practice §§ 19.03 ("[Rule 19] specifically requires that the potential harm threaten an absentee's interest relating to the subject of the action. This interest must be legally protected, not merely a financial interest or interest of convenience.") (internal quotations omitted), 19.06 ("joinder of ...