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Central Mutual Insurance Co. v. Tracy's Treasures, Inc.

Court of Appeals of Illinois, First District, Third Division

September 30, 2014

CENTRAL MUTUAL INSURANCE COMPANY, Plaintiff-Appellee and Cross-Appellant,
v.
TRACY'S TREASURES, INC., and PAUL IDLAS, Defendants-Appellants and Cross-Appellees

Modified upon denial of rehearing November 5, 2014.

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[Copyrighted Material Omitted]

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Appeal from the Circuit Court of Cook County. No. 07 CH 14995. Honorable Rita M. Novak, Judge Presiding.

SYLLABUS

In a declaratory judgment action seeking a determination of whether plaintiff insurer was obligated to provide coverage for its insured in an underlying class action seeking damages for violations of the Telephone Consumer Protection Act arising from the insured's transmission of unsolicited faxes and the insured had obtained its own counsel and entered into a settlement of the underlying action providing for a $14 million judgment that would be enforceable only against plaintiff's policies, the entry of summary judgment finding that plaintiff was not obligated to provide coverage based on the Illinois Appellate Court's decision in Lay, which holds that awards under the Act are punitive and uninsurable, was reversed, since the Illinois Supreme Court later reversed that decision and held that such awards are insurable liquidated damages; furthermore, the denials of plaintiff's motions for summary judgment seeking determinations that the settlement between its insured and the underlying plaintiff was collusive and unreasonable and that the policies issued to its insured had been reformed to eliminate coverage for " advertising injury" and " personal advertising injury" were reversed and the cause was remanded for further proceedings, in view of the existence of material issues of fact with regard to the reasonableness of the underlying settlement.

For Appellants: Brian J. Wanca, David M. Oppenheim, Jeffrey A. Berman, of counsel, Anderson & Wanca, Rolling Meadows, IL; Phillip A. Bock, Robert M. Hatch, of counsel, Bock & Hatch, LLC, Chicago, IL.

For Appellee: Michael D. Sanders, of counsel, Purcell & Wardrope, Chicago, IL; William M. Savino, Stephen J. Smirti, Jr., M. Paul Gorfinkel, of counsel, Rivkin Radler, LLP, Uniondale, New York.

JUSTICE MASON delivered the judgment of the court, with opinion. Presiding Justice Pucinski and Justice Neville concurred in the judgment and opinion.

OPINION

MASON, JUSTICE.

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[¶1] This insurance declaratory action raises issues regarding: (1) whether coverage is available for an underlying class action alleging claims for unsolicited faxes in violation of the federal Telephone Consumer Protection Act (TCPA) (47 U.S.C. § 227(b)(1) (2006)); (2) the reasonableness of a settlement in the underlying action between the insured and the underlying plaintiffs, which those parties stipulated would be paid from the proceeds of the insurance policies; and (3) whether the " buyout" of coverage under the insurance policies, which resulted from a settlement of a prior class action against the insured, precludes claims under the " advertising injury" coverage of these policies. Due to an intervening change in the law that formed the basis of the trial court's ruling in favor of plaintiff and cross-appellant, Central Mutual Insurance Company, we must reverse. We affirm the other rulings appealed by Central and remand for further proceedings.

[¶2] BACKGROUND

[¶3] Tracy's Treasures, Inc., is the insured under a number of primary and excess commercial liability policies issued by Central. Central insured Tracy's under a series of business owner primary liability insurance policies, cumulatively effective from May 5, 1997, until May 5, 2005, and a series of commercial excess liability insurance policies, cumulatively effective from January 29, 2002, until January 29, 2005. The face value of all of Central's policies of insurance in effect during the relevant time period is $14 million.

[¶4] Tracy's and Paul Idlas, the plaintiff in the underlying class action, appeal from an order of the trial court granting Central's

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motion for summary judgment. The trial court determined, in accordance with the decision in Standard Mutual Insurance Co. v. Lay, 2012 IL App. (4th) 110527, 975 N.E.2d 1099, 363 Ill.Dec. 790, that amounts awarded to claimants under the TCPA are punitive in nature and therefore not insurable. After the filing of this appeal, our supreme court reversed Lay and held that damages awarded for TCPA claims are liquidated rather than punitive and, thus, are not uninsurable as a matter of public policy. Standard Mutual Insurance Co. v. Lay, 2013 IL 114617, 989 N.E.2d 591, 371 Ill.Dec. 1.

[¶5] Central concedes the applicability of the supreme court's decision in Lay but argues that liquidated damages, such as those provided for under the TCPA, are not covered under its policies. Central also advances other provisions of its policies as a bar to coverage for TCPA claims. Finally, Central cross-appeals from two rulings denying its motions for summary judgment: (1) in one motion for summary judgment, Central sought a determination that the settlement reached between its insured and Idlas was, as a matter of law, collusive and unreasonable under the standards articulated by our supreme court in Guillen v. Potomac Insurance Co. of Illinois, 203 Ill.2d 141, 785 N.E.2d 1, 271 Ill.Dec. 350 (2003); (2) Central also sought summary judgment on the ground that the insurance contracts had been reformed to eliminate coverage for " advertising injury" or " personal and advertising injury." Both motions were denied by the trial court.

[¶6] The Idlas Case

[¶7] Tracy's engaged in the business of selling dating and social relationship services, which it publicized, at least in part, by facsimile advertisements. On March 5, 2007, Idlas filed a three-count class action complaint against Tracy's for unsolicited fax advertisements that allegedly violated the TCPA, the Illinois Consumer Fraud and Deceptive Business Practices Act (815 ILCS 505/2 (West 2006)), and Illinois common law ( Idlas ). Idlas alleged that between March 5, 2003 and March 5, 2007, Tracy's sent unsolicited facsimile messages advertising Tracy's dating services without prior express permission from the recipients. Idlas received his unsolicited fax on July 22, 2003, and waited almost four years to seek redress.

[¶8] Tracy's tendered Idlas's claims to Central pursuant to the insurance contracts. On April 27, 2007, Central disclaimed coverage for the claims asserted in Idlas on several grounds, including that (i) in 2005 the parties had agreed to a " buyout" of the coverage for personal and advertising injury, (ii) no " occurrence" giving rise to " property damage" was alleged in Idlas, (iii) any injury caused by the faxes sent by Tracy's was expected or intended by Tracy's, and (iv) Tracy's knew that its conduct in sending the faxes was prohibited.

[¶9] Despite Central's denial of coverage, it advised Tracy's on October 8, 2007, that it was assigning a lawyer to provide Tracy's a " courtesy defense." Counsel appointed by Central filed an appearance in the case. Billing records for assigned counsel reflect that he filed a motion to dismiss and discovery requests. The record on appeal does not contain the motion, but counsel's records reflect that portions of the Idlas complaint were dismissed with leave to replead. On June 6, 2007, Central also filed a declaratory judgment action in the circuit court of Cook County seeking an adjudication that it owed no duty to defend or indemnify Tracy's in connection with Idlas.

[¶10] On November 29, 2007, another lawyer, Gregory Ellis, filed a substitute appearance on behalf of Tracy's. Two

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weeks later, on December 12, 2007, Ellis wrote to Central regarding the substitution. Ellis advised that Tracy's retained him due to the conflict between Central and Tracy's in light of Central's position that the Idlas claims were not covered under its policies. In his letter, Ellis described to Central his planned defense of the case:

" My goal would be to attack the viability [of] any finding of a class action in this case. From my review it looks like names of at least 10,000 customers are known. This may be the level of damage control. The fact that the lists are 41/2 to 6 years old could be in Tracy's Treasures favor because of the transient nature of our society these people may not be able to be contacted. Additionally, a great number of people may well opt-out from this type of case.
In any event, as I am transitioning into this lawsuit I will be contacting you further about the status of the case as I further get my arms around the facts and circumstances and the current law on the TCPA in Illinois and elsewhere. However, you can see from the attached letter that I am familiar with these types of cases and the current law."

[¶11] On December 17, 2007, Central consented to the substitution of counsel and indicated that it would pay Ellis a reasonable fee (albeit at an hourly rate less than Ellis's normal billing rate). Central reserved the right to discontinue paying for Tracy's defense on reasonable notice to Tracy's. The record does not reflect that Tracy's ever complained about the rate Central was paying Ellis or informed Central that its decision to pay less than Ellis's normal billing rate constituted a breach of its obligations to Tracy's under the policies. The record also does not reflect whether Tracy's paid Ellis the difference between his hourly rate and the rate at which he was being paid by Central.

[¶12] Correspondence in the record indicates that a month before he wrote to Central and even before he filed an appearance for Tracy's, Ellis was discussing settlement with counsel for Idlas. On November 15, 2007, two weeks before he filed his substitute appearance and nearly a month before he claimed to be " transitioning into" the lawsuit, Ellis wrote to Tracy Choubmesser, president and sole shareholder of Tracy's, informing her:

" Idlas will settle with Tracy's and you personally but you need to give them all the names/fax numbers or faxing and listing company so they can notify 90,000 people. I'm preparing a settlement agreement and I have talked to [Idlas's] attorney to get this done in the next 30 days."

[¶13] In a November 27, 2007 letter to Idlas's attorney, Ellis wrote, " I met with Tracy today. She seems to have gotten onboard. *** Let me know what you think about this information." And in a December 10, 2007 letter to Choubmesser, Ellis wrote:

" In order to prepare the Settlement Agreement that we have discussed, we will need additional information regarding these fax providers to use in your Affidavit in support of this settlement."

[¶14] Ellis failed to disclose the ongoing settlement negotiations in his December 12, 2007 letter to Central.

[¶15] On January 25, 2008, six weeks after he wrote to Central, Ellis, on behalf of Tracy's, and counsel for Idlas filed with the Lake County circuit court a motion for preliminary approval of a settlement agreement providing for entry of a $14 million judgment against Tracy's, which was enforceable only against Central's policies. No notice of the motion was provided

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to Central. On February 5, 2008, the court preliminarily approved the settlement.

[¶16] In their motion, as well as in other materials submitted in support, counsel for Tracy's and Idlas represented:

" 2. Through arms-length negotiation, the parties reached an agreement to settle the claims of [Idlas] and the Class, as set forth in the [attached] Agreement ***.
3. Counsel for [Idlas] and Tracy's Treasures have reviewed and analyzed the legal and factual issues presented in this action, the risks and expenses involved in pursuing the litigation to conclusion, the likelihood of a damage award in excess of that negotiated in this settlement, the protracted nature of the litigation, and the likelihood, costs and possible outcomes of one or more procedural and substantive appeals. Based upon their review and analysis, [Idlas] and [Tracy's] agreed to and executed the Agreement. "

[¶17] The settlement agreement provided for class counsel to be paid attorney fees equal to one-third of the recovery from Central plus costs. Each class member who submitted a claim form was to receive a pro rata share of the amount recovered from the insurance policies, " not to exceed $500.00 regardless of the number of facsimiles received." The agreement provided for an incentive award of $9,500 to Idlas " for his services on behalf of the Class as the class representative." (The record does not disclose what " services" Idlas rendered as class representative justifying a recovery of 19 times greater than the potential recovery of every other class member and, in particular, it does not appear that Idlas was ever deposed.) Finally, pursuant to the settlement, any unclaimed funds would be " given to charitable organizations approved by the Court."

[¶18] The motion also stated that " [Central] has denied coverage, claims it has no obligation to defend or indemnify and has filed a declaratory judgment action seeking [a] coverage determination in the Circuit Court of Cook County." Additionally, the motion declared: " Central Mutual is not controlling the defense of [the Idlas ] case. Tracy's has retained its own counsel."

[¶19] Although the Idlas complaint alleged a putative class of recipients who had received faxes four years prior to the filing of the complaint (from March 5, 2003 through March 5, 2007), the settlement agreement defined the class as those persons who allegedly received unsolicited faxes during the period from September 1, 2002, through July 22, 2003, the date Tracy's last sent a fax advertisement. It does not appear that any class members came forward to allege receipt of an unsolicited fax prior to July 22, 2003, yet the class was expanded to include a period of time prior to Idlas's receipt of his fax and outside what plaintiffs claimed was the four-year statute of limitations applicable to the TCPA claim. Without expansion of the class definition to a time period earlier than the one originally alleged in the Idlas complaint, a $5 million excess policy issued by Central that expired on January 29, 2003, would not have been triggered.

[¶20] Attached to the motion for preliminary approval was Choubmesser's affidavit. Choubmesser testified that " Central Mutual declined to defend or indemnify Tracy's in this case" and attached the April 27, 2007 letter from Central to Tracy's denying coverage. Choubmesser also stated that " Tracy's has hired its own attorneys to represent it in this matter. Central Mutual is not controlling Tracy's defense in this matter." The affidavit did not disclose that Central had hired and paid for counsel to provide Tracy's a " courtesy

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defense," that Central was paying for substitute counsel selected by Tracy's, or that the reason Central was not controlling Tracy's defense was because of a conflict of interest and not because Central refused to respond to Tracy's demand.

[¶21] In Choubmesser's affidavit, she stated that Tracy's engaged various fax broadcasting services to obtain contact lists and transmit Tracy's advertisements by fax. The fax broadcasters represented their lists consisted of people who had consented to receive advertisements by fax and that their practice of broadcasting the faxes was legally compliant. According to Choubmesser, nearly 140,000 faxes were sent on behalf of Tracy's during the class period (now expanded to include more than 34,000 additional class members who received faxes between September 1, 2002, and March 5, 2003).

[¶22] Of the total universe of putative class members, Tracy's, as noted by Ellis, was only able to produce a list of approximately 10,000 fax numbers. Pursuant to the settlement, those class members were to receive notice of the settlement via fax; the remainder (and vast majority) of class members were to receive notice by publication. The faxed and ...


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