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In re First Farmers Financial Litigation

United States District Court, N.D. Illinois, Eastern Division

September 6, 2017

In re FIRST FARMERS FINANCIAL LITIGATION
v.
BCM HIGH INCOME FUND, LP and HIGH INCOME GP, LLC, Defendants. PATRICK CAVANAUGH, not individually, but as the Receiver of the Overall Receivership Estate, Plaintiff,

          MEMORANDUM OPINION AND ORDER

          AMY J. ST. EVE UNITED STATES DISTRICT COURT JUDGE

         In Defendants' Answer to Complaint (the “Answer”), Defendants BCM High Income Fund, LP (“BCM”) and BCM High Income Fund GP, LLC (“BCM GP” and collectively with BCM, “Defendants”) asserted Thirteen “Affirmative and Other Defenses.” (R. 1466, Defs.' Answer to Compl., 44-47.) Patrick Cavanaugh, as receiver of the Overall Receivership Estate (“Overall Receiver” or “Plaintiff”), moves to strike the First Defense, Third Defense, Fourth Defense, Fifth Defense, Sixth Defense, Seventh Defense, Eighth Defense, Ninth Defense, Tenth Defense, Eleventh Defense, Twelfth Defense, and Thirteenth Defense (collectively, the “Defenses”). (R. 1486, Mot. of Overall Receiver to Strike Defs.' Affirm. and Other Defenses.) Defendants agreed to withdraw their Thirteenth Defense, thus this aspect of the motion is moot. (R. 1491, Defs.' Mem. Law in Opp'n to Pl.'s Mot. to Strike Defs.' Affirm. and Other Defenses, 1.) For the following reasons, the Court grants in part and denies in part Plaintiff's motion to strike.

         BACKGROUND

         On May 1, 2017, the Overall Receiver filed his Complaint against Defendants to recover alleged fraudulent transfers in excess of $22 million made by First Farmers and the Guaranty Fund, and to obtain additional relief against Defendants. Plaintiff's claims arise from a fraud conducted by First Farmers and its owner, Nikesh Patel, who sold millions of dollars in loans that were purportedly guaranteed by the U.S. Department of Agriculture's Rural Development Program.

         In their Answer, Defendants assert thirteen affirmative defenses. (Answer, 44-47.) In the First Defense, Defendants assert that Plaintiff fails “to state a claim against Defendants upon which relief may be granted.” (Id. at 44.) In the Second Defense, Defendants assert that Plaintiff's claims are barred because “BCM received the P&I Transfers and the Repurchase Transfer in good faith and for reasonably equivalent value.” (Id.) In the Third Defense, Defendants claim that they “did not have actual or constructive knowledge of First Farmers' or the Guaranty Fund's fraudulent activities or insolvency.” (Id. at 45.) In the Fourth Defense, Defendants allege that they “were not unjustly enriched by their alleged conduct.” (Id.) In the Fifth Defense, Defendants assert that the doctrine of unclean hands bars Plaintiff's claims. (Id.) In the Sixth Defense, Defendants allege that the doctrine of in pari delicto bars Plaintiff's claims. (Id.) In the Seventh Defense, Defendants claim that “the doctrines of set off and/or recoupment” bar Plaintiff's claims. (Id. at 45-46.) In the Eight Defense, Defendants assert that Plaintiff has an adequate remedy at law and that there is “no factual or legal basis for…granting… equitable relief.” (Id. at 46.) In the Ninth Defense, Defendants assert that Plaintiff “has incurred no damages as a result of Defendants' alleged conduct.” (Id. at 46-47.) In the Tenth Defense, Defendants allege that Plaintiff's claims are barred because Defendants' alleged conduct benefitted Plaintiff more than it harmed it. (Id. at 47.) In the Eleventh Defense, Defendants claim “an offset for the total amounts paid to” Plaintiff. (Id.) In the Twelfth Defense, Defendants allege that express contracts govern and bar the unjust enrichment claims. (Id.) In the Thirteenth Defense, Defendants “reserve and assert all affirmative and other defenses available under any applicable federal or state law, ” including “additional defenses, counterclaims, cross-claims, and third-party claims.” (Id.)

         For all Defenses with the exception of the Seventh Defense and the Thirteenth Defense, Defendants lay out each affirmative defense in exactly one sentence. Defendants provide factual allegations only to support the Seventh Defense. Defendants plead the Thirteenth Defense in three sentences, but do not include any facts.

         Plaintiff did not move to strike the Second Defense. (Mot. to Strike Defs.' Affirm. Defenses.) Defendants “agree[d] to withdraw their Thirteenth Affirmative Defense.” (Defs.' Opp'n to Pl.'s Mot. to Strike, 1.) Therefore, the Court addresses below the following eleven defenses: First Defense, Third Defense, Fourth Defense, Fifth Defense, Sixth Defense, Seventh Defense, Eighth Defense, Ninth Defense, Tenth Defense, Eleventh Defense, and Twelfth Defense.

         LEGAL STANDARD

         Pursuant to Rule 12(f) of the Federal Rules of Civil Procedure, the Court can strike “any insufficient defense or any redundant, immaterial, impertinent, or scandalous matter.” Fed.R.Civ.P. 12(f); Delta Consulting Grp., Inc. v. R. Randle Constr., Inc., 554 F.3d 1133, 1141 (7th Cir. 2009). District courts have considerable discretion under Rule 12(f). See Delta, 554 F.3d at 1141-42. “Affirmative defenses will be stricken ‘only when they are insufficient on the face of the pleadings.'” Williams v. Jader Fuel Co., 944 F.2d 1388, 1400 (7th Cir. 1991) (quoting Heller Fin. v. Midwhey Powder Co., 883 F.2d 1286, 1294 (7th Cir. 1989)). “Motions to strike are not favored and will not be granted unless it appears to a certainty that plaintiffs would succeed despite any state of the facts which could be proved in support of the defense, and are inferable from the pleadings.” Id. (citations and quotations omitted).

         It is appropriate, however, “for the court to strike affirmative defenses that add unnecessary clutter to a case.” Davis v. Elite Mortgage Servs., 592 F.Supp.2d 1052, 1058 (N.D. Ill. 2009) (citing Heller, 883 F.2d at 1295). “It is also true that because affirmative defenses are subject to the pleading requirements of the Federal Rules of Civil Procedure, they must set forth a ‘short and plain statement' of all the material elements of the defense asserted; bare legal conclusions are not sufficient.” Id. (citing Heller, 883 F.2d at 1294; Fed.R.Civ.P. 8(a); Renalds v. S.R.G. Rest. Grp., 119 F.Supp.2d 800, 802 (N.D. Ill. 2000)). According to Rule 8(a)(2), every pleading must contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a).

         Again, “[a]ffirmative defenses are pleadings and, therefore, are subject to all pleading requirements of the Federal Rules of Civil Procedure.” Heller, 883 F.2d at 1294. “An affirmative defense must include direct or inferential allegations as to all elements of the defense asserted.” LaSalle Bank Nat'l Ass'n v. Paramont Properties, 588 F.Supp.2d 840, 860 (N.D. Ill. 2008) (citing Reis Robotics USA, Inc. v. Concept Indus., Inc., 462 F.Supp.2d 897, 904 (N.D. Ill. 2006)). In their Answer, Defendants for the most part allege one-sentence Defenses and only develop their arguments in their Opposition to Plaintiff's Motion to Strike. Despite their efforts to later supplement their briefing, it is an “axiomatic rule that a plaintiff may not amend his complaint in his response brief.” Pirelli Armstrong Tire Corp. Retiree Med. Benefits Tr. v. Walgreen Co., 631 F.3d 436, 448 (7th Cir. 2011) (citing Frederico v. Home Depot, 507 F.3d 188, 201-02 (3d Cir. 2007); Car Carriers, Inc. v. Ford Motor Co., 745 F.2d 1101, 1107 (7th Cir. 1984)). The same is true for a defendant attempting to amend their answer in a later filing. Therefore, the Defenses stand alone as written in the Answer and are not amended by Defendants' later briefing.

         The Court-along with many others in this District-examines affirmative defenses by reference to Twombly's “plausibility” pleading standard. See, e.g., State Farm Fire & Cas. Co. v. Electrolux Home Prods., Inc., 2011 WL 133014 (N.D. Ill. Jan. 14, 2011) (citing Bell Atl. v. Twombly, 550 U.S. 544, 555 (2007)); see also Edwards v. Mack Trucks, Inc., 310 F.R.D. 382, 386 (N.D. Ill. 2015) (“While the Seventh Circuit has not addressed whether the Twombly-Iqbal standard applies to affirmative defenses, judges in this district have generally found these requirements to apply”).

         The Court-again along with many others in this District-assesses the sufficiency of an affirmative defense in three steps. In re DiPiero, 553 B.R. 122, 128 (Bankr. N.D.Ill. 2016); Bryson v. Benchmark Mgmt. Corp., 2015 WL 1188524, *2 (Mar. 12, 2015); LaSalle Bank, 588 F.Supp.2d at 860; Reis Robotics, 462 F.Supp.2d at 905. First, the Court determines whether the matter pled actually constitutes an affirmative defense. Reis Robotics, 462 F.Supp.2d at 905. Second, the Court considers whether the defense is adequately pled under the pleading standards of Rules 8 and 9. Id. Third, the Court evaluates the sufficiency of the defense pursuant to a standard identical to Rule 12(b)(6). Id. “Before granting a motion to strike an affirmative defense, the Court must be convinced that there are no unresolved questions of fact, that any questions of law are clear, and that under no set of circumstances could the defense succeed.” Id.

         In a case premised on diversity jurisdiction, the legal and factual sufficiency of the affirmative defenses is examined with reference to state law. Id.; Williams, 944 F.2d at 1400. Plaintiff and Defendants do not to dispute that Florida law governs these issues. Neither parties' briefings address choice of law issues. “Courts do not worry about conflicts of laws unless the parties disagree on which ...


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