PRMConnect, Inc. v. Drumm and Company et al
Filing
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MEMORANDUM OPINION AND ORDER Signed by the Honorable Robert M. Dow, Jr. on 12/5/2016. Mailed notice(cdh, )
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
PRMCONNECT, INC.,
Plaintiff,
v.
JEAN DRUMM and
DRUMM AND COMPANY,
Defendants.
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Case No. 15-cv-417
Judge Robert M. Dow, Jr.
MEMORANDUM OPINION AND ORDER
Before the Court is Defendants’ motion to dismiss for lack of subject matter jurisdiction
[24]. For the reasons set forth below, Defendants’ motion [24] is denied. This case is set for
further status on December 20, 2016, at 9:30 a.m. to discuss pre-trial scheduling and the
possibility of settlement.
I.
Background
This case involves an alleged negligent failure to procure adequate business insurance. In
2007, Plaintiff PRMConnect, Inc.—a software development company incorporated in Illinois
and based in Las Vegas, Nevada—hired Defendants Jean Drumm and Drumm and Company (an
Indiana-based accounting firm) to provide “accounting, consulting, and payroll services.”
Plaintiff alleges that Defendant Drumm “undertook the responsibility to procure and maintain
property insurance coverage” on Plaintiff’s behalf from 2008 through 2014. [1, ¶ 9; 27, at 1–2.]
In September 2012, Plaintiff relocated one of its Las Vegas offices from 7313 Mount Kearsarge
to 7495 W. Azure Drive. No one updated Plaintiff’s property insurance policy to reflect the
change in address. On April 8, 2014, thieves broke into the Azure Drive office and stole
computer equipment and accessories.
Plaintiff submitted a claim to its property insurer
(Travelers Insurance), which denied the claim because the policy was not updated to cover the
Azure Drive location.
On January 15, 2015, Plaintiff sued Defendants for negligence, invoking this Court’s
diversity jurisdiction. [1, ¶ 4.] On October 31, 2015, Defendants filed a motion for summary
judgment [12], which the Court denied on May 26, 2016 [27]. Just before the Court issued its
summary judgment order, Defendants filed a motion to dismiss for lack of subject matter
jurisdiction [24]. Specifically, Defendants argue that Plaintiff cannot satisfy the $75,000 amount
in controversy requirement. At the Court’s request, the parties submitted supplemental briefing
on the proper measure of damages for Plaintiff’s claims under Illinois law [see 35, 36, 37, 38].
II.
Legal Standard
A Federal Rule of Civil Procedure (“Rule”) 12(b)(1) motion seeks dismissal of an action
for lack of subject matter jurisdiction. Rule 12(b)(1) motions “are meant to test the sufficiency
of the complaint, not to decide the merits of the case.” Ctr. for Dermatology & Skin Cancer, Ltd.
v. Burwell, 770 F.3d 586, 588 (7th Cir. 2014). The Court accepts as true the plaintiff’s wellpleaded allegations and draws all reasonable inferences in its favor. Long v. Shorebank Dev.
Corp., 182 F.3d 548, 554 (7th Cir. 1999). Where the defendant raises a factual challenge to
jurisdiction, however, the Court “may properly look beyond the jurisdictional allegations of the
complaint and view whatever evidence has been submitted on the issue.” Id. (citation omitted);
accord Apex Digital, Inc. v. Sears, Roebuck & Co., 572 F.3d 440, 444 (7th Cir. 2009) (describing
the difference between facial and factual challenges to jurisdiction). In such instances, “the trial
court is free to weigh the evidence and satisfy itself as to the existence of its power to hear the
case.” Apex, 572 F.3d at 444 (citation omitted). A plaintiff facing a Rule 12(b)(1) motion bears
the burden of establishing the jurisdictional requirements. Burwell, 770 F.3d. at 588–89.
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III.
Analysis
The sole question presented by Defendants’ motion is whether Plaintiff can satisfy the
amount in controversy requirement for purposes of federal diversity jurisdiction. Federal courts
have jurisdiction over civil suits between citizens of different states “where the matter in
controversy exceeds the sum or value of $75,000, exclusive of interest and costs.” 28 U.S.C. §
1332(a). If the material factual allegations regarding amount in controversy are contested, the
proponent of federal diversity jurisdiction must “prove those jurisdictional facts by a
preponderance of the evidence.” Meridian Sec. Ins. Co. v. Sadowski, 441 F.3d 536, 543 (7th Cir.
2006). “Once the facts have been established, uncertainty about whether the plaintiff can prove
its substantive claim, and whether damages (if the plaintiff prevails on the merits) will exceed the
threshold, does not justify dismissal.” Id. (citation omitted). “Whether damages will exceed
$75,000 is not a fact but a prediction.” Id. at 541. “Only if it is ‘legally certain’ that the
recovery (from plaintiff’s perspective) * * * will be less than the jurisdictional floor may the case
be dismissed.” Id. at 543.
There are several ways in which the proponent of federal jurisdiction may establish the
amount in controversy, including “contentions interrogatories or admissions in state court,”
“calculation from the complaint’s allegations,” “reference to the plaintiff’s informal estimates or
settlement demands,” or “introducing evidence, in the form of affidavits * * * about how much it
would cost to satisfy the plaintiff’s demands.” Meridian, 441 F.3d at 541–42. This “list is not
exclusive; any given proponent of federal jurisdiction may find a better way to establish what the
controversy between the parties amounts to, and this demonstration may be made from either
side’s viewpoint,” such as “what a judgment would be worth to the plaintiff.” Id. at 542. Once
this estimate supported by “competent” proof is made, “the case stays in federal court unless it is
legally certain that the controversy is worth less than the jurisdictional minimum.” Id.
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Although Plaintiff’s negligence claims sound in tort, both parties agree that the proper
measure of damages is the insurance policy that Plaintiff allegedly sought but Defendants failed
to procure. [35, at 2; 36, at 1]; accord Bros. Future Holdings, LLC v. Indiana Ins. Co., 2015 IL
App (1st) 141581, ¶ 49 (“The measure of such damages is determined based upon the terms of
the policy which was sought by the insured but which the broker failed to procure”); Lake Cty.
Grading Co. of Libertyville v. Great Lakes Agency, Inc., 226 Ill. App. 3d 697, 701 (1992);
Lazzara v. Howard A. Esser, Inc., 802 F.2d 260, 266–67 (7th Cir. 1986); Wheaton Nat. Bank v.
Dudek, 59 Ill. App. 3d 970, 973 (1978). As a result, whether the amount in controversy is
satisfied depends on Plaintiff showing that its losses exceed $75,000 and that those particular
losses would have been covered by the insurance policy that it sought but did not receive.
Plaintiff identifies two categories of damages that it claims clear the $75,000 hurdle.
First, it claims that the “replacement cost of the stolen business personal property” from the
Azure Drive location totals $113,005. [36, at 4.] To support this claim, Plaintiff attaches an
itemized inventory of the lost equipment with prices that Plaintiff produced in response to one of
Defendants’ document requests.1 [See 29-3.] Plaintiff also cites deposition testimony from a
partner at PRMConnect who stated that the stolen equipment was “worth” “in excess of a
hundred thousand dollars,” but refused to elaborate further. [29-1, at 83:8–84:14.] Second,
Plaintiff claims that it suffered $98,000 in “lost revenue * * * due to cancelation of SAP business
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The Court notes that Plaintiff’s response to Defendants’ document request characterizes this itemized
list as representing the “original costs” of the stolen equipment. [29-2, ¶ 10.] In other words, this list
does not necessarily represent “replacement costs.” In fact, documents with a different Bates range,
which Plaintiff did not submit to the Court, purportedly represent the receipts and invoices for all of the
equipment “replaced” from the burglary. Id. ¶¶ 11–12. In its order for supplemental briefing, the Court
directly asked whether the itemized list represents replacement costs. [34, at 2.] Plaintiff’s response is
somewhat equivocal, stating that this list “represents the replacement cost” as it “is a copy of the original
costs.” [36, at 4.] The Court interprets Plaintiff’s response to mean that there is no difference between
the original cost and the post-conversion replacement cost of the stolen equipment.
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because of the lost and stolen equipment.” [29, at 3.] In support, Plaintiff cites its response to
one of Defendants’ discovery requests, which makes the same assertion.2 [29-2, ¶ 14.]
Defendants challenge each category of damages. With respect to the “replacement cost,”
Defendants argue that no contemporaneous documents show losses exceeding $75,000, as
required by 28 U.S.C. § 1332(a). Defendants point to (i) an April 8, 2014 Property Loss Notice
that refers to a telephone call where Plaintiff describes the stolen equipment as valued at
“approximately $75,000” [24, Ex. D]; (ii) a letter from Plaintiff’s insurance broker to Plaintiff
stating that the equipment is “valued at $75,000” [24, Ex. E]; (iii) a May 23, 2016 affidavit from
Defendant Jean Drumm stating that he spoke with Plaintiff’s corporate counsel in “late April or
early May of 2014” and Plaintiff’s counsel stated “approximately $30,000 in equipment was
stolen” [24, Ex. F, ¶¶ 4–5]; and (iv) Plaintiff’s itemized tax returns from tax year 2014, which
claim a $71,002 cost basis for the stolen equipment [24, Exs. A & B; 24-1, at 6]. With respect to
the “lost revenue,” Defendants argue that Plaintiff’s assertion of $98,000 is unsubstantiated, was
not declared on Plaintiff’s tax returns, and was not reported with its insurance claim to Travelers.
While these arguments may ultimately undermine Plaintiff’s ability to recover damages
exceeding $75,000, they do not show that Plaintiff is “legally certain” not to recover such
damages.
First, regarding the replacement costs, both the Property Loss Notice and the
insurance broker letter are rough approximations in the ballpark of the jurisdictional threshold.
[24, Exs. D & E.] Neither generalization purports to be a definitive estimate of the stolen
property’s replacement cost or a stipulation that damages did not exceed $75,000. Similarly,
Defendant Drumm’s recollection of a two-year-old telephone conversation is not dispositive.
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Defendants also submitted a Local Rule 56.1 statement that “the amount in controversy exceeds
$75,000.00,” which Plaintiff admitted. [21, ¶ 4.] Even if the parties (at one time) agreed that the
jurisdictional amount was satisfied, the Court has an independent duty to ensure that the amount in
controversy is satisfied. Smith v. Am. Gen. Life and Accident Ins. Co., Inc., 337 F.3d 888, 893 (7th Cir.
2003).
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Plaintiff offers sworn testimony from one of its own principals that losses exceeded $100,000,
and this conflicting damages testimony shows that “an award over the threshold cannot be ruled
out.” Rising-Moore v. Red Roof Inns, Inc., 435 F.3d 813, 816 (7th Cir. 2006). Likewise,
Plaintiff’s tax returns do not estop it from arguing that replacement costs are more accurately
represented by the itemized inventory produced in discovery [see 29-3]. Plaintiff may have
chosen not to declare all of its losses on its tax return, and Defendants identify no authority
suggesting that losses declared on tax returns limit damages in negligence cases like this one.
Defendants do not argue, for example, that the itemized inventory erroneously includes property
that was not stolen. Rather, Defendants argue that the “best evidence of fair market value” is the
tax returns. That is not the same as arguing that Plaintiff is “legally certain” to recover $75,000
or less if it prevails. Ultimately, these arguments speak to uncertainty about whether Plaintiff’s
damages will exceed the jurisdictional threshold if it prevails. See Reason v. Wal-Mart Stores,
Inc., 2008 WL 410227, at *2 (C.D. Ill. Feb. 12, 2008) (“Uncertainty differs from impossibility”).
That “does not justify dismissal.” Meridian, 441 F.3d at 543. Plaintiff has satisfied its burden to
show more than $75,000 in equipment replacement costs are in controversy.
Second, regarding “lost revenue,” Plaintiff’s alleged $98,000 in lost revenue also satisfies
the jurisdictional threshold. Defendants’ request for production sought “documents evidencing
[that] the value of this lawsuit exceeds seventy-five thousand dollars.” [29-2, ¶ 14.] Plaintiff’s
response—signed by counsel—is equivalent to an interrogatory response about its losses, which
is one way of showing the amount in controversy. See Meridian, 441 F.3d at 541; see also Fed.
R. Civ. P. 11(b)(3). Again, Plaintiff’s failure to report this loss on its 2014 taxes does not legally
foreclose recovery for this loss. Furthermore, Plaintiff’s insurance claim was denied on April 17,
2014—less than ten days after the burglary. [1, ¶ 29.] It is hardly surprising that $98,000 in lost
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revenue does not appear on this claim, since it is highly unlikely that these losses would have
been realized in such a short window (and, of course, there would have been no reason for
Plaintiff to report lost revenue to Travelers in a future claim once it became clear on April 17 that
all claims related to the theft would be denied). In short, nothing before the Court suggests that it
would be “legally impossible” for Plaintiff to recover more than $75,000 in lost revenue. Spivey
v. Vertrue, Inc., 528 F.3d 982, 986 (7th Cir. 2008).
The next question is whether the insurance policy that Plaintiff allegedly sought would
have covered the property and revenue losses. The Court starts with whether the property losses
would have been covered. The insurance policy in effect on April 8, 2014 includes a section
titled, “Loss Payment – Building and Personal Property,” which provides that “[i]n the event of
[a covered] loss * * * at our option, we will either: (1) [p]ay the value of lost or damaged
property; (2) [p]ay the cost of repairing or replacing the lost or damaged property.” [35-1, at
RAGLAND001009.] The “value” is determined “[a]t replacement cost (without deduction for
depreciation),” but is subject to various limitations. Id. at RAGLAND001010. The limitation in
subsection (c) provides that the insurer “will not pay more for loss or damage on a replacement
cost basis than the least of Paragraphs (i), (ii) or (iii) * * *:”
(i) The Limit of Insurance applicable to the lost or damaged property;
(ii) The cost to replace the lost or damaged property with other property:
a) Of comparable material and quality; and
b) Used for the same purpose; or
(iii) The amount actually spent that is necessary to repair or replace the lost or
damaged property.
Id.
The Limit of Insurance that applied to personal property losses at the Mount Kearsarge
location on April 8, 2014 (and thus the limits that would have applied to the Azure Drive
location had the address been updated) is $24,272. Id. at RAGLAND000974. Based on this
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policy limit, Defendants argue that it is legally certain that Plaintiff cannot satisfy the amount in
controversy: if Defendants had updated the insurance policy to cover the Azure Drive location,
then the maximum payout for stolen equipment would have been $24,272 (assuming no other
deductions apply)—far below of the jurisdictional minimum.
Defendants overlook the fact that Plaintiff’s allegations go beyond the failure to update
an address. According to Plaintiff, had the correct insurance policy been in effect on April 8,
2014, the policy would have included an “adequate” limit for lost personal property.
Specifically, Plaintiff alleges that Defendants “never informed [its insurance broker or insurer] of
the need to increase the limits of coverage for [Plaintiff’s] office or data center so as to ensure
adequate limits of insurance were in place to cover all of [Plaintiff’s] business property.” [1, ¶
24.] The complaint further alleges that both Defendants were negligent by “failing to advise [the
insurance broker or insurer] of the need to increase the limits of coverage,” “failing to * * *
request additional coverages,” and “failing to adequately and clearly document a response to [the
insurance broker] so that * * * the appropriate amount of insurance was procured.” Id. ¶¶ 33, 42.
The meaning of “adequate limits of insurance” will certainly be subject to dispute, but this
phrase does not establish a hard $24,272 ceiling on Plaintiff’s ability to recover for lost property
at this stage. Therefore, it is not legally certain that the insurance policy that Plaintiff alleges
should have been in effect would have precluded property losses in excess of $75,000.
The same is true with respect to the policy’s coverage of lost business. The insurance
policy in effect on April 8, 2014 covers the “actual loss for 12 consecutive months” from lost
business income. [35-1, at RAGLAND000973.] The specific provision in the policy, titled
“Business Income and Extra Expense,” defines “business income” as “Net Income (Net Profit or
Loss before income taxes) that would have been earned or incurred.” Id. at RAGLAND000983.
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The policy covers “the actual loss of Business Income [Plaintiff] sustain[s] due to the necessary
‘suspension’ of [its] ‘operations’ during the ‘period of restoration.’ The ‘suspension’ must be
caused by direct physical loss of * * * property [and] [t]he loss * * * must be caused by or result
from a Covered Cause of Loss.” Id. at RAGLAND000983–84. The business income policy
does not cover “[s]uspension, lapse or cancellation of any license, lease or contract” unless
“directly caused by the ‘suspension’ of ‘operations,’” in which case “such loss that affects [the]
Business Income during the ‘period of restoration’ and the period of Extended Business Income”
are covered. Id. at RAGLAND001007. The policy also excludes “[a]ny other consequential
loss.” Id. Neither side identifies any monetary caps that apply to a payout under this provision.
By its terms, this policy could cover Plaintiff’s $98,000 in losses due to “the cancellation
of SAP business because of the lost and stolen equipment.” [29-2, ¶ 14.] This lost business was
allegedly “caused by the direct physical loss” of the stolen equipment.3 Defendant argues that
Plaintiff “has not alleged any facts that the ‘lost revenue’ is not from a cancellation of a contract
or other consequential losses, which were specifically excluded from coverage under the
insurance policy.” [37, at 5.] But that argument misconstrues Plaintiff’s allegations and its
burden.
Plaintiff has alleged that the stolen equipment caused the “cancellation of SAP
business,” not the cancellation of a contract, so Plaintiff’s allegation does not directly implicate
this exclusion.
Likewise, Defendants offer no reason to think that the phrase “other
consequential loss” would apply to business income lost based on suspended operations because
of stolen equipment, which appears to be the kind of loss directly covered by the policy. Even
so, Plaintiff is not required at this stage to disprove application of a potential policy exclusion
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The Court assumes that Plaintiff uses “revenue” and “income” interchangeably. The policy covers “Net
Income,” which means net profit or revenue minus expenses. Defendant does not specifically argue that
“Net Income” from Plaintiff’s alleged business losses would actually be less than $75,000 once expenses
are deducted. For purposes of this motion only, Plaintiff’s claim that $98,000 in “lost revenue”
approximates $98,000 in “Net Income” is unrebutted.
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absent reason to believe that it is “legally certain” this exclusion controls and forecloses damages
above the jurisdictional threshold. Here, the exclusion identified by Defendants does not even
preclude coverage of all losses from cancelled contracts. Losses from suspended, lapsed, or
cancelled contracts may still be covered if those losses were “directly caused” by suspension of
business operations and accrued during certain time periods.
Id. at RAGLAND001007.
Uncertainty about an exclusion’s application or the degree to which Plaintiff’s damages may be
limited by these exclusions is not grounds for dismissal. Meridian, 441 F.3d at 543. Plaintiff
has alleged business income losses exceeding $75,000, identified policy provisions that could
cover these losses, and there is not clear definitive language in the policy that forecloses
coverage for these losses. That is sufficient to survive a motion to dismiss.
IV.
Conclusion
For the foregoing reasons, Defendants’ motion to dismiss for lack of subject matter
jurisdiction [24] is denied. This case is set for further status on December 20, 2016, at 9:30 a.m.
to discuss pre-trial scheduling and the possibility of settlement.
Dated: December 5, 2016
_________________________________
Robert M. Dow, Jr.
United States District Judge
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