Methodist Hospitals Inc The v. FTI Cambio LLC et al
Filing
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OPINION AND ORDER: 44 Motion to Dismiss is GRANTED as to Count 3 of Plaintiffs Complaint but it is otherwise DENIED; 56 Motion is CONSTRUED as a Motion to Dismiss and is GRANTED as to Count 3 but is otherwise DENIED; 70 Motion is DENIED AS MOOT . Paragraph 82 of Plaintiffs Complaint is STRICKEN. Count 3 of Plaintiffs Complaint is DISMISSED WITHOUT PREJUDICE. Methodist is afforded until and including 7/29/2011 to amend it Complaint if it chooses to do so. Signed by Chief Judge Philip P Simon on 7/1/11. (mc)
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF INDIANA
HAMMOND DIVISION
THE METHODIST HOSPITALS, INC.,
Plaintiff,
v.
FTI CAMBIO, LLC, HEALTHNET
SYSTEMS CONSULTING, INC.,
CLIFTON JAY, and MEDICAL
INFORMATION TECHNOLOGY, INC.,
Defendants.
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2:11-cv-036
OPINION AND ORDER
Plaintiff Methodist Hospitals believes it has suffered “in excess of $16 million” in
compensatory damages as a result of being sold glitchy software that was supposed to
revolutionize the day-to-day operations of its hospitals and healthcare facilities. As a result, it
has filed a complaint against four defendants: 1) FTI Cambio, the healthcare management
company that Methodist hired to provide consulting services; 2) HealthNET Systems Consulting,
a healthcare information technology consulting firm that FTI Cambio hired on behalf of
Methodist; 3) Clifton Jay, the president of HealthNET; and 4) Medical Information Technology
(“Meditech”), which created the allegedly glitchy software. The Complaint alleges that FTI
Cambio, HealthNET, and Jay all wrongfully induced Methodist to purchase the software and that
Meditech breached its contract with Methodist by failing to ensure proper implementation of the
software.
These defendants have taken different tacks in responding to the Complaint: Meditech
has answered, FTI Cambio has filed a motion to dismiss [DE 44], and HealthNET and Jay
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together have tried to piggyback on FTI Cambio’s motion by filing a “Motion for Leave to Adopt
FTI Cambio LLC’s Motion to Dismiss” [DE 56]. As explained in more detail below, these
motions will be granted in part and denied in part.
FACTUAL BACKGROUND
Methodist operates hospitals and outpatient healthcare facilities in northwest Indiana.
During the 1990s, Methodist entered into various loan agreements that were funded through
revenue bonds. The loans stated that if Methodist failed to meet various financial covenants it
was required to hire an independent “turnaround” consultant to make recommendations
regarding Methodist’s continued operations. These covenants were triggered in 2006, at which
point Methodist hired FTI Cambio as the independent consultant and the two parties entered into
a “Turnaround Support Services Agreement.” The Turnaround Agreement required FTI Cambio
to provide professional services that would help Methodist increase its revenue and reduce its
costs. As part of the turnaround process, FTI Cambio officials also became the CEO and the
CFO of Methodist. As alleged in Methodist’s complaint, FTI Cambio assumed a vital role in the
Methodist’s operations: “In their capacities as Independent Consultant, CEO, and CFO, Cambio
and its employees were charged with directing, supervising and implementing all operations of
the Hospital, all of which were to be undertaken with the best interests of the Hospital as its
ultimate responsibility.” [DE 1 at 9.]
FTI Cambio then hired HealthNET to conduct an assessment of Methodist’s information
technology system. Methodist already had a healthcare information software system called Epic,
which it had purchased in 2004 and which it was in the process of implementing. According to
the Complaint, however, FTI Cambio, HealthNET, and HealthNET’s President Clifton Jay
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concluded that “Epic was a larger, more complicated, and more expensive system than Methodist
needed” and thus recommended that “Methodist discontinue implementing the Epic Software
and, instead, purchase and implement a health care information system designed by Meditech.”
[DE 1 at 10.]
In 2007, HealthNET prepared a due diligence report for Methodist that ultimately
concluded that there would be significant overall cost savings in moving from the Epic software
to the Meditech software. FTI Cambio then recommended that Methodist hire HealthNET to
serve as the implementation consultant in charge of implementing the Meditech software.
Before making the final decision to switch to the Meditech software, Methodist discussed the
software with Meditech employees to ensure that it would function properly with Methodist’s
existing security and antivirus protocols, some of which were mandated by federal laws
regarding the protection of patient records. Methodist alleges it was assured that the software
would function properly.
Ultimately, Methodist agreed to switch to the Meditech software by first entering into a
“Software Agreement” with Meditech and then also entering into an “Implementation
Agreement” with HealthNET. From there, at least as it is told by Methodist in its Complaint, the
story turns into a cascade of software horrors: as the software was implemented, computers
began to freeze, crash, display incorrect information, inaccurately record patient information,
and produce superfluous screens, menus, submenus, and options. These glitches “engendered
widespread frustration and confusion among Methodist physicians and staff as well as
unworkable inefficiencies in Methodists operations,” so much so that the Methodist’s Medical
Council (comprised of various physicians at the hospital) voted unanimously in April of 2009 to
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“terminate the Meditech system and pursue another system.” [DE 1 at 18.]
In May of 2009,
Methodist’s Board of Directors voted to terminate the Meditech implementation.
Four months prior to that termination vote, Methodist and FTI Cambio entered into a
confidential “Settlement Agreement and Mutual Release,” dated January 5, 2009. The
relationship between Methodist and FTI Cambio had evidently soured and a dispute arose about
the amount of fees Methodist owed to FTI Cambio for its consulting services. FTI Cambio
claimed that it was owed a seven-figure amount, but Methodist disputed that calculation.1 In any
event, they resolved their differences, signed a settlement agreement whereby Methodist agreed
to pay approximately 55% of the amount FTI Cambio claimed it was owed, and both sides
walked away with a mutual release. For reasons explained more fully below, this agreement is
potentially quite significant: FTI Cambio believes it gets them out of this case. Relatedly,
HealthNET/Jay want access to the settlement agreement, presumably to see what hay they can
make of it.
DISCUSSION
Methodist’s Complaint has seven counts against the four defendants: Count 1) breach of
fiduciary duty against FTI Cambio; Count 2) breach of the Turnaround Agreement against FTI
Cambio; Count 3) fraud against HealthNET and Jay regarding the representations about the
implementation and maintenance of the Meditech software, along with vicarious fraud against
FTI Cambio; Count 4) breach of the Implementation Agreement against HealthNET; Count 5)
negligence against FTI Cambio, HealthNET, and Jay; Count 6) breach of the Software
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The settlement agreement is confidential and has been filed in this case under seal.
Thus, throughout this opinion I try as mush as possible to refer to the terms of the agreement
only in a general way.
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Agreement against Meditech; and Count 7) fraudulent inducement against Meditech.
FTI Cambio first claims that all four counts brought against it (Counts 1, 2, 3 and 5)
should be dismissed because Methodist did not tender to FTI Cambio the consideration it
received for the release it previously signed, which Indiana law requires as a condition precedent
to bringing this action and which thus violates Rule 9(c)’s requirement that a plaintiff allege that
it has met all conditions precedent. Second, FTI Cambio argues for dismissal of Count 3 on the
grounds that Methodist has not pled fraud with sufficient particularity in violation of Rule 9(b)
and for the dismissal of Count 1 (breach of fiduciary duty) on the grounds that it “sounds in
fraud” and has also failed to meet Rule 9(b)’s requirement. Finally, FTI Cambio claims that
Methodist has not made sufficiently plausible fraud allegations that would state a cognizable
claim under Rule 12(b)(6).
For their part, HealthNET and Jay have responded in a puzzling way: they have neither
answered the Complaint nor moved to dismiss. Instead, they filed a motion to “adopt” FTI
Cambio’s Motion and in doing so they essentially parrot FTI Cambio’s arguments while also
tacking on an argument that Count 5 (negligence) “sounds in fraud” and has not met Rule 9(b)’s
standards. HealthNET and Jay do add cryptically that, if their adoption approach doesn’t work,
they want to file their own motion to dismiss specific to Jay. [See DE 57 at 7.] But that
procedural maneuver to get two bites at the apple won’t fly; I am construing their Motion to
Adopt as a Motion to Dismiss. And in doing so, it’s worth pointing out that by adopting FTI
Cambio’s motion, HealthNET makes no attack on Count 4 of the Complaint. This is because
FTI Cambio did not move to dismiss Count 4 since that count does not pertain to FTI Cambio.
Thus, as it now stands, by merely adopting FTI Cambio’s arguments, HealthNET has neither
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answered nor otherwise pled to Count 4 of the Complaint.
I. The Prior Settlement Agreement and Condition Precedent Under Rule 9(c)
FTI Cambio’s first argument depends on the Settlement Agreement and Mutual Release
entered into between Methodist and FTI Cambio in January of 2009. When the relationship
between FTI Cambio and Methodist began to sour, the smell of litigation must have been in the
air. Evidently, at the center of the dispute was how much money Methodist owed FTI Cambio.
The parties resolved their dispute (as least as it relates to fees) with Methodist paying FTI
Cambio a portion of the amount FTI Cambio claimed it was owed. For its part, Methodist claims
– and the Settlement Agreement confirms – that the amount of the debt was totally in dispute.
A release is not typically at issue in a motion to dismiss; instead, in answering the
complaint a defendant will ordinarily invoke “release” as an affirmative defense, which is
exactly what Rule 8(c) requires. See Fed. R. Civ. P. 8(c)(1) (“In responding to a pleading, a
party must affirmatively state any avoidance or affirmative defense, including: . . . release . . .
.”); Deckard v. Gen. Motors Corp., 307 F.3d 556, 561 (7th Cir. 2002) (release is an affirmative
defense). There are some rare instances where it is appropriate to consider an affirmative
defense before a responsive pleading is filed, namely where the complaint so unmistakably
establishes the presence of a defense that the suit is rendered frivolous. Walker v. Thompson, 288
F.3d 1005, 1009-10 (7th Cir. 2002). And occasionally courts will just transmute a 12(b)(6)
motion that raises an affirmative defense into a 12(c) motion, which is evaluated under the same
standards. McCready v. eBay, Inc., 453 F.3d 882, 892, n.2 (7th Cir. 2006) (“Although it is
incorrect to grant a motion to dismiss under Rule 12(b)(6) on the basis of an affirmative defense,
resolution is appropriate here as a judgment on the pleadings under Rule 12(c).”).
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Following these principles, Methodist argues that FTI Cambio must raise the release as
an affirmative defense and that its reliance on the release at this point is therefore premature.
But this reasoning fails to take seriously the more idiosyncratic way in which FTI Cambio is
invoking the release here. At this point, FTI Cambio is not arguing that the substance of the
release precludes Methodist from stating a claim – an argument that would indeed seem to be
premature. Instead, FTI Cambio makes a more subtle three-step argument concerning the
release. Here’s how the argument goes: First, FTI Cambio claims that Methodist’s Complaint is
necessarily seeking “to avoid [the] release” [DE 49 at 8] – i.e., to proceed with claims that the
release could otherwise bar. Second, citing Indiana cases, FTI Cambio asserts that any party
seeking to avoid a release must first, as “a condition precedent,” return the consideration it was
offered when it entered into the release. Finally, because Methodist has failed to allege that it
returned the consideration it received, it has thus failed to comply with Rule 9(c)’s requirement
that a party must allege “that all conditions precedent have occurred or been performed.” Fed.
R. Civ. P. 9(c).
There is a certain syllogistic, chrome-finish ingenuity to this argument. But after taking
the “return-of-consideration” theory for a test-drive through the common law, I can’t help but
see the corrosion around its edges. In short, this case is simply ill-suited for application of the
return-of-consideration paradigm.
First off, while the parties focus their attention on just a handful of Indiana cases, the
return-of-consideration principle is known more generally as the “tender-back” doctrine and is
actually “one of the most elementary principles of contract law,” namely “that a party may not
rescind a contract without returning to the other party any consideration received under it.”
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Fleming v. U.S. Postal Service AMF O'Hare, 27 F.3d 259, 260 (7th Cir. 1994). “It is the same
with a release, which after all is just another contract” and therefore it is “a general principle of
contract law” that “a release can be rescinded only upon a tender of any consideration received.”
Id. Justice Thomas has underscored the principle’s basic simplicity: “The tender back doctrine
requires, as a condition precedent to suit, that a plaintiff return the consideration received in
exchange for a release, on the theory that it is inconsistent to bring suit against the defendant
while at the same time retaining the consideration received in exchange for a promise not to
bring such a suit.” Oubre v. Entergy Operations, Inc., 522 U.S. 422, 436-437 (1998) (Thomas, J.
dissenting).
Despite this doctrine’s superficial ease, however, it has numerous provisos and
exceptions that have long beguiled courts – so much so that fifty years ago another district court
analyzing the principle found “the cases from all jurisdictions . . . in hopeless disagreement.”
Taxin v. Food Fair Stores, Inc., 197 F. Supp. 827, 831 (D.C. Pa. 1961). An exhaustive (and
exhausting) American Law Report on the doctrine – originally published in 1941 and now
stretching, with updates, to some 209 pages – concluded:
The courts have apparently been unwilling to apply the principle universally to all
the possible legal situations in which questions as to the avoidance of a release or
settlement may arise and to all the varying circumstances and equities presented
by individual cases, and consequently a number of well-recognized exceptions,
limitations, qualifications, and modifications of the rule have arisen.
Annot., 134 A.L.R. 6 (1941).
Maryland’s highest court helpfully categorized a number of these exceptions in a 1966
case:
The general rule is . . . that one who seeks to rescind a contract or to have equity
rescind it must restore to the other party the consideration that was given by that
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party, but there are a number of exceptions to the rule. . . . Equity will in an
appropriate case order rescission without restoration if: (1) the performance by
the one against whom rescission is sought has become worthless, or (2) the
respondent has prevented its return, or (3) the performance conferred only an
intangible benefit upon the complainant, or (4) only a promise was given, or (5)
the complaint can properly retain it irrespective of the voidable transaction, or (6)
it is in possession of or is subject to the order of a person having a right superior
to the complainant, or (7) restoration is impossible for some reason not
hereinbefore mentioned and the clearest and strongest equity demands that
rescission be granted (sometimes with a monetary substitute for restoration).
Funger v. Mayor and Council of Town of Somerset, 223 A.2d 168, 173-74 (Md. 1966).
Exceptions three and four in this list – instances where the consideration at issue is “an
intangible benefit” or “only a promise” – invoke an important distinction in the tender-back
caselaw between tangible and intangible consideration. That is, there’s a long-standing, often
implicit assumption of the tender-back rule: it is limited to cases “where one party to the
contract has received goods, money, or other thing of value, which is capable of being returned
to the other party.” Timmerman v. Stanley, 51 S.E. 760, 762 (Ga. 1905) (refusing to apply
tender-back rule to a private teaching contract because “there would be no possible way by
which such instruction as he had given could be returned or tendered back to him”). See also
Citizens' St. R. Co. v. Horton, 48 N.E. 22, 25 (Ind. Ct. App. 1897) (quoting Mullen v. Old
Colony R. Co., 127 Mass. 86 (Mass. 1879)) (“It is well established that if a party enters into a
contract, and in consideration of so doing receives money or merchandise, and afterwards seeks
to avoid the effect of such contract as having been fraudulently obtained, he must first give back
to the other party the consideration received.”) (emphasis added).
This principle goes unstated in the Indiana cases cited by FTI Cambio, but with good
reason: in each of those cases the plaintiff seeking to avoid the release had received tangible
property that could have actually been returned. Monnier v. Central Greyhound Lines, 129
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N.E.2d 800, 803 (Ind. Ct. App. 1955) (release executed in exchange for $1,585); Lazarrus v.
Employers Mut. Cas. Co., 364 N.E.2d 140, 140 (Ind. Ct. App. 1977) (release executed in
exchange for $4,481.57); Prall v. Indiana Nat. Bank, 627 N.E.2d 1374, 1379 (Ind. Ct. App.
1994) (money advanced on a $230,000 loan to a partnership in which plaintiff was a partner);
Midwest Lumber and Dimension, Inc. v. Branch Banking and Trust Co., 2007 WL 2757270, at
*8 (S.D. Ind. Sept. 20, 2007) (money advanced on a line of credit); Sturgis v. AuthorHouse, 2008
WL 679100, at *2 (S.D. Ind. Mar. 12, 2008) (settlement payment of $1,699.00). And, as the
Prall court emphasized, when a party has actually received cold, hard cash or tangible property,
there is a certain logic to requiring its return prior to litigation:
Without this rule an unscrupulous releasor would be under no duty to restore the
consideration he received and, being subject only to the possibility of having it set
off against any judgment he might recover, could use the very money he received
in compromise to prosecute subsequent action and, if unsuccessful therein, force
the releasee to further protracted and expensive legal action for the attempted
recovery thereof.
Prall, 627 N.E.2d at 1379.
This tangible/intangible distinction is particularly relevant here because Methodist only
received intangible consideration in the settlement and release agreement. The agreement arose
out of a dispute over the amount of money Methodist owed FTI Cambio for its consulting
services. FTI Cambio asserted it was a seven-figure amount; Methodist disputed that
calculation. So, they entered into a garden-variety settlement agreement to resolve the dispute.
FTI Cambio received as its consideration for that agreement 1) payment of a portion of that
disputed amount and 2) Methodist’s promise not to pursue any claims related to the Turnaround
Agreement; in exchange, Methodist received 1) FTI Cambio’s corresponding promise not to
pursue any claims related to the Turnaround Agreement (including claims for the rest of the
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disputed amount). Thus, the only consideration Methodist received was a promise not to be sued
by FTI Cambio – an intangible benefit and a prototypical exception to the tender-back rule. See,
e.g., Funger, 223 A.2d at 173-74 (listing “an intangible benefit” and “only a promise” as
exceptions).
In a last-ditch salvo, FTI Cambio floats out a contorted argument that Methodist has
actually received tangible consideration that could (and must) be returned. In FTI Cambio’s
world, Methodist “received” a large amount of cash in the settlement – the amount it “received”
when it got to keep the difference between the amount FTI Cambio claimed it was owed for its
services and the amount Methodist actually paid in the settlement agreement. But this argument
ignores the fact that the original dispute between Methodist and FTI Cambio involved a
disputed, unliquidated amount – at the outset of the agreement, the recitals state that Methodist
disputes FTI Cambio’s calculation of its fee. Indeed, FTI Cambio’s description of the
consideration in its reply brief betrays the argument’s sleight-of-hand: FTI Cambio argues that
Methodist received “a forgiven debt,” but what Methodist actually received was “a forgiven
claim for a disputed, uncertain debt.” FTI Cambio’s relinquishment of this claim for the
unliquidated amount was, by itself, the necessary and sufficient consideration received by
Methodist. See Hakim v. Payco-General American Credits, Inc., 272 F.3d 932, 935 (7th Cir.
2001) (“Forbearance of a right to a legal claim constitutes valid consideration.”).
Thus, because Methodist did not receive any “goods, money, or other thing of value” that
would be “capable of being returned” to FTI Cambio, Timmerman, 51 S.E. at 762, the tenderback rule is inapplicable under these circumstances and not a condition precedent to Methodist’s
claims. FTI Cambio’s argument regarding Rule 9(c) will therefore be denied.
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II. Rule 9(b)
FTI Cambio next argues that Methodist’s Complaint fails to plead its fraud count with
sufficient particularity to meet the standards of Rule 9(b) and that the breach of fiduciary duty
count “sounds in fraud” such that it also must conform to Rule 9(b). HealthNET and Jay have
glommed onto this argument for the fraud count and have argued that the negligence count also
sounds in fraud. I’ll start with addressing whether the breach of fiduciary duty and negligence
claims sound in fraud.
A. Breach of Fiduciary Duty and Negligence
The parties dispute whether the first count (breach of fiduciary duty) and the fifth count
(negligence) sound in fraud such that they would be subject to Rule 9(b). It is clear that “Rule
9(b) applies to ‘averments of fraud,’ not claims of fraud, so whether the rule applies will depend
on the plaintiffs' factual allegations.” Borsellino v. Goldman Sachs Group, Inc., 477 F.3d 502,
507 (7th Cir. 2007). Thus, “[a] claim that ‘sounds in fraud’ – in other words, one that is
premised upon a course of fraudulent conduct – can implicate Rule 9(b)'s heightened pleading
requirements.” Id.
I can see the argument that the breach of fiduciary duty count sounds in fraud, since the
count alleges numerous instances where FTI Cambio is purported to have mislead Methodist.
But this argument misses the fact that, while any breach of fiduciary duty must necessarily
involve some duplicity or neglect, the breach need not rise to the level of intentional fraud for
there to be liability. Which is to say that while fraud is an intentional tort, a breach of fiduciary
duty could arise through negligence and without intent. Tamari v. Bache & Co., 838 F.2d 904,
908 (7th Cir. 1988) (a “breach of fiduciary duty . . . could of course result from negligence . . .”);
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F.T.C. v. Think Achievement Corp., 2007 WL 3286802, at *4 (N.D. Ind. Nov. 5, 2007) (noting
that under Indiana law “the elements of breach of fiduciary duty are the same” as negligence,
“except that the duty owed and breached must have been a fiduciary one”); Hotel Des Artistes,
Inc. v. Transamerica Ins. Co., 1994 WL 263429, at *6, n.5 (S.D.N.Y. Jun. 13, 1994) (“[A]
fiduciary's duty can be breached through acts of negligence.”); American Family Mut. Ins. Co. v.
Dye, 634 N.E.2d 844, 847 (Ind. Ct. App. 1994) (construing count in plaintiff’s complaint “as a
claim for breach of fiduciary duty arising out of a negligent failure to advise”).
This distinction between fraud and breach of a fiduciary duty is important for the 9(b)
analysis here because “courts generally have held that the periphery of Rule 9(b) lies at the
distinction between intentional fraudulent misrepresentations and negligent misrepresentations.”
Siegel v. Shell Oil Co., 480 F. Supp. 2d 1034, 1041 (N.D. Ill. 2007) (summarizing case law). See
also Tricontinental Indus., Ltd. v. PricewaterhouseCoopers, LLP, 475 F.3d 824, 833 (7th Cir.
2007) (recognizing that heightened pleading standards of Rule 9(b) do not apply to negligent
misrepresentation claim); Kennedy v. Venrock Associates, 348 F.3d 584, 593 (7th Cir. 2003)
(Federal Rule of Civil Procedure 9(b)'s heightened pleading standards does not apply to claims
under Section 14(a) of the Securities Exchange Act of 1934 unless those claims charge fraud, as
opposed to negligence); Banta Corp. v. Honeywell Intern., Inc., 2006 WL 801008, at *1 (E.D.
Wis. Mar. 24, 2006) (“[A] claim of negligent misrepresentation is only a pale simulacrum of a
fraud claim, and it is therefore doubtful that such claims were intended to be covered under [Rule
9(b)].”).
And here, in fact, Methodist has repeatedly alleged that FTI Cambio’s breach of fiduciary
duty may have arisen through negligence rather than intentional fraud. See DE 1 at 22-25. Thus,
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I find that Methodist’s count for breach of fiduciary duty does not “sound in fraud” such that it
would require the application of Rule 9(b). Cf. Jackson v. N'Genuity Enterprises, Co., 2010 WL
4628668, at *2 (N.D. Ill. Nov. 8, 2010) (finding Rule 9(b) inapplicable to breach of fiduciary
duty claim); Nat'l Council on Comp. Ins., Inc. v. Am. Int'l Group, Inc., 2009 WL 466802, at * 17
(N.D. Ill. Feb. 23, 2009) (declining to apply Rule 9(b) to breach fiduciary duty claim);
Cement-Lock v. Gas Technology Institute, 2005 WL 2420374, at *17 (N.D. Ill. Sept. 30, 2005)
(“Rule 9(b) does not apply to Plaintiffs' breach of fiduciary duty claim.”).
There is one caveat to this analysis, however: the breach of fiduciary duty count does
contain one allegation that could only be attributed to intentional fraud. Methodist alleges the
following in paragraph 82 of its Complaint: “Cambio also breached its fiduciary duty to
Methodist when, in January 2009, Cambio fraudulently induced Methodist to enter into a socalled Settlement Agreement and Mutual Release (“Settlement Agreement”) purporting, among
other things, to release Cambio from certain potential claims by Methodist.” [DE 1 at 23.] This
is really a separate claim for fraudulent inducement that has been shoehorned into the breach of
fiduciary duty count. The Seventh Circuit is clear that “if both fraudulent and nonfraudulent
conduct violating the same statute or common law doctrine is alleged, only the first allegation
can be dismissed under Rule 9(b).” Kennedy, 348 F.3d at 593. Since this single-paragraph
allegation of fraud doesn’t come close to meeting the requirements of Rule 9(b), it will be
stricken from the Complaint. See Siegel, 480 F. Supp. at 1040 (“When an averment of fraud fails
to satisfy Rule 9(b), it must be stricken from the complaint.”). If Methodist wants to bring a
claim for fraudulent inducement against FTI Cambio, it must amend its Complaint to include
such a count – and it must ensure that the count is sufficiently detailed to comply with the
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specifications of Rule 9(b).
As for the negligence count, the same reasoning that applies to the breach of fiduciary
duty count applies here as well. Negligence is based on an alleged duty of care and an alleged
breach of that duty that proximately causes plaintiff’s injuries. It has nothing to do with
intentional fraud. Cf. Decatur Ventures, LLC v. Stapleton Ventures, Inc., 373 F. Supp. 2d 829,
848, n.18 (S.D. Ind. 2005) (“Rule 9(b)'s particularity requirement does not apply to Plaintiffs'
negligence claim.”). So the negligence count is obviously not subject to Rule 9(b)’s heightened
pleading requirements.
B. Fraud against HealthNET and Jay
On the other hand, Methodist’s third count – “Fraud” – is clearly subject to the standards
of Rule 9(b). The analysis of this count get a little tricky, however, because the count against
FTI Cambio is brought vicariously, based on the alleged direct fraud of its agent, Jay. I’ll
address the vicarious fraud issue momentarily, but first I’ll take up the direct fraud allegations
against HealthNET and Jay.
Under Rule 9(b), a party who alleges fraud or mistake “must state with particularity the
circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b). The Seventh Circuit has
repeatedly described this requirement as the “who, what, when, where, and how” of the fraud –
“the first paragraph of any newspaper story.” United States ex rel. Lusby v. Rolls–Royce Corp.,
570 F.3d 849, 854 (7th Cir. 2009). However, because “courts and litigants often erroneously
take an overly rigid view of [that] formulation,” the Seventh Circuit as also stated “that the
requisite information – what gets included in that first paragraph – may vary on the facts of a
given case.” Pirelli Armstrong Tire Corp. Retiree Med. Benefits Trust v. Walgreen Co., 631
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F.3d 436, 442 (7th Cir. 2011).
I agree with HealthNET and Jay that Methodist’s allegations do not meet the Seventh
Circuit’s standard of “who, what, when, where, and how.” It is true that Methodist has sketched
the general outlines of a fraud: Clifton Jay is alleged to have made various misrepresentations
about the cost of implementing the Meditech software as well as HealthNET and Jay’s
qualifications to lead the implementation of that software. Whether this was fraud – a knowing
and intentional misrepresentation – or merely salesmanship remains to be seen. Fraud usually
involves a misrepresentation of fact. Fimbel v. DeClark, 695 N.E.2d 125, 127 (Ind. App. 1998).
Fraud also occurs when a person fails to disclose all material facts when that person has the duty
to disclose. Id. But mere expressions of opinion cannot form the basis of a fraud claim. Shriner
v. Sheehan, 773 N.E.2d 833, 849 (Ind. App. 2002). The case of Clinton County v. Clements, 945
N.E.2d 721 (Ind. App. 2011) provides a recent example of that concept. In Clinton County the
county auditor told the commissioners that new software would cost $200,000 to install. This
proved to be wrong, but it was not fraudulent because it was merely a statement of opinion.
In any event, setting aside for the time being whether Methodist has alleged a
misrepresentation of fact, its broad sketch of the fraud isn’t sufficient to satisfy the particularity
requirements of Rule 9(b). For instance, the alleged misrepresentations are almost always
attributed either to FTI Cambio, HealthNET, and Jay together, or to Jay and HealthNET
together, or to Jay and Cambio together. “A complaint that attributes misrepresentations to all
defendants, lumped together for pleading purposes, generally is insufficient” for purposes of
Rule 9(b). Sears v. Likens, 912 F.2d 889, 893 (7th Cir. 1990) (quoting Design Inc. v. Synthetic
Diamond Technology, Inc., 674 F. Supp. 1564, 1569 (N.D. Ill. 1987)). It might be possible to
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reconcile Methodist’s grouping: in his representations, Jay is alleged to speak for himself, as
well as (directly) for the company of which he is the president (HealthNET), and (vicariously)
for the company who is alleged to have engaged him as its agent (FTI Cambio). But if that’s
right then the instances of alleged misrepresentations where only Jay and HealthNet are grouped
together or where only Jay and FTI Cambio are grouped together make no sense. HealthNET
and Jay cannot reasonably be expected to understand exactly who is alleged to have said what
statement, and “in a case involving multiple defendants . . . the complaint should inform each
defendant of the nature of his alleged participation in the fraud.” Vicom, Inc. v. Harbridge
Merchant Services, Inc., 20 F.3d 771, 778 (7th Cir. 1994).
Thus, the fraud count against HealthNET and Jay will be dismissed without prejudice
and Methodist will be given leave to amend its Complaint.
C. Vicarious fraud against FTI Cambio
With respect to FTI Cambio, Methodist alleges that its fraud liability is strictly vicarious,
based on the idea that Jay’s allegedly fraudulent statements were made while he was acting as
FTI Cambio’s agent. [DE 1 at 28.] A claim for vicarious fraud is a viable cause of action. See,
e.g., Am. Soc'y of Mech. Eng'rs v. Hydrolevel Corp., 456 U.S. 556, 565–66 (1982) (“[A]
principal is liable for an agent's fraud though the agent acts solely to benefit himself, if the agent
acts with apparent authority.”). But since the underlying fraud claim against HealthNET and Jay
will be dismissed here, the vicarious fraud claim must also necessarily be dismissed. If
Methodist amends its Complaint to include a new vicarious fraud claims against FTI Cambio,
however, FTI Cambio should note that a claim for vicarious fraud is governed by Rule 8, not
Rule 9(b). See Guaranty Residential Lending, Inc. v. International Mortg. Center, Inc., 305 F.
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Supp. 2d 846, 853 (N.D. Ill. 2004) (“An agency relationship establishing vicarious liability for
fraud generally does not have to be pleaded with particularity.”).
FTI Cambio goes on to argue that there is no plausible reason for FTI Cambio to have
engaged in this fraud, and that this lack of plausibility is a fatal flaw under the standards of
Ashcroft v. Iqbal, ––– U.S. ––––, 129 S.Ct. 1937, 1949 (2009). Again, this argument is mooted
by the fact the fraud count will be dismissed. If Methodist amends its Complaint to include a
new vicarious fraud claim against FTI Cambio, however, FTI Cambio should note that the
plausibility of a defendant’s incentives or motive to engage in a fraud would be irrelevant in the
context of a claim for vicarious fraud.
III. Disclosure of the Release
The final issue to address here is HealthNET and Jay’s request that they be permitted to
review the settlement and release agreement between Methodist and FTI Cambio.
As Methodist points out, HealthNET and Jay are less than clear as to the procedural
mechanism they believe entitles them to access to the release. Looking at the request with a
practical eye, however, it is clear that what they really want is an order to compel the production
of the release. But to get such an order, HealthNET and Jay need to go through the steps
required by Rule 37(a): “On notice to other parties and all affected persons, a party may move
for an order compelling disclosure or discovery. The motion must include a certification that the
movant has in good faith conferred or attempted to confer with the person or party failing to
make disclosure or discovery in an effort to obtain it without court action.” Fed. R. Civ. P.
37(a). HealthNET and Jay have not filed such a motion, nor have they confirmed that they
attempted to confer with Methodist and FTI Cambio about the disclosure of the release. See also
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N.D. Ind. Loc. R. 37.1 (requiring certification to state the date, time, and place of the conference
or attempted conference and the names of all persons who participated). While it seems likely
that ultimately HealthNET and Jay should be entitled to review a copy of the release
(presumably pursuant to a protective order), they will not be entitled to any order from this Court
directing as much until they have complied the Federal Rules of Civil Procedure and the Local
Rules of this District.
CONCLUSION
Accordingly, FTI Cambio’s Motion to Dismiss [DE 44] is GRANTED as to Count 3 of
Plaintiff’s Complaint but is otherwise DENIED. HealthNET and Clifton Jay’s Motion for Leave
to Adopt FTI Cambio’s Motion to Dismiss and Request for Disclosure of the Release [DE 56] is
CONSTRUED as a Motion to Dismiss and is GRANTED as to Count 3 but is otherwise
DENIED. HealthNET and Clifton Jay’s Motion for Leave to File Memorandum [DE 70] is
DENIED AS MOOT. Paragraph 82 of Plaintiff’s Complaint is STRICKEN. Count 3 of
Plaintiff’s Complaint is DISMISSED WITHOUT PREJUDICE. Methodist is afforded until
and including July 29, 2011 to amend it Complaint if it chooses to do so.
SO ORDERED.
ENTERED: July 1, 2011
s/ Philip P. Simon
PHILIP P. SIMON, CHIEF JUDGE
UNITED STATES DISTRICT COURT
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