## In the



# U n ited S ta tes Co urt o f Ap p ea ls

F o rth eS e v e n th C ir cu it
N o. 10

- 3522 R Y ER S ON I NC ., Plai nt i f f

-Appe l l ant, v. F EDERAL I NSURANCE C OMPAN Y, D efend a nt-A pp ellee

.

A pp eal from the United S t ates Di strictC our t fo r the N o rthernDi stricto f Illino is, Eas tern Di v isi on. No . 09 C4173

—E lai ne E . Bu cklo, Judge
.
A RG UE D F EB RU AR Y 16, 2012

— D ECI DE D A PRI L 12, 2012

Befo re P OSNER, R IPPLE, a nd W I L L I A MS, C ircu it Judges . P O SNER, Cir cu i tJudg e . Thi s di ver si ty sui t, go ver ned by Illino is law be c au se filed in a d ist ric t c ou rtloc at ed in t h at st at e a n d n eit h er p ar ty arg u ed ch oic e o f law , Santa’s Be s t Cra f t, L L C v . S t
. Pa u l F i r e & M a r i n e In s . Co. , 61 1 F
. 3d 339, 34 5 ( 7th Ci r. 20 10) , pi ts an i nsure d , R yer son, ag ai nst i ts li ab i l i tyi ns ur er, F ede r alI ns ur an ce Co m pan y . The dist ri ct c ourtgr anted sum m ar y j ud gm ent i n f avo r of the i nsurance com pany.2 N o. 10

- 3522 I n 199 8 Rye rs on ( actual l y a p re decesso r, but w e ca n disr ega rd thatdetai l ) so l d a gr oup ofsubsi dia rie s t o EM C G ro up , I nc. f or$2 9 m i l lion. The f ol l owing yea r EMC s u e d R y e r s o n, s e e k i n g r e s c i s s i o n o f th e s al e an d re st itu ti on o fthe pu rchas e pr i ce. The gr ound w as that Ry e r s o n had c o nc e a l e d a n o mi no us i mpe nd i ngde v e l o pm en t affectin g one of the s ub sidiaries: the su bsid iary’s l ar ges t cust om erhad decl ar ed that unle ss it sla shed i ts pri ces the c ustom erwould bui l d its o w n pla nt and st op buy i ngfr o m the s ubsi di ar y . The c us to m err epe at ed th e dem and fo r a pri ce c ut to E M C w h en EM C acquir ed the s ubsi diar y from Ryer son; and w hen EM C fa i l ed to accede to the de m and, the c ustom er, as i t had thr eat ened to do, to ok i ts busi ness el se w here

. EM C’s sui t char ged Ryer son w i th fra ud ule nt con ceal m ent intended to i nd uce EM C to buy the subsi diar y, b reach o fco ntra ct ( the c on tr ac t f orthe sal e o fthe subsi diar i es) , and br each ofwarra nty ( vi ol ati on o fas sura nces that R yerso n had given E M C i n th e con tract of sale). Feder alI nsurance Com pany had i ssued Ryer son an “E xecuti ve Pro tect i on Pol i cy, ” a l i abi l i ty i nsurance pol i cy that re quir ed Federal both to i nd em ni fy i t f or j ud gm ent and s ett l em ent cos ts, and t o re i m burse i t f or defe nse c ost s, r eas on ab l y i ncurr ed by Ryer son i n sui ts ar i s i ngfr o m r i s k s c o v e r e d b y the p o l i c y . F e deral re fused Ryer son’ s dem and fo r re i m burse m ent o fdef ense cos ts, o n the gr ound that EM C’s cl aim a gainstRyer son w as not a co ver ed ri sk. Thr ee y ea r s in to EM C’ s su i t ag ai ns t Ry er so n, the parti es set tl ed, with R yerso n agr eei ng to m ake “a post
-N o. 10

- 3522 3 cl osi ng pri ce a dj ustm ent” of$ 8. 5 m i l l i on “ re fl ecti ng a c h an ge i n the pu rchas e pr i ce pai d by EM C to Ryer son f orthe pu rchas e” ofthe sub sid iary that had g ott en in to tro u b le w ith its cu st om er . (Ry er so n rep or te d th is as a “sel l i ngpr i ce a dj us tment ” o n i ts F o r m 1 0- K. ) The set tl em ent thus gav e E M C a part i alr efund o fthe pri ce i t ha d pa i d f o r the s ubs i di ar i es . W i thF ede r ala dhe r i ng to i ts posi ti on that EM C’s cl ai m ag ai nst Ry er son w as not a co ver ed ri sk, and thus r efusin g to i nd em ni fy Rye rs on for th e c o s t of th e s et tle m en t, R ye rs on br ou gh t t h is s u it f or a decl ar ato ry j ud gm ent that Feder al ’s insur ance pol i cy cove re d the $8

. 5 m i l l i on that Rye rs on had re fund ed to EM C to set tl e the l att er ’ s s uit
. The i ns ur an ce po l i cy c o ve r s “a l l LOS S f o r whi ch[ th e i nsured] bec om es leg al l y o bl i gat ed to pay on a ccount of any CLA I M
. . . f ora W RO N GFU L A ct [ el sewhere defi ned i n the pol i cy to i ncl ud e a ‘m i sl eadi ng st ate m ent’ o r ‘ om i ssi on’ ]
. . . al l ege dly co m m i tte d by” the i nsured. Fe deral de ni e s tha t“ l o s s ” i nc l ud e s r e s t i t ut i o n pa i d b y a n i ns ur e d, as dist i nct fro m dam age s, wh i ch ar e ex press l y denot ed in the policy as a covered l oss. Federa l is r ight; f or otherw i se f ra ud would be encour age d. Ryer son re cei ved $29 mi l l i o n f r o m EM C f o r the s ub s i di a r i e s , a nd a gr eed t o g i v e b a c k$ 8
. 5 m i l l i o n t o s e t t l e E MC ’ s fr a u d c l a i ms aga i nst i t. The r efund r epres ented a retu rn o fparto r m aybe al l o fthe profit th at Ryer son had obta i ned by i n d u c i n g E MC t o o v e r p a y . I f R y e r s o n c a n o b t a i n r e i mburse m ent o fthatam ount fro m the i nsurance com pany, it w i l l have go tte n away w i th fra ud

. I t wil l ge t t o kee p $2 9 m i l l i o n ( $2 0. 5 f r o m EM C a fte rthe s et tl ementa nd $8 .5 m i llion from Fe d er al) e ve n th ou gh , i f E M C ’s c laim4 N o. 10

- 3522 that Ryer son agr eed to se ttl e was notco m ple te ly mer i t l e s s , s o me po r t i o n o fthe $ 2 9 mi l l i o n wa s pr o c e e ds o ffr a ud

. I fdi sg o r g i ngs uc h pr o ce eds i s i nc l ude d wi th i n the pol i cy’ s defi ni ti on o f“l oss , ” thi eve s coul d buy i nsurance ag ai ns t ha vi ngt o r etur n mone y the y s to l e. N o o ne w ri tes such i nsurance. S ee Sc ot t s dal eIndemnity Co. v. Vil l ageof

Cr e s t wood, N o. 11 -23 85 , 201 2 W L 76 97 30 , at *3, *5 (7t h C ir. M ar c h 12 , 201 2 ) (Ill in ois law ); Fe de r al Ins . Co. v. ArthurAnde rs e n L LP , 5 22 F.3d 74 0, 743-44 (7th Cir. 20 08 ) (d itt o); M or t e ns on v. Nat i onal U ni on Fi r eIns . Co. , 249 F. 3d 667, 67 1- 72 ( 7th C ir. 2 001) ( dit to) , and no s tat e w oul d enfo rce such a n i nsurance pol i cy i fi t were w ri tte n . Id . at 6 72 ; Le ve l 3 Com m uni ca t i ons, Inc
. v. Fe de r al Ins . Co. , 2 72 F .3d 90 8, 91 0 ( 7th Ci r. 20 01)
. You can’ t, at l eas t f ori nsurance pu rpos es, sust ai n a “ l oss ” o fso m ethi ng y ou don’ t ( orsh ou ldn’t) have

. Id. ; In re Tran s Texa s Gas Corp. , 597 F. 3d 298, 308-11 (5th Cir. 2010); Saf e way St or e s , Inc. v . N at i onal U ni on Fi r eIns . Co. , 64 F
. 3d 12 82 , 1 28 6 ( 9th Ci r . 1 99 5)
. And s o the r e is no in su ra b le in te re st in t h e p ro c ee d s o f a fra u d . C f. G rigsby v. R uss el l , 222 U
. S. 149, 154-55 (1911 ) (H olm es, J. ); 3 C ouch on Insurance §§ 41: 3, 42: 57, pp . 41- 12, 42-9 6 (3 d ed

. 2011). W hethera cl ai m f orr est i tuti on i s ba sed o n f ra ud o r on s om e o therdel iber ate to rt ious orcr i m i nal act, o r at th e o th er ex tr em e o f th e re st itu tio n sp ec tr u m m er ely on an i nnocent m i sta ke or the re nd i ti on of a s er vice for w hi ch com pensati on i s expected but contr acti ng is i nfe asibl e ( as w hen a ph ysi ci an m i ni ste rs to a perso n w ho col l apses unconsci ous on the str eet ) ; an d w h etherN o. 10

- 3522 5 th e pl ai nt i f fi s se ek i ngth e r etur n o fpr o per tyo r the profi ts that the defendant m ade fro m appropr i ati ng it, a cl ai m f orr est i tuti on i s a cl ai m thatthe defe nd ant has so m ethi ngtha t be l o ng s o fr i g htno t to h i m b utt o the p lain tiff. Tull v . U nited Sta tes , 48 1 U. S

. 41 2, 42 4 (1987); C onFo ld Pa cif

ic, Inc. v. Po lari s Ind u st ri es, Inc. , 43 3 F
. 3d 952, 957- 58 ( 7th Ci r. 200 6); B raunst ei n v. M cCa be, 57 1 F
. 3d 108, 12 2 (1 st C ir. 20 09 ); Res t at e m e nt( Thir d) of Re s t i t ut i on & Unj u s tEn r i c hm e nt § 1, co m m ent c ( 2011 ) ; 1 Dan B
. Dobbs, La w of R em edies § 4.1 (1), p p . 5 5 0

- 5 4 ( 2d ed . 199 3). A c laim for “ d am ag es ” in th e p ro p e r s e n s e o f th e w or d is diff er ent. I fa cardri ven neg l i gentl y hi ts and inj ures a pede st r i an, the pe d est r i anwi l l s ue the dr i ve r f o r the m onet ar y e quiva l ent o fthe harm done t o hi m , notf or th e “ p rofi t” th at th e accid en t gen erated f or the d river. I t g ener ate d no pro fi t; i t g ave hi m nothi ng. EM C res tyl ed i ts cl ai m ag ai nst Rye rs on a s o ne f or dama g e s a ft e r i ts o l d th e s u b s i d i a r y ( t h e r e b y mo o t i ng its cl aim to un w ind the p urc ha se) . B u t t he l abel isn’t im p or ta n t. Le vel 3 Com m uni ca t i ons, Inc . v. Fe de r al Ins . Co. , sup ra , 272 F.3d at91 0-1 1; P an P a ci fic Retail Propert ie s, Inc. v. Gul f Ins . Co. , 471 F.3d 961 , 966-69 (9th C ir. 2006); U ni f i e d We s t e rn G roce rs , Inc . v. Twin City F i r eIns . Co. , 45 7 F.3d 1 10 6, 1115 ( 9th Ci r. 20 06)
. EM C w as see ki ng to recove r a profit m a d e at its exp en se by R yerson ’s fraud , w hich m ean s tha t ifthe insu ran ce com p an y w ere l i abl e t o Ryer so n , Ryers on would ge t t o kee p profi ts offra ud

. H avi ng to sur ren d er t hose pro fi ts w as not a
“ l o s s ” t o R y e r s o n wi t hi n t he me a ni ngo fthe i ns urance p oli cy, as w e held i n th e nea rly iden t ic a l c ase of Level 3 Com m unicat i on s , In c . v . F e de r al In s . Co ., sup ra , 27 2 F
. 3d at6 N o. 10

- 3522 910; se e a l so St
. Paul Fi r e& M ar i neIns . Co. v. Vi l l ageof Frankl i n Park, 5 23 F.3d 75 4, 75 6-5 7 (7 th C ir. 20 08 ); In re Tra n s Tex a s G a s C o rp. , sup ra , 59 7 F
. 3d at 310; Republi c Western Ins. C o . v. Spierer, Wo o dw a rd, Wi llens, D enis & Furs t m an , 68 F .3d 34 7, 35 1-5 2 (9 th C ir. 19 95 ); Ba n ko f t he West v. Sup erior C o urt, 833 P.2d 545, 553 (C al. 1992). A j u d gm en t o r se tt lem en t in a fra u d ca se co u ld i nvol ve a co m b i nat i on o fr es ti tu ti o n an d da m ag es , a nd th enthe ins ur an ce c o m pany woul d b e l i ab l e f o r the dam age s por ti on i n acco rdance w i th t he al l oca ti on for m u la in th e p olic y. Pan Paci f i c Ret ai l Pr ope r t i e s , Inc . v. Gul f Ins . Co. , sup ra , 471 F.3d at96 7-6 9; U nifie d Western Groc e rs , Inc . v. Twin Ci ty F i r eIns . Co. , sup ra , 45 7 F
. 3d at 1114

- 16. EM C’s com p lai nt ag ai nst Rye rs on dem anded “r es tit u tio n oft h e m o n ies p aid for [t h e s u b sid iar y] . .
. i ncl ud i ng tr ansact i on co sts
. ” Rei m bursi ng EM C’s tr ansacti on co sts would not be r est i tuti on because Ryer son ga in ed n ot h i n g fro m th e m on ey th at E M C p aid i ts l awy er s an d ac co unt an ts to ha ndl e th e acqu i si ti o n. B ut Rye r so n’ s l awy erc o nc ede s th athi s cl i en t m ade no eff or t t o al l oca te i ts l oss bet w een th e l oss o fi l l

- got ten gai ns a nd o t he r c o s t s , s o a ny c l a i m t o t ho s e c o s t s has b e e n f o r f e i t e d. Ryer son has, h owever, another gro und of appeal

. W hen i t fi rst aske d F ede r alI ns ur an ce Co m pan y t o c o ve r the $2 9 m illion “los s,” Fe d e r al re fu se d on gro u n d s t h at it no l onge r ass er ts, noto n the “n o los s” gr ound that i t pr e v a i l e d o n i n t he di s t r i c tc o ur ta nd tha tc o nv i nc es us as well

. Ryer son ar gues that Fed er al’ s chang e o f posi ti on vi ol ate s the doctr i ne of “m end the ho l d,” wh i chN o. 10

- 3522 7 f orbi ds the defe nd ant i n a b re ach o fco ntra ct s uit( w hi ch R ye rs on ’s s u it a ga in st Fe d er al is

— a s ui tc ha r g i ngb re ach ofthe i nsurance contr act) to c h an ge i ts defe nses, atl eas t w i thout a goo d r eas on to do so, se e H e r r e m ans v. C a rrera D e s igns, Inc . , 1 57F
. 3d 11 18 , 1 12 3 ( 7th Ci r . 1 99 8) , i n the m id st of th e s u it. Sc huy l e r County v. M i s s our i Bri dge & Ir on Co. , 100 N
. E
. 239, 240 (Il l. 1912); Hor witz-M at t he ws, Inc . v. City of Chic ago , 78 F.3 d 12 48 , 12 51 -52 (7t h C ir. 19 96 ) (Ill in ois law ); First C o m m o dity Trad ers, Inc
. v. H eino ld C o m m o dit ies, Inc. , 766 F.2d 100 7, 1013 ( 7th Cir. 1985) (ditto); cf. H a r b or Ins. C o. v. Cont i ne nt al Bank Corp. , 9 2 2 F
. 2 d 3 5 7, 3 6 2

- 6 4 ( 7th Ci r . 1 99 0) ( di tt o ) ; Ro be r t H
. S i tk o f f, Co m m en t, “ ‘ M en d the Ho l d’ a nd E ri e : W hy a n Ob sc ur e Con tracts Do ct r i ne Should Contr oli n Feder alDiv er si ty Cases, ” 6 5 U
. Ch i. L. R ev. 1059 ( 1998 ). B u t a t le as t a s u n d e r s t oo d in Illin ois , m en d th e h old do es notf o rbi d the def en dan t to a dd a de f en se a fte r b eing sued; thati s, i t doe s no t con fin e hi m to the defe nse ( or de f e ns e s ) tha th e a nn o un c e d befo rethe sui t. T o re q u i re a potenti aldef endant to co m m i t i rr evo cabl y t o defe nses bef or e he i s s ued w oul d be unre aso nabl e t o t h e poi nt o f ab s u r d i t y . Un t i l h e r e c e i v e s a n d r e a d s th e c o mpl a i nt h e c a n n o th a v e a c l ea r i d e a o fh o w b e s tt o d e f e n d

. He sh ou ldn ’t be pu t to th e ex p en se of ha ving to id e nt ify and art i cul ate al l poss ibl e l ega l def enses to a su it unl ess an d unt i l the r e i s a su i t. The o nl y lasting eff ec t o fthe expansi ve i nter preta ti on o fthe doctr i ne urg ed by Ryer son w oul d be th at insur ance c om panie s would r efuse t o off er any e xplanat i on f ordenyi ng co ver age un tilthe i nsured sued

— as Fe d er al w ou ld h a v e b ee n en tit led to d o, First C om m odi ty Traders, Inc. v. Hei nold C om m oditie s, Inc. , sup ra ,8 N o. 10

- 3522 766 F. 2d at 1013

— l ea vi ng insur eds t o s pec ul at e o n the g r o unds f o r den i al an d th us pr ec i pi ta ting l aws uits m an y ofwh i ch w oul d prove gr oundles s. A nd fi nal l y F ede ral ’ s chang e o fdef enses co uld not have harm ed Ryer son, bec ause i n d en ying cove ra ge F e de r a l t o l d Ry e r son i twa s r e s e r v i ngthe r i g htt o a dd su p p l em entalgr ounds f orthe denia l

. Com pare P rog ress i ve In s . Co. v. Br own ex r el

. Br own , 96 6 A.2 d 666, 66 8- 69 ( Vt
. 2 00 8)
. W he n t h e r e i s n o p r ej u d i c e to t he op p os in g p ar ty , i n vo kin g t h e d oc tr in e o f m en d th e h old to bara val i d defens e i s o ver ki l l

. S ee Tros sm an v. P hil ipsb o rn , 869 N
. E .2d 1147, 1166-67 (I ll

. A p p . 2007); Lars on v. Johns on , 11 6 N
. E
. 2d 187, 191-92 (I ll

. A p p . 1953); c f. N e w H am ps hi r ev. M ai ne, 532 U
. S. 742, 750-51 (2001 ). A FFI RMED .

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