Civ Pro 2 Notes 8/25/04


We left off looking at the conflict between what one pleads in order to meet Rule 8 and what one must do in order to meet Rule 11.  The Rules present inconsistent burdens: the lawyer must have, theoretically, the facts in order to prove that you’ve done a reasonable investigation before filing, but you don’t have to plead those facts per the notice pleading standard.  Today, we continue, skipping the ethical part and looping back to the pleading part.


Heightened pleading


The drafters of the Rules envisioned a limited situation where more specific pleading would be required: pleadings involving fraud or mistake.  This is found in Rule 9(b): “…all averments of fraud or mistake…shall be pleaded with particularity.”  In certain cases, the pleading must do more than notice by articulating some factual basis to develop the claim.  This is pretty much a fraud rule because there isn’t a body of law in mistake.  So the drafters’ ideal world would be notice pleading for everything except for fraud.


Stradford v. Zurich Insurance Co.


This isn’t even a published opinion.  It’s rather unremarkable.  How is this pleading requirement applied?  What did Dr. Stradford do?  He had insurance covering his office.  He let his insurance payments lapse.  The insurance company cancelled the policy for a certain period of time.  Then he starts paying again, and the insurance company lets him restart coverage by saying that he had no claims during the period where he missed his payments.  But very soon after the policy was reinstated, he filed a claim saying that frozen pipes caused damage in his office.  The first claim was about $150,000, which was pretty big.  The company paid the claim.  But then he submitted a revised claim for $1.38 million!!!  That’s a red flag to an insurance company if you ever saw one!  The company starts investigating more thoroughly.  They end up believing that the loss actually occurred during the time when the policy had lapsed.  They don’t pay the big claim!


The dentist sues for this claim, and the insurance company countersues for the $150,000, plus punitive damages and investigation expenses.  Does it matter for the purposes of Rule 9 whether it’s a claim or counterclaim?  Apparently not.  One of the issues around Rule 9 is what it applies to.  All courts will apply the standard to claims and counterclaims.  What about a subset of a claim that has a “fraud-like” element to it?  The counterclaim is for common law fraud.  But what if it were a state statutory claim for fraud?  Would that make a difference to the pleading standard?  There isn’t consensus on that point: some courts contend that this is limited to only common law fraud, but this is a minority view.  Yeazell chose a common law case so we don’t have to get into the issue.


Why do we have a different rule for pleading fraud than everything else?  What does the court say?  How do we interpret the “circumstances constituting the fraud”?  What did the drafters mean?  Is there sort of a “legislative history” of the Rule?  Neither Congress nor the ABA have any commentary whatsoever on Rule 9!  But we do get a comment with the Rule.  We have a shoddy history!  Fairman thinks that this rule is a historical accident.  Fraud was plead with particularity under the common law system.  Even though we shifted to the notice pleading standard, there was some reason judges liked this standard.  But the drafters don’t tell us why they liked it!  We have to try to figure out why it was adopted!  Because it’s not ingrained in the history, the “whys” very dramatically.  This court uses the “time, place, nature” standard.  But that’s not the only standard applied by the federal appellate courts as to fraud.


There are Circuits that require you to “detail the statements”: you must provide the statements that were made that were allegedly fraudulent.  You must identify the speaker.  You must identify when and where the statements were made and you must explain why they were fraudulent.  You need the “who”, “what”, “where”, “when” and “why”.  That’s the mainstream argument, but it’s not the only one.  This truncated version is used because there is no question of who.  So let’s say we have the newspaper standard.  Some standards require you to plead the elements of fraud, which is clearly wrong.  The best practice is to always plead the elements, based on what your jurisdiction wants.  There’s also a standard that says that you must give fair notice of fraud.  That’s the better view, says Fairman, because you should read Rule 9 in relation to Rule 8.  Rule 9, it is argued, wasn’t meant to change the way pleading is done, but it’s just a slight “tweak” done to fraud cases.  In some jurisdictions, the standard varies depending on the complexity of the case.


None of these standards are found in the Rule!  It’s hard to figure out what the proper approach to Rule 9 should be.  It simply depends on your jurisdiction.  But how does this all come together theoretically?  We have reasons that are given as to why we want to have heightened pleading for fraud claims.  The major rationales are to (1) protect settled transactions, (2) protect the defendant’s reputation, (3) deter frivolous suits, and (4) provide notice (“the right one”).


At common law, the equity courts were the only courts that recognized fraud as an affirmative defense.  You couldn’t go to the law courts if someone sued you on the contract and defend it by saying that you were fraudulently induced into signing it.  You would have to wait until there was a law judgment against you.  Then you would go file a separate suit in the equity court to undo the judgment of the law court.  Pleading with more particularity makes sense in the Middle Ages, since you’re trying to overcome the judgment of another court.  But the law courts, over time, begin to adopt all the basic affirmative defenses that the law courts used.  When the two systems are eventually merged, you can still see a “glimmer” of why the rule is there: perhaps you’re trying to protect the transaction itself.  But why is this extended from an affirmative defense to a claim for fraud?  Doesn’t make sense to Fairman.  If someone has defrauded you, you typically want something back.  Whatever rationale for having these suits in the equity courts is now gone.  This requirement is extended to the Field Codes and remains as a legacy.  This isn’t a justification you see very much.  Courts don’t particularly understand it, for one thing.


How about protecting the defendant’s reputation?  How would that work?  Is Dr. Stradford on notice of what the insurance company means by the counterclaim?  Well, sure!  If the pleading had been judged by a Rule 8 standard, there’s no way it would have been dismissed.  Would it affect your decision about going to a dentist if that dentist was sued for fraud?  We don’t require heightened pleading for professional malpractice!  That will probably hurt a dentist’s reputation even more than fraud.  What about intentional torts or wrongful death claims?  Those claims don’t have heightened pleading!  Why do we single out fraud?  If this is the justification, then this is an underinclusive rule.  There are a lot of claims that are probably worse that, according to this logic, ought to have heightened pleading too.


Let’s say you file a fraud claim and someone rushes in with a motion to dismiss.  If you don’t require heightened pleading for fraud and you use a notice pleading standard (just as the rules intend), then these suits are easy to file.  Then you do discovery and try to find the facts later.  Because of this dynamic, there is at least some merit to the rationale of deterring frivolous “strike suits”.  It’s argued that the claims are too easy to plead and too hard for defendants to get out of.  Fairman’s problem with this is that he thinks there are no frivolous lawsuits.  He thinks that’s a myth.  How do you know a lawsuit is frivolous?  The same lawsuit is never both tried and not tried in order to find out if it was really frivolous.  Fairman claims that you can’t prove any particular lawsuit is frivolous.  You can look at what kinds of cases are dismissed at particular stages, but that might be due to circular reasoning.


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