Civ
Pro 2 Notes
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
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.